How to Choose the Right Loan Terms

The best student refinance loan terms depend entirely on personal circumstances, so it’s crucial to know how to choose the right loan terms.

Bar Graph: Common Financial Goals Among Student Loan Borrowers, select the right loan terms for saving for retirement (47.2%), increase disposable income (46.4%), save for a home (37.4%), improve credit (23.1%), increase job options (17.1%), plan a wedding or start a family (14.4$)

Choose the Right Refinance Loan Terms

The “right” loan terms depend on your goals as a borrower. On the surface, your primary choices are between loan term lengths and whether you want a fixed or variable rate. There are many more factors to consider, however.

Refinancing may be an opportunity to qualify for a better rate – that is, a lower interest rate or annual percentage rate (APR) – but refinancing does not guarantee a lower APR. A lower rate also doesn’t necessarily mean you’ll pay less in the long run.

Some borrowers refinance in order to reduce monthly payments. Though this results in a larger share of total interest, the inability to make full monthly payments also drives up the final repayment total. Other drawbacks of late or incomplete payments include a negative impact on your credit score.

Shorter terms often reduce total interest, but refinancing for a shorter term means monthly payments will likely increase. This may be preferable for someone with a steady paycheck and a willingness to budget.

$10,000 Refinance Loan Term & Repayment Examples
Interest Rate Term Length Total Interest
3.50% 10 years $1,866.30
3.50% 20 years $3,919.03
5.00% 5 years $1,322.74
5.00% 15 years $4,234.29
6.50% 5 years $1,739.69
6.50% 10 years $3,625.76

Choose the Right Rate

It’s important to comparison shop and use refinance calculators when choosing the right rate. For example, it may seem preferable to choose a loan with a lower APR, but you’ll ultimately pay an additional 7.28% in interest on a 10-year loan at 3.50% than you would on a 5-year loan at 6.50%.

Fixed rates remain the same for the life of your loan. Though advertised rates are usually higher than variable rates, a fixed APR may be the best option for someone with a long-term loan, someone with a steady job, or someone who wants a predictable payment for budgeting purposes.

Variable rates change according to market indices, such as the Secured Overnight Financing Rate (SOFR) or the London Interbank Offered Rate (LIBOR). Lenders may adjust variable rates monthly or quarterly. While these rates are usually lower than fixed rates at first, any changes in the market, for better or for worse, will influence your loan rate.

Variable rates are usually capped. The most reasonable variable rate cap is 9.00%, but they can run as high as 25.00%.

Line Graph: 30-Day Secured Overnight Financing Rate (SOFR) Index, Rates as Posted on the First Day of the Financial Quarter, from 2.37 in the first quarter of 2019, 2.42 in 2019Q2, 2.40 (2019Q3), 2.20 (2019Q4), 1.54 (2020Q1), 1.59 (2020Q2), 0.08 (2020Q3), 0.09 (2020Q4), 0.08 (2021Q1), 0.04 (2021Q2), 0.03 (2021Q3), 0.05 (2021Q4), 0.05 (2022Q1), 0.17 (2022Q2)

Choose the Right Term Length

For refinance loans, 5-, 10-, and 20-year term lengths are the most common. Some lenders offer terms of any lengths between 5 and 20 years, though these extra term options may not be advertised.

Longer terms usually have higher interest rates, boosting the ultimate cost. A longer term also increases a variable rate’s risk factor. In the long-term, market indices are wildly unpredictable.

5.00% APR, $15,000 Loan Term Length Examples
Term Length Monthly Payment Total Interest
5 years $283.07 $1,984.11
7 years $212.01 $2,808.73
10 years $159.10 $4,091.79
12 years $138.73 $4,977.63
15 years $118.62 $6,351.43
20 years $98.99 $8,758.41

Choose the Right Monthly Payment

Though rare, some refinance lenders offer interest-only payments for a certain period or pay-as-you-grow income-based repayment plans.

You cannot lower your monthly loan payment without contributing to the amount of interest you will ultimately pay. A $15,000 refinance loan at 5.00% APR can cost more than half of the original loan’s value with a monthly payment below $100. Increasing your monthly payment by 185.90%, however, decreases the total interest repayment by 77.35%; it also decreases the loan term length by 15 years.

Pie Chart: Borrowers Who Have Refinanced or Consolidated Student Loans; 66.7% never refinanced or consolidated, 22.1% consolidated federal loans, 7.7% refinanced private and federal loans, and 3.5% refinanced private loans only

How Not to Choose Loan Terms

Common mistakes when selecting loan terms include not comparison shopping and using the wrong resources. Refinancing can be an intimidating prospect, which is why many borrowers prefer to avoid it entirely. As such, family and friends may not be the best sources of information.

The refinance lender’s web site alone won’t necessarily tell you everything you need to know. Always consult official sources, such as the U.S. Department of Education’s Office of Federal Student Aid, your school’s financial aid office, or a third-party financial professional. See Education Data’s detailed reports on and reviews of refinance lenders.

Finally, any potential benefits of refinancing may not be worth losing certain legal protections and benefits that come with federal loans. While federal consolidation won’t help lower your APR or shorten your loan term, you may be able to temporarily reduce monthly payments. You may even qualify for student loan forgiveness.


  1. Consumer Financial Protection Bureau (CFPB), What is the Difference Between a Fixed APR and a Variable APR?
  2. FinAid, Loans: Understanding Loan Options
  3. U.S. Department of Education Office of Federal Student Aid, Direct Consolidation Loan Application: What is Loan Consolidation?
  4. Yale Law School, FAQ Refinancing And Consolidating Federal Student Loans
  5. Federal Reserve Bank of St. Louis Economic Data (FRED), 3-Month London Interbank Offered rate (LIBOR)
  6. FRED, 1-Month LIBOR
  7. U.S. News & World Report, Student Loan Refinancing & Consolidation