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Should I Pick a 5, 10, 15 or 20 Year Student Loan Refinance?

Michael Lux Blog, Strategy 0 Comments

When you refinance your student loans, one of the most significant decisions to make is on repayment length. Most companies offer 5, 10, 15, and 20-year loans. Picking the right repayment length requires some strategy and a bit of guess-work about what your finances will look like in the future.

Repayment Length Basics

As the repayment period increases, monthly payments will go down. This gives borrowers increased flexibility with their loans. The downside is that as the repayment length increases, the interest rate also increases. When looking at the best student loan refinance rates of various lenders, 5-year loans currently start just below 2%, 10-year loans are in the 3-4% range, and 20-year loans start at just over 5%.

Repayment Length Strategy – Items to Consider

Mortgage Considerations – If you will be purchasing a house in the future, it can impact the approach you take with your student loan refinance. If you plan on buying a house in 6 or 7 years but think you can pay off your student loans in 5, a short-term loan could be ideal. The downside is that the high student loan payments make putting money aside for a down payment more difficult. The other option is to stretch out payments as long as possible. By stretching things out, monthly payments are at their lowest. This allows for saving for the down payment and can help your monthly debt-to-income ratio.

Multiple Refinances – Another option to consider is the multiple refinance route. This option could be ideal for people who expect a dramatic increase in their income in the future. For the first refinance, they can opt for a long-term loan to keep payments low. Once income grows, a second refinance can be done to lock down the lowest possible rate.

Aggressive Debt Elimination – If you are looking to pay off your student loans aggressively, the best option is typically a short loan with the lowest interest rate possible. The one exception would be if monthly payment might be so high that it becomes unaffordable at times. In this case, a borrower might opt for a 10-year loan and target making extra payments so that it is eliminated in 5 years. Refinance companies do not charge any pre-payment penalty.

Flexibility – Borrowers who work on commission or have large swings in their income should consider sticking with a longer loan. During the good months, they can make extra payments so that the debt gets paid off faster. When the bad months happen, the low payments ensure that the debt stays current. The difference in interest rate between two loans is the cost of flexibility. For some people paying a little extra each month to ensure flexibility is a good idea. For others, it could be a waste.

Self Control Issues – Aggressive repayment of student loans is usually the preferred method because it reduces interest spending as much as possible. Unfortunately, not everyone has the self-control necessary to make the extra payments towards their student loans. These people normally pay the minimum and nothing more. If you are one of these people, opting for the shorter loan length could be the smart move. It will force you to pay off your loan promptly and significantly reduce interest spending over the life of the loan.

Fixed-Rate or Variable-Rate?

In addition to deciding loan length, borrowers also usually can choose between a fixed-rate loan and a variable-rate loan. Fixed-rate loan payments never change, but the interest rate on a fixed-rate loan is typically a little bit higher than a variable-rate loan.

Interest rates are presently near all-time lows. This means that the variable-rate loans are much more likely to go up than down. As a result, for longer loans, we encourage borrowers to opt for a fixed-rate loan.

Picking the Best Repayment Length for Low Rates

One thing to keep in mind is that the 5-year variable-rate loan will always have the lowest starting rate. Over the years, we have also noticed a pretty measurable gap between the best 5-year variable-rate loan and other loans. We suspect this is due to lenders squeezing extra hard to make sure that their headline rate is as low as possible.

At present, the best interest rates available are from the following lenders:

RankLenderLowest Rate
1CommonBond1.81%
2LendKey1.90%
T-3Laurel Road1.99%
T-3Splash Financial1.99%

That being said, the 5-year loan isn’t for everyone.

Many lenders make rate selection pretty easy. Borrowers can see what rates they qualify for at various loan lengths. This allows borrowers to preview monthly payments and see how their personal interest rate changes with different options. If there is a huge gap in interest between a 15-year loan and a 20-year loan, it may make sense to go with the shorter loan length.  However, if the rate difference is minimal, it could make more sense to stick with the longer loan. This is something that every borrower should check as they shop around.

Ultimately, the key to finding the best repayment length and the best rate is to cast a wide net. Lenders make checking rates very easy, and comparison shopping is simple. There are over 15 lenders offering student loan refinancing services, but checking rates with 3-5 companies is usually enough to give the average borrower a pretty good idea of who has the best deal.

Getting the Lowest Possible Monthly Payment

Even though the interest rates can be higher on longer loans, monthly payments will be much lower.

The root issue for many borrowers comes down to a simple question. Do I want to minimize the amount I have to spend each month, or do I want to minimize the amount I spend over the life of the loan? 

Those looking to minimize their monthly student loan bill will benefit from a 20-year loan.

The current best rates for 20-year loans are the following:

RankLenderLowest Rate
1Splash Financial4.58%
2Citizen's Bank4.68%
3ELFI4.82%

The above rates are for fixed-rate loans. Many lenders do offer 20-year variable rate loans, but opting for a variable-rate loan over such a long period is likely a mistake. If rates drop in the future, borrowers can always refinance again to get the better rates, but if rates increase in the future, borrowers on variable-rate loans are stuck.

Final Thought: Remember the Big Picture

Focusing on just one aspect of student debt can be a big mistake.

Borrowers that focus just on monthly payments may spend too much in interest over the life of the loan.

Borrowers looking for the best rate, my stretch themselves too thin on a 5-year loan.

Ultimately, student loans are just one part of the financial picture and just one goal among many. When picking a repayment length, be sure to consider how it fits in with goals like buying a house or saving for retirement.