Like many college graduates, you may have left school with outstanding student loans. According to The College Board, bachelor’s degree recipients graduated with $29,300 in student loan debt, on average.
If you graduated with five-figures of student loan debt, refinancing your loans can be an excellent way to save money or make your payments more affordable. When you refinance, you can select a new term; depending on your balance and lender, terms often range between five and 15 years.
How do you choose the right student loan refinancing term? The decision depends on your goals and monthly budget.
How Student Loan Refinancing Works
Student loan refinancing replaces your existing loans with one private loan with new terms. You may qualify for a different repayment term and interest rate, so refinancing can affect both your monthly payments and overall repayment cost.
What rate and terms you’re eligible for depends on factors like:
- Your credit score
- Income
- Debt-to-income ratio
- Lender’s options
- Co-signer information (if applicable)
In general, you can choose a term between five and 15 years, and rates can be fixed or variable. Fixed rates never change, but variable rates can fluctuate throughout the repayment term.
Learn More: Student Loan Refinancing with a Cosigner
3 Ways Refinancing Student Loans Affects Your Payments
Refinancing can affect your repayment in several ways:
Shorter Terms Generally Qualify for Lower Rates
Generally, lenders give the lowest-possible rates to borrowers who opt for shorter loan terms, such as terms which are shorter than 10 years. To get the best rates, select a loan term between five and seven years.
Lenders view longer loan terms as higher-risk options, so they charge borrowers higher rates on terms over 10 years.
A Longer Term Can Get You a Lower Payment
A longer term can be appealing because it gives you a smaller monthly payment. When you refinance, you can change your loan term from 10 years to 12 or even 15 years. With more time to pay off the loan, you can significantly reduce your payments, so this is a good option for those who need more breathing room in their budgets.
A Shorter Term Has a Lower Overall Cost
Although a shorter loan term will have a higher monthly payment, less interest will accrue over time with a shorter repayment period. A shorter term can make sense for those who can afford their payments and who want to pay off their debt aggressively.
How to Choose Your Student Loan Refinancing Term
Which term you choose affects your rate, monthly payment amount, and overall loan cost. To select the right term, ask yourself these five questions:
1. What Is Your Goal for Refinancing?
Think about what you hope to accomplish by refinancing your debt. For example:
- You want more affordable payments: If you need to reduce your payments, a longer term may be the best choice.
- You want to pay off your debt faster: If you want to pay off your student loans as quickly as possible, opting for a shorter term may be a better option since you’ll qualify for a lower rate.
2. How Much Can You Afford to Pay Each Month?
Create a budget and consider how much you can realistically pay toward your loans each month. How much cash you have available for student loan payments will impact what loan term matches your budget. If money is tight, you may need to select a longer term to make the numbers work.
3. What Rate Can You Qualify For?
Your credit, income, and debt-to-income ratio affect your refinancing rates. If you have excellent credit, you could qualify for a lower rate even with a longer loan term.
If your credit is less-than-stellar, consider adding a co-signer to your loan application; a co-signer can boost your odds of qualifying for a loan with a lower rate.
You can use a prequalification tool from ELFI to view potential rates and loan term options.
4. Do You Have Federal Student Loans?
If you have federal student loans, refinancing may not make sense; you may be eligible for federal income-driven repayment plans that give you more relief with your monthly payments, and federal loans often have other benefits, such as eligibility for loan forgiveness.
If you have a mix of both federal and private loans, you could refinance just your private loans, and leave your federal loans untouched.
5. How Reliable Is Your Income?
If your income varies from month to month — for example, if your earnings change with seasonal demands — opting for a longer term can make sense since your payments will be lower. During months where your income is higher, you can make additional payments to cut down on interest.
Refinancing FAQs
What’s the most common student loan refinancing term?
Terms vary by lender, but most student loan terms are between 10 and 15 years.
Can I change my refinancing term later?
Once your loan is finalized, you can’t change your loan term. However, there is no limit on how many times you can refinance, so you can refinance your loan again and choose a different term if your needs change.
Does choosing a longer term affect my credit?
No, your loan term doesn’t affect your credit as long as you keep up with the payments. Since a longer term can produce a lower monthly payment, it can help you keep up with all of your required payments.
Refinance Your Student Loans With ELFI on Your Terms
Refinancing can be a powerful way to manage your loans, but selecting the right term is key. A shorter term will produce the greatest savings, but a longer term can give you more affordable payments. Consider your budget, financial goals, and other priorities to select the best term option for you.
