Fixed vs Variable Interest Rates For Student Loans - Make The Right Decision For Your Future

Still wondering of a fixed or variable rate is right for you? Decide better by taking the pros and cons into consideration and how each loan type can be beneficial to you. Check out the list of questions to ask yourself to help the decision process.

Updated by Jason Joy Manoj on 23rd December 2019

The student loan interest rate plays a huge role in influencing the monthly payment to be made and the total interest paid during the entire life of the loan. Fixed and variable interest rates have their own drawbacks and benefits. It is important to consider both holistically and decide which is more suitable for you during your repayment both in the short term and long term financial future.

Having a fixed student loan interest rate is considered to be a favorable option for a borrower as the variable interest rate has been rising and is expected to continue going up. When you get a loan with a fixed interest rate then the rate given to you will be locked in from the time the loan is disbursed to you finish repaying the loan. The variable rates aren’t locked in and are subjected to the economic conditions. They are expected to change monthly or on a quarterly basis. 

As federal student loans have only fixed interest rates it is advised to apply and exhaust yourself of every federal student loan you can qualify for. In addition to that with a federal student loan, you can qualify for income-driven repayment plans and loan forgiveness programs that private student loans don’t provide access to.

Table of Contents

Pros and Cons of Fixed and Variable interest rates

If you can’t decide on which interest is best suited for you here are the pros and cons of each kind of interest rate to help you make a decision. Having a fixed interest rate on your student loans is a safer bet especially if you are considering to get out of debt faster. If you are willing to take a risk where you can save some extra money by saving in interest payments then you should consider a variable interest rate. 

Pros and cons of fixed interest rates

A fixed interest rate is locked in from the time the loan is disbursed till the repayment of the loan is finished. Unless you refinance your student loan the interest rate remains the same. 

Pros of fixed interest rates 

  • The interest rate does not increase due to any economic conditions

  • The monthly payments to be made will remain the same, so the payments to be made are quite predictable 

Cons of fixed interest rates

  • The rates offered here are usually higher than those of variable interest rates

  • You can’t really save on interest to be paid on the loan

Pros and cons of variable interest rates

The variable interest rates are set based on an economic indicator called LIBOR or also known as the London Interbank Offered Rate. The private lenders determine their variable interest rates by adding the LIBOR rate to a base rate. If the LIBOR rate goes up then the borrower’s rate goes up by that much as well. 

If you’ve decided to go ahead with a variable interest then it is advised to ask the lender how often the rates are adjusted. Some rates are adjusted on a monthly basis while others are done on a quarterly basis. Another important query to be made is the overall rate cap. All variable rates are often capped but the caps can be as high as 25%. 

Pros of variable interest rates 

  • These rates usually start out lower than those mentioned as fixed interest rates

  • If the rates don’t rise by much then you could potentially save on interest payments

Cons of variable interest rates

  • Recently the rates have been increasing which has resulted in higher interest payments to be made

  • The monthly payments to be made are unpredictable as the rates are adjusted on a monthly or quarterly basis. 

Who can benefit from a fixed or variable interest rate?

Each one’s financial condition varies so what might seem beneficial to somebody might not be beneficial to someone else. As discussed earlier fixed and variable interest rates have their own sets of pros and cons so they have their own set of benefits and advantages linked with them. 

A fixed interest rate is beneficial for those borrowers who - have a preference for a consistent and straightforward repayment plan. With a variable interest rate, you will tend to rush in repaying your loan before the rate increases. This is not realistic as student loans are long term commitments. Private student loans have loan terms ranging from 15 to 20 years.

A variable interest rate is beneficial for those borrowers who - are confident that they can be done with the repayment of their loans before the rate increases. As long as the rate is lower than the fixed-rate loan you are benefited financially. 

When do I consider a fixed or variable interest rate?

You need to consider a fixed interest rate loan when - 

  • The index and interest rates are increasing or are on the rise

  • You have a long time to go since your loans need to be paid off

  • You want to have a set monthly budget 

You need to consider a variable interest rate when - 

  • You have a good credit score which can help you get a lower interest option

  • You want to pay off your loans ahead of time as compared to a standard 10-year plan

  • You can expect to get a high paying salary to cover up the high-interest payments incase the rates rise.

Learn more about student loan interest rates

Questions to ask yourself while making a decision between fixed and variable interest rates 

Here are some questions a borrower needs to ask oneself before refinancing to get a fixed interest rate - 

  1. Is there an interest rate cap on the variable rate loan?

  2. What kind of interest rate am I most comfortable with?

  3. How long will I take to repay my loans?

By asking yourself those questions you get an overall idea of the whole loan situation. If you are planning to pay off your student loans in a few years then the variable interest rate is a good option so you can target the loans before the rates get higher. If your private lender can provide an interest cap then you can reduce the risk associated with the variable interest rate as you can get a fair idea of the fluctuation. 

Although comfort is not a quantifiable factor it still plays a vital role in your repayment journey. If you choose a rate that can make your repayment journey easier but it adds on to your stress and takes away your peace of mind then it isn’t advised to ahead with this particular rate type.

If you can qualify for a lower interest rate with a variable interest type loan then you can save on interest payments during the initial repayment period and enables you to make higher payments for a shorter loan term. 

Another factor to look out for is type of loans you currently have. If you have private student loans with variable interest and you are looking for the stability offered with a fixed rate then refinancing your loans is a great option and will help you in the long run.

Worried about your college tuition? Learn more about student loans

How much can I expect to save while choosing between fixed and variable interest rates?

The amount saved also depends on the loan term, if you have a shorter repayment term then you can save money with a variable interest rate even if the rate increases. But given the situation that interest rates keep on rising then it will be hard to meet the monthly payments. With the continuous rise in rates then it isn’t advisable to go for a variable rate. Budgeting is easier with a fixed interest rate.

Before you go ahead and choose with option is right for you, consider the repayment term and your risk of tolerance. If the repayment term for your loan is 20 years and you prefer a stable monthly payment to help you get a peace of mind. However, if you are well convinced that the savings of a lower, fluctuating rate are preferable over a risk that the rate could skyrocket overnight then going ahead for a variable rate makes sense.