If you have a significant amount of student loan debt, you know how insurmountable it can feel. Student loan refinancing can be a smart way to manage your repayment, but how do you decide between lowering your monthly payments or saving money over the life of your loan?
Here is a quick guide on what options to choose based on your goals.
If you want to save as much money as possible
If you’re considering student loan refinancing, you likely have a large student loan balance. Our research for 2020 student loan and refinancing statistics found that the average balance for borrowers refinancing their loans was $63,880.
If you had that much debt, assuming an interest rate of 6% and a 10-year repayment term, you’d pay $21,224 in interest charges by the time you paid off your loan.
If you’re like most people, you can think of much better ways to use that money. Approximately $20,000 can help you travel the world, buy a new car, pay for a wedding, or even serve as a down payment on a house.
If you’re wondering how to lower your interest rate as much as you can so you can save money, refinancing can help. Refinancing lenders typically reserve the best student loan refinance rates for borrowers with excellent credit who opt for shorter loan terms.
When shopping for a loan, choose a term of five years to save the most money. With a short term, some refinancing lenders are offering fixed interest rates as low as 2.55%. If you qualified for that rate with a $63,880 loan balance, you’d pay just $4,227 in interest charges — saving you a whopping $16,997.
| Loan at 6% Interest | Refinanced Loan at 2.55% Interest | |
| Loan Term | 10 Years | 5 Years |
| Monthly Payment | $709 | $1,135 |
| Total Interest | $21,224 | $4,227 |
| Total Repaid | $85,104 | $68,107 |
| Total Savings: $16,997 |
If you want to lower your monthly payments
If you can’t afford your payments or simply want more breathing room in your expenses so you can pursue other goals, you can refinance your loans and reduce your monthly payment.
For example, if you had the same balance listed above and a 6% interest rate with a 10-year term, your minimum monthly payment would be $709 per month — a huge chunk out of your budget each month. With such a high payment, you may have to make some sacrifices or may even reduce your retirement contributions just to make ends meet.
To get a lower payment, you can select a longer loan term. Some lenders offer terms of 15 or even 20 years, giving you a significantly smaller monthly payment.
If you qualified for a 20-year loan at 6% interest, your monthly payments would drop to $458, freeing up $252 each month for other expenses.
Keep in mind that you’ll pay more in interest charges with a longer loan term than if you stuck with a 10-year repayment plan. However, that downside can be worth it to get a more affordable payment when you’re establishing your career. Later on, you can make extra payments when you can afford it if you want to pay off your loans early and cut down on interest charges.
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When you want a more balanced approach
If you’re wondering how to save money without substantially increasing your monthly payments, there is a solution: you can choose a hybrid approach to refinancing your loans.
If you opt for a shorter loan term — but longer than five years — you can qualify for a lower interest rate and pay less in interest charges over time. But with a term of seven or eight years, the monthly payment won’t significantly increase.
For example, let’s say you qualified for an eight-year loan at 4% interest. Your monthly payment would increase from $709 to $779 — a difference of just $70. But with the lower interest rate and shorter loan term, you’d save $10,353 in interest charges and get out of debt two years sooner.
| Loan at 6% Interest | Refinanced Loan at 4% Interest | |
| Loan Term | 10 Years | 8 Years |
| Monthly Payment | $709 | $779 |
| Total Interest | $21,224 | $10,870 |
| Total Repaid | $85,104 | $74,750 |
| Total Savings: $10,354 |
Refinancing your student loans
If you decide that student loan refinancing is right for you, spend some time thinking about your financial goals and current budget. If you want to get rid of your debt as quickly as possible and reduce interest charges, choosing a shorter loan term is best for you. By contrast, a longer loan term makes more sense if you want to lower your monthly payment.
Whichever you choose, make sure you compare offers from multiple refinancing lenders before selecting a lender. While you can research companies on your own manually, Purefy’s Compare Rates tool makes it easier. Just fill out one simple form, and Purefy will list rate quotes and loan terms from top lenders — and it doesn’t affect your credit score.
