Credible takeaways
- Fixed-rate student loans have interest rates that never change, while variable-rate loans have rates that fluctuate.
- Fixed-rate student loans may make more sense if you want predictable monthly payments or expect to repay your loans over a longer period.
- Variable-rate loans may be a better fit if you plan to pay off your debt quickly and can handle the risk of your interest rate increasing in the future.
Private student loans come with either fixed or variable interest rates. Fixed rates stay the same for the life of the loan, while variable rates can change over time. The right option depends on whether you want predictable monthly payments or are comfortable with the possibility of your rate changing in exchange for a potentially lower starting rate.
This guide breaks down the pros and cons of fixed- and variable-rate student loans to help you choose the best option for your financial situation.
Current private student loan rates
Fixed- vs. variable-rate student loans
- 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).
Pros and cons of fixed-rate student loans
Pros
- Predictable monthly payments
- Fixed lifetime loan cost
- Usually less expensive over a long repayment term
Cons
- Not all borrowers qualify
- No chance for rates to drop
- Could cost more than a variable loan over a short repayment period
Details on the pros
- 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.
Details on the cons
- 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.
When should you choose a fixed-rate loan?
A fixed-rate student loan can make sense if you want predictable monthly payments and long-term stability. Your interest never changes, so your payment won’t increase if rates rise in the future.
Fixed-rate loans are also a better fit if you expect to repay your loans over a longer period of time. While variable-rate loans may start with lower rates, those rates can increase over time, making the loan more expensive in the long run.
A fixed-rate loan may also be a better choice if you prefer consistency in your budget. You’ll know exactly what your monthly payment will be, which makes it easier to plan your finances after graduation, especially if your income may fluctuate early in your career.
Pros and cons of variable-rate student loans
Pros
- Can be easier to qualify for
- Typically lower initial payments
- Potential for interest rate drops
Cons
- Interest rate could go up with economic conditions
- Unpredictable payments
- Potentially more expensive over the life of the loan
Details on the pros
- 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.
Details on the cons
- 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
When should you choose a variable-rate loan?
Variable-rate student loans may make sense if you expect to repay your loan quickly and are comfortable with the risk that your interest rate and monthly payment could increase over time. These loans often start with lower interest rates than fixed-rate loans, which can reduce your borrowing costs in the short term.
However, many borrowers underestimate how much rates can change over the life of the loan.
“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.”
Your loan balance also plays a role in how much rising rates could affect you.
“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.”
Borrowers who expect a high income after graduation may be in a better position to take on a variable-rate loan since they may be able to pay off their debt faster or afford higher payments if rates rise.
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.
FAQ
Is it better to get a fixed-rate or variable-rate student loan?
Open
What is the difference between a fixed-rate and variable-rate student loan?
Open
Do fixed-rate or variable-rate student loans have the lowest starting interest rate?
Open
Can I switch my student loan from a variable rate to a fixed rate later?
Open
Are variable-rate student loans riskier than fixed-rate loans?
Open
How do I qualify for the lowest interest rate on student loans?
Open
