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The Best Student Loan Refinance Length is a 20-Year Fixed-Rate Loan

When picking a student loan refinance solution, it is essential to think about your other financial goals. Opting for a flexible choice is often the safest bet.

Written By: Michael P. Lux, Esq.

Published:

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When student loan borrowers refinance their debt, many opt for loans with a five-year repayment period.

At first glance, the shorter-term loan seems like a great choice. The interest rate is often the lowest possible, and the accelerated repayment reduces total interest spending.

This approach may work well for some borrowers, but the 20-year refinance loan is the best choice in most cases.

20-Year Loans have the Lowest Monthly Payment

The longer the repayment length, the lower the monthly payment. It’s simple math, but the consequences are significant.

A lower monthly bill makes it easier to pay your rent bill. The lower monthly payment enables borrowers to attack high-interest credit card debt or save money to buy a house.

In short, the 20-year loan means flexibility for borrowers.

Managing Extra Interest Charges on a 20-Year Student Loan

If the lower payment is the obvious advantage, spending extra on interest is the obvious disadvantage.

However, this downside isn’t nearly as bad as borrowers might think.

For starters, the interest rate gap between 5-year refi loans and 20-year refi loans is quite small. The 5-year loans start at around 5% interest, and the 20-year loans start at just over 6%.

Secondly, and more importantly, borrowers are not obligated to make minimum payments on a 20-year loan. Someone could choose to aggressively pay it off in five years or less. By securing a 20-year loan instead of a five-year loan, borrowers pay slightly more each month in interest, but they gain flexibility and improve their credit profile.

Improving Borrower Credit Profiles

When people think about creditworthiness, credit scores are usually the first item that comes to mind.

However, an equally important number is the debt-to-income ratio. If you have ever seen a credit application rejected due to insufficient income relative to your debts, it was a debt-to-income ratio issue.

Crucially, debt-to-income ratios look at monthly debt payments instead of total debt balances.

Locking in a lower monthly payment makes it easier to buy a house or to pay off an auto loan.

Thus, even if you plan on paying off a student loan in five years, you might still be better off with a 20-year loan.

Fixed vs. Variable Rate Loans

We can’t discuss the best refinance loan without considering fixed versus variable interest rates.

At a time when interest rates are high across the economy, it might seem like picking a variable-rate loan is the smart choice because monthly payments could drop as interest rates go down.

This approach would be a mistake. Even though rates are high right now, they could continue to climb. A variable-rate loan exposes borrowers to this risk.

Should rates drop in the coming months or years, borrowers can always refinance their loans again. Unlike a mortgage, there are not any costs associated with refinancing a student loan. If rates drop by .5%, a borrower could refinance, and the only cost would be the 15 minutes spent applying for the loan.

Think of the fixed rate as a ceiling rather than a floor.

The Best Rates on 20-Year Refinance Loans

As of May, 2024, the following lenders advertise the lowest interest rates on 20-year fixed-rate loans:

RankLenderLowest RateSherpa Review
1Splash Financial6.08%*Splash Financial Review
2ELFI6.64%ELFI Review
About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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