Whether a fixed or variable student loan interest rate is right for you can depend on a few different things. You’ll need to think about the type of loan you take out, your credit score, and your potential salary after you graduate.
Here’s the difference between the two:
- Fixed interest rates: Choosing a fixed-interest rate means the rate doesn’t change through the entire life of the loan. Your last payment will have the same interest rate as your first payment. Unless you refinance, the interest rate never changes.
- Variable interest rates: Variable rates change based on economic conditions. Your interest rate can rise or fall based on the index rate. If the index rate increases, your interest rate and monthly payments will go up, as well. If the rate drops, so does your monthly payment.
Fixed or variable student loan interest rates
The idea of a lower interest rate sounds enticing, but the stability of the same interest rate feels secure. It can be hard to determine which one is right. Here’s a comparison of fixed and variable rate student loans.
|Fixed-interest rate||Variable-interest rate|
|Interest rate||The rate you start with is the rate you’ll have throughout the term of the loan.||The rate can periodically increase or decrease along with the reference rate (such as LIBOR or the prime rate) it's indexed to.|
|Monthly payment||Your monthly payment will remain constant throughout the term of your loan (unless you choose an income-driven repayment plan).||Your monthly payment can fluctuate depending on changes in the interest rate.|
|Pros||• Certainty of the same rate and monthly payment throughout the term of the loan.||• Generally offers a lower rate at the outset.
• If the reference rate does not rise, can provide a lower overall repayment amount compared to a fixed-rate loan.
|Cons||• Interest rate will generally be higher than a variable-rate loan with the same repayment term.||• Less predictability in terms of your monthly payment amount.
• Possibility of your interest rate increasing in the long term (variable rates are often capped, but that cap is often high, at 15%-18%).
Consider a fixed interest rate loan if…
- It’ll be a while before your loans are paid off.
- Index and interest rates are on the rise.
- You’re unsure about your potential salary and want to have a set monthly budget.
Consider a variable interest rate loan if…
- Your credit score guarantees you a lower interest option.
- You’ll pay off your loans faster than the standard 10-year plan, meaning less chance of seeing rates rise.
- You expect to have a high-paying salary that can cover your costs in case interest rates rise.
Fixed interest rates
Depending on the loans you have, you might not need to make a choice between which interest rate to get. Your loan might determine that for you.
Federal student loans only offer fixed interest rates, although each type of loan varies in how much interest they charge. Federal loans are offered by the federal government and tend to offer lower interest rates than private loans, so try to take advantage of them first.
If you need to tap into private student loans, you might get an option for a fixed or variable interest rate — you can choose.
Variable interest rates
Generally, fixed interest rates are a safer bet for long-term loans like student loans. But if you want a variable interest rate, you might need a:
- Good credit score: The higher your credit score, the lower your interest rate will be. If your credit score gets you a lower variable interest rate compared to your fixed option, it might be worth checking out.
- Decent salary: Going to college doesn’t guarantee a high-paying job. But if you’re going into a high-demand field, you might feel confident in getting a job that pays well once you graduate. A good salary means you can cover the interest rate changes when they occur. A lower salary means a tighter budget. Your future career might decide which interest rate is best for you.
- Cosigner: If you don’t have the credit history or the cash to prove your creditworthiness, you might need someone to vouch for you. Having a cosigner gives you the chance to land a lower interest rate you wouldn’t normally get on your own.
Can you get lower loan rates?
When you agree to your loan repayment term, you’re agreeing to the loan payments set by the student loan lenders. A lower interest rate generally means a new loan. If you’re alright with that, you can look into refinancing.
Student loan refinancing combines all your student loans by replacing them with one new loan. Your interest rate is based on your credit score. An excellent credit score means a low-interest rate, regardless of whether it’s fixed or variable.
Before you decide to refinance, it’s important to compare private lenders first, so you can get the lowest interest rate and best terms for your situation. You even have the option to pay your loans off sooner than the standard 10-year repayment plan. But you also have the chance to lower your monthly payments if you can’t afford to make huge loan payments at the moment.
The choice between a fixed rate or variable-rate loan isn’t as confusing once you know the difference between the two. But the one you choose is based on many different factors, including your financial well-being while you’re in school and after you graduate. Try to be cautious now so your future self is prepared for the payments in the future.
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