How to Choose Between Variable And Fixed Rate Student Loans
Got student loans? We’ve got you covered with our Student Loan Smarts blog series. Our expert tips and hacks will help you save money, pay off loans sooner, and reduce stress over student loan debt. Read the other posts in the series here—and get all the info you need to make intelligent student loan decisions.
So, you’ve decided to refinance your student loans. You’ve filled out the application, have gotten approved (congrats!), and now you’re faced with a couple of loan options—including the choice between a variable rate or fixed rate student loan. Even if you’re already familiar with both, factors like changing interest rates and your own financial situation have bearing on which type of loan is right for you.
What do you need to know before making a decision? Here’s the scoop on how these two options differ.
Fixed-rate student loans:
Generally have a higher interest rate than variable rate student loans
Are not affected by interest rate changes
Charge the same interest rate over the life of the loan
Variable-rate (or floating-rate) student loans:
Generally have a lower initial rate than fixed rate loans
Are affected by interest rate changes, so your loan’s rate can go up or down on a monthly, quarterly, or annual basis
How to Choose
Your final decision depends on your situation.
If you plan to pay off your loan relatively quickly (lucky you), a variable rate student loan can save you money. However, be aware that the longer it takes you to pay off the loan, the more opportunity there is for interest rates to rise. You can mitigate your risk by choosing a lender that caps its variable rates.
If you don’t plan to pay off your student loan quickly, if your future income level is uncertain, or if you’re simply uncomfortable taking on extra risk, consider a fixed rate student loan. In today’s low interest rate environment, fixed rates can be competitive. If you have a high interest rate grad school loan, for example, you could get a lower fixed rate by refinancing.
Whether you choose a fixed rate or variable rate student loan, the main thing to remember is that the rate you got when you first took out your loan doesn’t have to be the rate you’re stuck with for life. Knowing your refinancing options can help put your mind at ease—and hopefully save you some money, to boot.
Editor’s Note: This is an updated version of a post we originally published in September 2013. We welcome new comments and questions below.