Choosing Between Variable And Fixed Rate Student Loans

So, you’ve realized that you need to take out student loans to help finance your education. Or maybe you’ve settled on student loan refinancing to help you pay back the student loans you’ve already taken out. Either way, you’ve filled out the application, gotten approved (congrats!), and now you’re faced with loan options—including the choice between a fixed vs. variable rate.

Even if you’re already familiar with both, factors like changing interest rates and your own financial situation can potentially have a 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 ways these two student loan options differ.

Fixed-Rate Student Loans:

Fixed-rate student loans have a locked in interest rate for the entire loan term. This means that the interest rate you have when you take out the loan will be the same rate you have at the end of the term. The only way you are able to change this interest rate is if you refinance your student loans with a private lender or consolidate them through the government.

Fixed-rate student loans are usually considered the safer option as there is no chance your interest rate will rise. All federal student loans (since July 1, 2006) have fixed interest rates that are set by Congress each year, so no matter which federal loan you qualify for, your interest rate will not change over the life of the loan.

Each type of federal loan will have its own fixed interest rate. For example, Direct PLUS Loans have a different fixed interest rate than Direct Unsubsidized Loans. You can check the current federal loan fixed interest rates here . Private student loans, on the other hand, can have either fixed or variable rates.

Pros of Fixed-Rate Federal Loans

•   They’re not affected by interest rate changes.
•   Charge the same interest rate over the life of the loan.
•   Your monthly payments will stay the same, unless you increase them yourself.

Cons of Fixed-Rate Federal Loans

•   Generally, have a higher interest rate than variable rate student loans.
•   You could potentially miss out on savings if variable rates drop lower than your rate.

Variable-Rate (or Floating-Rate) Student Loans:

As mentioned above, all federal student loans have fixed interest rates. So as of this writing, you only have the option to choose a variable rate student loan with a private lender. Although variable rate student loans typically have a lower interest rate to begin with, they are also riskier. This is because the interest rate on a variable-rate student loan can change (increase or decrease) throughout the life of the loan based on how the market performs at any given time.

While it can be a good thing if the interest rate goes lower than your original rate, there is also a possibility that the interest rate can rise higher. How do lenders choose the rates? Private student loan lenders base the interest rates off of interest rate indices like the London Interbank Offered Rate (LIBOR). So if your variable-rate loan’s interest rates are pegged to LIBOR (and most are) and LIBOR rates go up, then so will the interest rate on your variable rate student loan.

It can be a good idea to also ask your lender how often your interest rate can change on their end. Each lender has their own way of adjusting rates (some do it every month, where others will do it every few months). You can also ask if there is a cap on the rate—some lenders will implement a cap such that a variable-rate can’t exceed a certain percentage.

Pros of Variable Rate Loans

•   Generally have a lower initial rate than fixed-rate loans.
•   They can be a good option if you are able to qualify for a low-interest rate and are on track to pay off your student loans quickly.
•   You could potentially save money if the interest rate drops.

Cons of Variable 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.
•   Your monthly payment may not remain stable, and may increase or decrease depending on the market.
•   Monthly payments are not predictable, as they can increase or decrease as the rate changes.
•   For those paying their loan off on a fairly long timeline, their interest rate has more time to go up, which could cost the borrower more in interest over the life of the loan.

Choosing a Student Loan That Works for You

Your final decision depends on your unique situation, of course. If you plan to pay off your loan relatively quickly (lucky you), a variable-rate student loan may help you 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 help mitigate your risk by choosing a lender that caps its variable rates, but they will still fluctuate.

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, you could consider a fixed rate student loan.

If you have a high-interest rate grad school loan, for example, and your financial situation has improved since you first took out that loan, you could qualify for a lower fixed rate by refinancing your student loans.

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.

Looking to understand more about student loans? Check out our student loan help center and find calculators and resources that can help you better understand your student debt.

Student loans can get complicated, but SoFi is here to help. From helping you finance your education to helping you manage your existing student loan debt, we’ve got you covered.

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