Fixed-rate or variable rate student loan: Which is best for you?

Fixed Vs. Variable Student Loan Rates

Fixed-rate or variable rate student loan: Which is best for you?

When you get a student loan, you might face the choice between fixed and variable interest rates. While the lowest interest rate available is important, whether or not your interest rate might change down the road also matters.

Fixed interest rates don’t change, while variable interest rates fluctuate. The right choice depends on the type of borrower you are, your future income and what you can reasonably afford to repay. Here’s the breakdown of variable versus fixed interest rates for student loans.

Fixed vs. variable student loans: Which is best?

Here are a few scenarios to consider when determining when to choose a fixed or variable student loan.

Fixed interest rates are rates that stay the same throughout the course of your student loan repayment term. The only time your interest rate will change is if you consolidate or refinance your student loans.

Fixed interest rates give you the same payment each month, which means that your budget remains consistent. All federal student loans have fixed interest rates, and fixed rates are typically an option with private lenders.

Here are some of the benefits of a fixed-rate student loan:

  • Interest never changes. There are no surprises when it comes to fixed interest rates. Your interest rate never changes, so even if student loan interest rates rise due to market conditions, you’ll still benefit from the rate you took out initially.
  • Repayment plan is consistent. Since student loans are typically repaid over the course of 10 or more years, you’ll be able to keep your monthly payment the same — which is especially helpful if you face income challenges.

When to choose a variable-rate loan

Variable interest rates are rates that fluctuate an index rate, the prime rate or the Libor. The interest rate changes, meaning your monthly payments could rise or fall an adjusted interest rate.

While you might start off paying a lower interest rate than you would with a fixed-interest loan, there’s a chance that you could have a higher interest rate later on.

Private student loans tend to offer variable interest rates along with fixed-interest options.

Here are some of the benefits of a variable-rate student loan:

  • Rates are typically lower. Variable interest rates are often much lower than fixed interest rates, especially upon sign-up.
  • Benefit from some market shifts. If interest rates drop, what happened in 2020, you will pay less on your loan. This is especially important if you can pay off your loan quickly, before interest rates rise again.

Factors to consider

While there are benefits to both fixed-rate and variable-rate student loans, there are a couple of factors that you should be aware of.

Things to watch out for with fixed-rate loans include:

  • Typically higher starting rates. Since fixed interest never changes, the advertised rate for fixed rates is typically higher than that of variable rates.
  • Can’t take advantage of rate drops. In environments where interest rates fall, people with variable rates will save a significant amount on their monthly payments, but people with fixed interest rates will still be tied to their higher rate.

Things to watch out for with variable-rate loans include:

  • Possible volatile fluctuation. Since variable interest rates are tied to market conditions, you could see a higher interest rate than with a fixed interest rate for the same type of loan.
  • Varying monthly payments. The higher your interest rate, the higher your payment, and your monthly balance may change from month to month.

Who is a fixed-rate student loan best for?

Fixed interest rates are good for borrowers who don’t have a lot of wiggle room to account for an adjusting interest rate. It’s ideal for low-income earners who can only devote a certain amount of money per month to student loan repayments and can’t afford to pay extra in case their interest rate (and monthly payment) go up.

Variable interest rates are good for borrowers with the best credit who qualify for the lowest interest rate available. These types of interest rates are good for borrowers who plan to pay off their loans as soon as possible — if you see an extremely low rate, you could pay off your loan before rates have a chance to rise, or you could afford to make higher payments more often.

Borrowers with high-paying jobs and those who don’t mind fluctuating payments would benefit from variable-interest-rate loans. If you can afford the wiggle room in your budget, you could end up saving a lot of money over the life of your loan.

Next steps

If you’re thinking about taking out or refinancing student loan debt, the type of interest rate can be a determining factor in where you borrow from. The first thing that you’ll want to do is look at your overall financial situation and decide which kind of student loan may be right for you. Federal student loans have only fixed interest rates, plus a variety of repayment terms.

Private student loans tend to offer both fixed and variable interest rates, giving you the option to take advantage of the one that best fits your finances and repayment plan. If you having the same set amount every month, a fixed interest rate may be a good match. If you think you can pay off your student loans before rates have a chance to rise, a variable interest rate might work best.

No matter which type of student loan you decide to get, make sure to get quotes from a few student loan lenders. That will help ensure that you are paying the least amount of interest possible.

Learn more:


Variable vs Fixed Rate Student Loans: Which Should You Choose?

Fixed-rate or variable rate student loan: Which is best for you?

Understanding the basic concept of variable vs. fixed rate student loans if fairly simple.  A variable interest rate will change periodically over the term of the loan whereas a fixed rate will not.  The questions many borrowers face is, “which is better?”  

Variable vs Fixed Rate Student Loans

Answering that question is more difficult than you might think–at first.  Let’s break down both, so you can make an informed decision about which type to choose for your student loans.

Federal Student Loans: Fixed Rate

To get started, let’s review five key things to understand about federal student loans.

  1. All federal student loans have fixed interest rates.
  2. The interest rate is set (fixed) prior to July 1st of each academic year and applies to loans made between July 1st and June 30th.
  3. If you attend college for four years, for example, you may borrow four times during each of those academic periods.  Your rate on each of those four loans will vary, but will not change over the repayment term.
  4. If you attend college for four years and you borrow during each academic period, you could wind up with four loans with different fixed rates. But for each of those loans, their interest rates won’t change over the course of repayment.
  5. When you enter repayment, you can decide whether or not consolidating those loans in to a single loan with a single fixed rate makes sense.  Your fixed rate on a federal consolidation loan is the weighted average of the rate on the loans to be combined.  Don’t be scared off by the term “weighted average.”  It just means that the rate on your higher balance loans will count more toward determining the average.

To learn more about federal student loans, and the current fixed rates, see: Federal Student Loans.

Private Student Loans: Variable or Fixed Rate

Now that we have federal loans the way, let’s review the five things to know about variable and fixed rate private student loans.

  1. Most private student loan lenders today are offering both variable and fixed rate loans.  The LoanFinder (our tool that helps you compare student loans) only includes variable interest rate programs.  We do this because it’s a bit less confusing for borrowers when they are first evaluating their options.
  2. A private student loan with a fixed rate will always have a higher interest rate than a variable rate loan from the same lender.  Since student loans are repaid over a relatively long period of time, lenders set rates such that if they do increase in the future, they aren’t losing out on the margin they could earn had the loan been variable.
  3. There’s no way to know if interest rates for a variable rate loan will increase. With some research about historical trends and an understanding of the financial markets or, better yet with the help of a financial expert, you can weigh the relative odds that a variable rate loan will increase. But remember: no one can predict the future.
  4. When looking at how rates have changed in the past to guess how they might behave in the future, its important to consider your repayment term of a private student loan, it may be 5, 10 or even 15 years in length. How interest rates fluctuate over 5-15 years may be very different.
  5. To repeat ourselves: no one can predict the future. A good rule of thumb to remember is that when interest rates have been historically low, they have nowhere to go but up.

Deciding between a fixed rate and variable rate student loan will depend on your particular situation and comfort with risk. To simplify what choosing between the two means: When you choose a variable rate, you are betting that interests rates won’t rise substantially during the repayment term.  If you choose a fixed rate, you are betting that rates will increase.

How To Choose Variable or Fixed Rate

The bad news is that we can’t choose for you on the question of variable vs fixed rate student loans. When it comes to federal student loans, you have no choice; your rate will be fixed.

For private student loans, it really comes down to a matter of personal preference and your willingness to accept risk.

A variable rate may be lower in the short term, but increase over your repayment period.

It could exceed the fixed rate option you were presented when you borrowed the loan at any time–now or along the course of repayment.

A fixed rate loan eliminates the guess work, but could cost you a lot more in interest than a variable rate loan whose rate does not increase substantially over the course of repayment.

The best advice we can offer is to compare your options and make a choice that feels right for your particular situation.

If you need more help deciding, we always encourage borrowers to seek the help of a financial planner or other qualified professional.


How To Choose Between Fixed-Rate Vs. Variable-Rate Student Loans

Fixed-rate or variable rate student loan: Which is best for you?

Editorial Note: Forbes may earn a commission on sales made from partner links on this page, but that doesn't affect our editors' opinions or evaluations.

When you apply for a private student loan or refinance your student loan, you often have the choice between variable and fixed interest rates. Variable-rate loans can be tempting because the advertised rates are so low. But what’s the catch?

In this breakdown of variable- vs. fixed-rate loans, learn about each interest rate type’s differences and advantages.

How Variable-Rate Loans Work

Variable interest rates are only available on private student loans and refinancing loans.

With variable-rate loans, the interest rate on your loan can change—perhaps monthly. They often start with lower interest rates than fixed-rate loans, but the interest rate can increase the index the lender uses.

Most private student loan companies use the London Interbank Offered Rate (LIBOR) as their index, although that is expected to change. LIBOR is designed for banks and financial institutions to use when lending to one another, but consumers need to be aware of LIBOR because it can impact the interest rates you get on student loans, mortgages and even business loans.

To calculate your interest rate, private student loan lenders will charge you the LIBOR rate plus their margin. For example, the three-month LIBOR rate as of January 13, 2021, was 0.24%. If a lender had a 3% margin, your interest rate would be 3.24% (0.24% LIBOR + 3% margin = 3.24%).

Keep in mind that the LIBOR rate is at record-breaking lows right now. By contrast, the three-month LIBOR in December 2018 was 2.81%. With that LIBOR rate, your interest rate would be 5.81% (2.81% LIBOR + 3% margin = 5.81%), a significant difference.

With variable-rate student loans, lenders have a cap on how high the interest rate can get. For example, Discover has a cap of 18% on variable-rate loans, meaning your interest rate will never exceed that number, even if the LIBOR skyrockets. The lender’s cap will be listed on the loan application and loan disclosure agreement.

Advantages of Variable-Rate Loans

  • You can get a lower interest rate. Variable rates typically are lower than fixed-rate loans, particularly at the start of your repayment term. As of January 2021, some lenders are offering variable-rate loans with rates as low as 1.24%.
  • You might save more money.

    Since you can get a lower rate with variable-rate loans, you may save more money over the length of your repayment term. With a lower rate, less interest accrues on your loan.

  • Extra payments will chip away at the principal.

    If you pay more than the minimum payment required, more of your payments will go toward the principal rather than interest charges since you have a lower initial rate, helping you pay off the loan faster.

Downsides of Variable-Rate Loans

  • Your interest rate can increase. While variable-rate loans typically start with low rates, there is no guarantee that rates will stay low. If the market changes, you could see your rate increase up to the lender’s cap.

  • Your monthly payment can go up. As the interest rate on your loan fluctuates, your monthly payments can change as well.

    If the interest rate increases, your monthly payment can get significantly larger, making it difficult to plan or budget, and it may be more than you can afford.

  • The total cost of repayment is unknown.

    Because your rate is not locked in and can change, it’s impossible to know your total cost of repayment. If the rate increases substantially, you could end up paying thousands more in interest charges.

How Fixed-Rate Loans Work

With a fixed-rate loan, you will have the same interest rate for the entire duration of your loan. Instead of using an index LIBOR to determine your rate, lenders decide your interest rate your credit score, income and whether you have a co-signer on the loan.

Federal student loans only charged fixed interest rates, and borrowers all have the same rate regardless of their creditworthiness. Private student loan lenders and refinancing lenders typically offer both fixed- and variable-rate loans.

Advantages of Fixed-Rate Loans

  • You have a predictable monthly payment. With a fixed-rate loan, your monthly payment will never change, so you can create a consistent budget.
  • You know exactly how much you’ll repay on your loan.

    Because the interest rates and payments don’t fluctuate, you can find out how much you’ll repay by simply calculating the sum of the number of payments you have to make.

  • Your interest rate never changes.

    The rates on fixed-rate loans remain the same for the life of your loan, so you don’t have to pay attention to indexes or market changes.

Downsides of Fixed-Rate Loans

  • Your loan may have a higher interest rate than some variable-rate loans. Lenders typically charge higher interest rates on fixed-rate loans than the initial rate offered on variable-rate loans.
  • You can’t take advantage of market changes.

    Because fixed rates never change, you can’t take advantage of lower rates—which means lower monthly payments—if the LIBOR goes down. The only way to get a new rate is to refinance your student loans.

  • You may pay more over time.

    Because fixed-rate loans could have higher rates, you might pay more in interest charges over the life of your loan.

Variable- or Fixed-Rate Student Loan: Which Should You Choose?

When deciding between fixed- or variable-rate loans, use the following tips to help you choose which is best for you.

When a Fixed-Rate Loan Is Best

  • You need more time. If you think you’ll need more time to repay your loan—10 years or more—opting for a fixed-rate loan makes more sense than a variable-rate loan. With a longer loan term, it’s more ly that interest rates will go up, so selecting a fixed-rate loan is the safer choice.
  • You want stable payments. If you’re worried about your monthly payments increasing and want more stability, a fixed-rate loan is a better choice.
  • You’re worried about interest rate changes.

    If you suspect that interest rates will fluctuate in the near future, choosing a fixed-rate loan can give you more peace of mind.

When a Variable-Rate Loan Is Best

  • You believe interest rates will remain steady. If you think market trends indicate that interest rates will remain stable throughout your loan term, a variable-rate loan might be a smart gamble.
  • You choose a short loan term.

    With a short loan term, such as five years, large market fluctuations are less ly, so a variable-rate loan can help you save money.

  • You want to pay off your debt aggressively.

    If you want to pay off your student loans as quickly as possible and plan to make extra payments, taking advantage of the lower initial rate will help you get rid of your debt faster.

Fixed vs. Variable Student Loan Rates: Student Loan Refinancing

other private student loan lenders, student loan refinancing lenders typically offer both fixed and variable-rate loans. You can refinance both private and federal student loans to potentially lower your interest rate, reduce your monthly payment and save money over time.

When refinancing your debt, a variable-rate loan can make sense when you want to pay off your loans ahead of schedule. However, if you have a substantial amount of debt and will need several years to pay it off, a fixed-rate loan might be a better option for you.


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