Fixed- vs. Variable-Rate Student Loans: How To Choose the Best Option

Student loan interest, in simple terms, is the additional money you repay on top of what you borrow. The interest rate is expressed as a percentage of the total amount you borrowed. Private student loans may offer fixed or variable interest rates, which affect the amount you pay for your loan over time.

This guide covers the pros and cons of fixed- and variable-rate loans to help you find the best private student loan for your financial needs.

Current private student loan rates

Fixed- vs. variable-rate student loans

Many student loan borrowers don't understand the difference between a fixed- and variable-rate loan until they enter repayment. Here's what you need to know:

• Fixed-rate loans have an interest rate that stays the same throughout the entire life of the loan. This means you'll always make the same monthly payment.
• Variable-rate loans have interest rates that can fluctuate depending on economic and market conditions. These loans usually offer lower initial interest rates, but the rates change based on circumstances outside of your control. That means your monthly payment can go up unexpectedly (or, in rare cases, go down).

“A lot of borrowers just look at the interest rate and pick the variable rate because it's lower to start,” says Joseph Reinke, a chartered financial analyst (CFA) and founder of financial planning firm FitBUX. “They don't understand what can make the rate go up, how often it can go up, or how high it can go up.”

Pros and cons of fixed-rate student loans

Fixed-rate student loans are generally the better option for most student borrowers, but they do have some drawbacks.

Pros of fixed-rate loans

• Predictable monthly payments: Your payment remains the same for the life of the loan, which makes it easier to budget for.
• Fixed lifetime loan cost: Since the interest rate never changes, you'll know exactly how much the loan will cost you over time.
• Usually less expensive over a long repayment term: Fixed-rate loans are often more affordable over the long run, especially if you plan to repay the loan over many years and want to avoid rate increases.

Cons of fixed-rate loans

• Not all borrowers qualify: While federal loans are fixed and available to most students, private lenders often reserve fixed rates for applicants with strong credit or a cosigner.
• No chance for rate drops: Unlike variable-rate loans, fixed-rate loans won't benefit if interest rates fall in the future.
• Can cost more for short-term borrowers: If you plan to repay your loan quickly, you might save more with a variable-rate loan, which usually starts with a lower interest rate.

Read More: What Is the Average Student Loan Interest Rate?

Pros and cons of variable-rate student loans

Variable-rate student loans can start with lower costs, but they also come with more risk. Weigh the pros and cons to decide if a variable rate fits your budget and repayment goals.

Pros of variable-rate loans

• Can be easier to qualify for: If you're applying for a private student loan and don't meet the requirements for a fixed rate, a variable-rate loan might be your only option.
• Typically lower starting payments: Variable-rate loans typically begin with lower interest rates than fixed-rate loans, which can result in smaller initial monthly payments.
• Potential for rate drops: While rare, your rate could decrease if market conditions improve, which would also lower your monthly payment.

Cons of variable-rate loans

• Interest rates can rise: Your interest rate may increase with market trends, driving up your total loan cost over time.
• Unpredictable monthly payments: Rate changes affect your monthly payment amount, which can make it harder to plan and budget. That said, depending on your lender, a variable-rate loan could come with an interest rate cap, which is the highest variable rate allowed by the lender. Your rate will never increase past this amount.
• Potentially more expensive overall: If you don't repay the loan quickly, you could end up paying more interest than you would with a fixed-rate loan, even if there's a rate cap in place.

Check Out: Strategies To Pay Off Student Loans Faster

How to choose between fixed-rate and variable-rate loans

If you need to decide whether a fixed- or variable-rate loan is right for you, make sure you consider the following factors:

• Loan term length: The longer it takes you to repay your loan, the more likely it is that a fixed-rate loan will cost you less.
• Risk tolerance: Borrowers likely to feel overwhelmed by uncertainty may prefer to stick with fixed-rate loans.
• Economic trends: During times of higher interest rates, taking out a new fixed-rate loan may be more expensive than a variable-rate loan. This is because the high rate will be set for the life of the loan with a fixed interest rate, while a variable rate may go down when the economy stabilizes. On the other hand, when interest rates are low, fixed-rate loans will typically cost less over time since variable rates may increase during the life of the loan.
• Loan balance: The size of your loan affects how much you pay in interest. “Let's say you borrow $10,000 in a variable-rate loan, and your interest rate goes up by 3%,” says Reinke. “It's no more than a $15 to $20 per month difference in your monthly payment. But if you borrowed $100,000 and your rate goes up by 3%, your monthly payment will increase by $150 to $200.”
• Future income: Borrowers who anticipate earning a high income after graduation may be in a better position to take on a variable-rate loan since they can plan on paying off their loan quickly or can afford to ride out rate fluctuations. Reinke does caution undergraduates to remember that not every college graduate can expect a six-figure income.

Refinancing fixed and variable student loans

If you refinance your student loans, you'll pay off your old loans with a new, private student loan, leaving you with just one loan and payment to manage. Refinancing may also be an opportunity to switch from a variable- to a fixed-rate loan or vice versa.

Borrowers with a variable-rate loan may choose to refinance to a fixed-rate loan for a number of reasons. To start, you might make the switch to lock in a fixed rate if you can now qualify for a better rate than you're currently paying. It might also make sense to refinance a variable loan into a fixed-rate loan if you expect to have a longer repayment period than you originally thought.

It's less common to refinance a fixed-rate loan into a variable-rate loan, but there are still some scenarios where that may make sense. For example, if you have a fixed loan with a high interest rate, you might choose to refinance it into a variable loan with a lower initial interest rate. Generally, this strategy will work best if you plan to repay the loan quickly before the rate increases.

See Also: Pros and Cons of Consolidating Student Loans