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Choosing Between Variable And Fixed Rate Student Loans

By Kayla McCormack · July 13, 2021 · 4 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

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 as a strategy to repay existing student loans.

Either way in this hypothetical, 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 personal financial situations may have a bearing on which type of loan is the right choice.

What factors are worth considering before deciding between a fixed- or variable-rate student loan? 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 on the loan when it is originally borrowed will be the same rate you have at the end of the term. The only way a borrower would be able to change this interest rate is through refinancing the loan with a private lender or, for federal student loans, consolidating them through the government.

Fixed-rate student loans are usually considered the safer option as there is no chance the 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 Student Loans

•  They’re not affected by interest rate changes.

•  The monthly payments stay the same throughout the life of the loan, unless the borrower chooses to increase what they pay.

Cons of Fixed-Rate Student Loans

•  Fixed-rate loans may have a higher starting interest rate than variable rate loans. This could mean missing out on initial savings if variable rates are lower than the fixed interest rate.

Variable-Rate (or Floating-Rate) Student Loans

As mentioned above, all federal student loans have fixed interest rates. So as of this writing, borrowers will only have the option to choose a variable rate student loan when borrowing from a private lender.

While variable rate student loans typically have a lower starting interest rate, they are also riskier than fixed-interest loans. 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 increase. How do lenders choose the rates? Many private student loan lenders base the interest rates on interest rate indices like the London Interbank Offered Rate (LIBOR).

So when a variable-rate loan’s interest rates are pegged to LIBOR, and the LIBOR rates go up, the interest rate on the variable-rate loan will generally follow.

Before choosing a variable-rate 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 interest rate than fixed-rate loans.

•  They can be a good option for borrowers who qualify for a low-interest rate and are on track to pay off their student loans quickly.

•  Borrowers 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.

•  The monthly payment may not remain stable, and may increase or decrease as the interest 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

The 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 spend less in interest.

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.

For borrowers who anticipate repaying student loans over a longer time period, or those whose future income level is uncertain, or those who are simply uncomfortable taking on extra risk, a fixed rate student loan may make more sense.

Securing a New Interest Rate with Student Loan Refinancing

Whether you originally borrowed a fixed rate or variable rate student loan, the main thing to remember is that the rate assigned when the loan was initially borrowed doesn’t have to be the rate for the entire life of the loan. Knowing your refinancing options can help put your mind at ease—and hopefully help you spend less in interest over the life of the loan.

While refinancing student loans can potentially help borrowers secure a lower interest rate, it’s not always the right option. Refinancing a federal student loan eliminates them from federal benefits and borrower protections like income-driven repayment plans or deferment.

The Takeaway

When thinking of the difference between a fixed and variable rate student loan, it helps that the names are descriptive. A fixed interest rate remains the same for the entire life of the loan.

A variable interest rate may fluctuate with market changes over time. All federal student loans have fixed interest rates that are set annually by Congress. Private student loans may be either fixed or variable.

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.

Potential borrowers can check the rates and terms they prequalify for in just a few minutes.


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SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF SEPTEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

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