Refinancing is an effective way to better manage your student loans. It allows you to exchange your old loans for a new loan with different terms. While this is an established fact, many borrowers rush to refinance without considering their refinance goal. This can be a huge mistake as the outcome could be completely different from the one you wanted.

How Student Loan Refinance Works

When you refinance your student loan, you can choose the terms on your new loan. The lender will offer you several options and you can choose one that works best for you. The term you choose will impact two main aspects of your loan – your monthly payments and the cost of the loan.

Choosing a shorter term will increase your monthly payments. It will also lower the cost of your loan because less interest will accrue over the shorter period. The extent of the impact will depend on how short a term you choose.

Choosing a longer term will lower your monthly payments. However, it will increase the cost of the loan because of the additional interest that accrues over the longer period. The extent of the impact will depend on how long a term you choose.

Here’s where your refinance goals come into play. Only when you know your goal for refinancing will you be able to choose a term that’s right for you.

Knowing Your Student Loan Refinance Goal Can Help You Make The Right Decision

If your refinance goal is to clear your debt faster, a shorter term may be the right option for you. This refinance goal works great for someone with strong finances as they can afford the higher payments. However, you must be careful about not choosing too short a term. The shorter the term you choose, the higher your monthly payments will be. It’s important to first take stock of your finances. Review your monthly income and expenses to calculate exactly how much you can extra afford to put towards your loan payments. Use an online student loan refinance calculator to determine the best loan term for you based on your finances and your refinance goals.

If your refinance goal is to make the payments more affordable, you’ll want to choose a longer term. This student loan refinance goal can be a life-saver for someone who’s struggling to cover their monthly payments. While lowering your monthly payments can give you some breathing space when finances are tight, this option has a major downside. You’ll take longer to pay off the loan and you’ll pay more by way of accrued interest. It’s important not to drag your loan out for the longest period possible. First explore ways to increase your income so you can pay off your loans. As before, use an online refinance calculator to determine the right loan term based on how much you can afford to pay every month.