Fixed vs. variable student loan rates: Which is best for you?

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When you get a student loan, you might face the choice between fixed and variable interest rates. While the lowest interest rate available is important, whether or not your interest rate might change down the road also matters.

Fixed interest rates don’t change, while variable interest rates fluctuate. The right choice depends on the type of borrower you are, your future income and what you can reasonably afford to repay. Here’s the breakdown of variable versus fixed interest rates for student loans.

Fixed vs. variable student loans: Which is best?

Here are a few scenarios to consider when determining when to choose a fixed or variable student loan.

When to choose a fixed-rate loan

Fixed interest rates are rates that stay the same throughout the course of your student loan repayment term. The only time your interest rate will change is if you consolidate or refinance your student loans.

Fixed interest rates give you the same payment each month, which means that your budget remains consistent. All federal student loans have fixed interest rates, and fixed rates are typically an option with private lenders.

Here are some of the benefits of a fixed-rate student loan:

  • Interest never changes. There are no surprises when it comes to fixed interest rates. Your interest rate never changes, so even if student loan interest rates rise due to market conditions, you’ll still benefit from the rate you took out initially.
  • Repayment plan is consistent. Since student loans are typically repaid over the course of 10 or more years, you’ll be able to keep your monthly payment the same — which is especially helpful if you face income challenges.

When to choose a variable-rate loan

Variable interest rates are rates that fluctuate based on an index rate, like the prime rate or the Libor. The interest rate changes, meaning your monthly payments could rise or fall based on an adjusted interest rate. While you might start off paying a lower interest rate than you would with a fixed-interest loan, there’s a chance that you could have a higher interest rate later on. Private student loans tend to offer variable interest rates along with fixed-interest options.

Here are some of the benefits of a variable-rate student loan:

  • Rates are typically lower. Variable interest rates are often much lower than fixed interest rates, especially upon sign-up.
  • Benefit from some market shifts. If interest rates drop, like what happened in 2020, you will pay less on your loan. This is especially important if you can pay off your loan quickly, before interest rates rise again.

Factors to consider

While there are benefits to both fixed-rate and variable-rate student loans, there are a couple of factors that you should be aware of.

Things to watch out for with fixed-rate loans include:

  • Typically higher starting rates. Since fixed interest never changes, the advertised rate for fixed rates is typically higher than that of variable rates.
  • Can’t take advantage of rate drops. In environments where interest rates fall, people with variable rates will save a significant amount on their monthly payments, but people with fixed interest rates will still be tied to their higher rate.

Things to watch out for with variable-rate loans include:

  • Possible volatile fluctuation. Since variable interest rates are tied to market conditions, you could see a higher interest rate than with a fixed interest rate for the same type of loan.
  • Varying monthly payments. The higher your interest rate, the higher your payment, and your monthly balance may change from month to month.

Who is a fixed-rate student loan best for?

Fixed interest rates are good for borrowers who don’t have a lot of wiggle room to account for an adjusting interest rate. It’s ideal for low-income earners who can only devote a certain amount of money per month to student loan repayments and can’t afford to pay extra in case their interest rate (and monthly payment) go up.

Who is a variable-rate student loan best for?

Variable interest rates are good for borrowers with the best credit who qualify for the lowest interest rate available. These types of interest rates are good for borrowers who plan to pay off their loans as soon as possible — if you see an extremely low rate, you could pay off your loan before rates have a chance to rise, or you could afford to make higher payments more often.

Borrowers with high-paying jobs and those who don’t mind fluctuating payments would benefit from variable-interest-rate loans. If you can afford the wiggle room in your budget, you could end up saving a lot of money over the life of your loan.

Next steps

If you’re thinking about taking out or refinancing student loan debt, the type of interest rate can be a determining factor in where you borrow from. The first thing that you’ll want to do is look at your overall financial situation and decide which kind of student loan may be right for you. Federal student loans have only fixed interest rates, plus a variety of repayment terms.

Private student loans tend to offer both fixed and variable interest rates, giving you the option to take advantage of the one that best fits your finances and repayment plan. If you like having the same set amount every month, a fixed interest rate may be a good match. If you think you can pay off your student loans before rates have a chance to rise, a variable interest rate might work best.

No matter which type of student loan you decide to get, make sure to get quotes from a few student loan lenders. That will help ensure that you are paying the least amount of interest possible.

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