Choosing a Repayment Term: Financial Aid Math That Adds Up to Savings

You’re a smart shopper. You spent hours researching all of your options to find the best student loan. The choices are narrowed, and you’re ready to choose, but did you consider all of the variables?

If you’re like most people, you compared interest rates (or APRs) to determine the lowest-cost student loan option. Why wouldn’t you? For decades, we’ve been inundated with interest rate-focused advertising from banks, mortgage lenders, and car dealers. It’s a simple comparison, and the math is already done for you, so it’s natural to stop there.

However, there are other variables you should consider that could reduce the cost of your student loan. In this case, we look at how a shorter repayment period could save you thousands of dollars.

How does a lower interest rate affect the monthly payment and total cost of my student loan?

First, let’s define what we mean by “total cost” of your student loan. The total cost is calculated as the amount borrowed plus any interest charged over the life of the loan.

Total Cost = Amount Borrowed + Interest Charges

Now, let’s look at how a lower interest rate affects the total cost of a student loan. In the example below, this student would pay approximately $8 less per month and save $1,422 over the course of a 15-year loan simply by choosing the loan with the lower interest rate.

choosing a repayment term

But look what happens when we add in a few more variables.

When we change the length of the loan, the lower interest rate doesn’t have the same effect. In this next example, the loan with the higher interest rate (7.2%) and shorter repayment period (10 years) is the better option if your goal is to reduce the overall cost of the loan. While it’s true that the monthly out-of-pocket costs will be $42 lower in the scenario with the 15-year term (and lower interest rate), you save more than $1,600 by taking the 10-year loan, even with a higher interest rate.

choosing a repayment term

Why? The value of time works both ways. When you’re saving for a big purchase (like college), we’re told the earlier we start the better, even if we can only afford to save a little at a time. When it comes to borrowing money, the concept is the same, but it works in reverse. A shorter time frame and larger payments drives down the total cost of a loan.

Save up to $3,600 for less than $61 per month

Let’s look at how a range of repayment period options (with the same interest rate of 6.50%) affects the total cost of your student loan.

choosing a repayment term

As you can see from the chart above, choosing a shorter repayment period (resulting in an increased monthly payment) can lead to big savings over the life of your loan. Shortening your loan from 15 to 8 years saves $3,657 in interest payments with a modest monthly payment increase of $60.

Private student loan interest rates are based heavily on credit, which is built over time and may be difficult to quickly improve (see Tips to Improve Your Credit Score). While it’s difficult for borrowers to control what interest rates they’re offered, College Ave Student Loans borrowers are able to choose a repayment period from a range of options that best fits their individual goals.

It’s important to note that you may be able to realize the benefits of a shorter repayment period without actually selecting one. Because most lenders do not have a penalty for early repayment, you could pay more than the minimum required payment each month. Keep in mind that while this is possible, it requires a discipline to stay on budget. Making an informed decision about your repayment period options empowers you to control the costs associated with borrowing money for college.

Fortunately, you don’t need a PhD in math to figure this out

The calculations described here aren’t complicated, but for a first-time or infrequent borrower, it can seem like a daunting task. This is part of the reason why so many borrowers focus attention on the interest rate comparison when choosing between different loan alternatives. For those that don’t want to learn the complexities of calculating accrued interest and monthly payments, you can use the simple (and free) College Ave student loan calculator to help you get the answers you need to find your best option.

Here’s what you need to know about comparing interest rates and repayment terms before you start crunching the numbers:

1) Interest rate has a direct relationship to monthly payment and total cost. For the same repayment plan, the lower the interest rate, the lower the monthly payment and total cost of the loan.

2) Repayment term has a direct relationship to total cost and an inverse relationship to monthly payment. For the same repayment option and interest rate, the shorter the repayment term, the lower the total cost of the loan and higher the monthly payment.

3) The combined effect of a lower interest rate and shorter repayment period will drive significant cost savings over the life of your student loan.


*All loan scenarios assume a $10,000 loan amount, one disbursement, deferred repayment, four-year in-school period, and a six-month grace period.

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