How to Pick the Best Repayment Terms When Refinancing Student Loans

student loan terms

If you can’t take one more day paying high interest rates on your student loans, refinancing them can be an excellent way to turn the ship around.

As easy as it is to go through the refinancing process, there’s an important step you shouldn’t breeze through: choosing your student loan terms.

Picking the right repayment terms for student loans makes all the difference in how you achieve your debt payoff goals.

How to choose the best student loan terms

When you evaluate your refinancing offers, make sure you compare interest rates, monthly payments, and other factors using this student loan term comparison calculator.

Then, figure out the best way to pay off your student loans by considering the following:

What is your biggest debt payoff goal?

The first thing you need to determine is your main goal. Do you want to pay off your debt faster or do you want to lower your monthly payment?

If you want to pay off your debt faster and you can afford the shortest repayment term offered, then you want your student loan terms to reflect that.

That said, if you’re overambitious, you can get yourself into trouble. After all, it doesn’t matter how short the repayment term is if you end up defaulting on your monthly payment. Make sure you choose the shortest repayment term you can afford both now and in the future as you evaluate your offers.

If lowering your monthly payment is the most important thing to you, then you want to choose the longest repayment term available. That will enable you to get the lowest monthly payment plan you can.

But keep this in mind: choosing a longer repayment plan means you’ll be in debt longer and you could pay more in the end for your total debt. This might be worth it if your number one priority is to lower your monthly payment, but not if you’re more focused on paying less on your overall debt.

However, there’s no reason you couldn’t still pay your debt off faster if you apply any extra money (such as tax refunds, work bonuses, gift money, etc.) to your student loans. Extra payments can go a long way!

Take your temperature on risk

Once you know the length of time in which you want to repay your loans, the next step is to choose an interest rate. Ask yourself:

  • Am I comfortable with my interest rate (and payment) increasing in the future so I can get the lowest interest rate now?
  • Do I prefer a higher interest rate with the guarantee that it will remain as is?

If you choose a variable rate, your rate will probably be lower than the fixed rate offer. However, it can increase or decrease at any time – variable rates fluctuate in time with industry rates set by global financial institutions.

With a variable rate, you want to choose a repayment term that keeps your payments low enough to afford even if the rate increases. Picking a variable rate with a monthly payment that’s already at the top of your budget could mean serious financial trouble if the rate goes up.

If you choose a fixed rate, the monthly payment you have today is the payment you’ll have throughout the life of your loan. That might mean paying more on interest today, but there’s no telling what the interest on a variable rate loan could become in the future.

For those with a low tolerance for risk, a fixed interest rate offers predictability. You might pay more over time than the variable rate (assuming the variable rate wouldn’t increase beyond your fixed rate), but it might be worth it for the peace of mind.

Consider the potential cons

Before you choose a refinancing offer, there are a few things to keep in mind:

  • The refinance loan you’re ultimately approved for may be different than the offer – offers are the best terms you can get, but are subject to change after the full application.
  • Refinancing federal loans turns them into private loans. You won’t be able to take advantage of benefits such as Income-Driven Repayment Plans, forbearance, deferment, or forgiveness.

Strike a balance in your repayment terms for student loans

It’s not easy to choose the best student loan terms for repayment. What matters is choosing terms that lead to monthly payments you can afford now and later, while helping you reach your financial goals.

As you evaluate your offers, forget about what you think you should do and choose what you’re most comfortable with. At the end of the day, sustainability is key when you’re plotting out a course to debt repayment.

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