Fixed vs. variable student loan rates: Which is best?
Key takeaways
- Fixed-rate student loans keep the same rate for the life of the loan.
- Variable-rate student loans have interest rates that change with the state of the market.
- Fixed rates are best for people who have longer loans and want monthly payment stability.
- Variable rates are best for people looking to get lower rates when markets improve and pay off loans relatively quickly.
Student loans can come with either fixed or variable rates. Each works best depending on the situation, such as the type of student loan you’re taking out. Fixed-rate loans are usually the safest choice for many students since it’s hard to predict which direction rates will go, but both rate types have their pros and cons.
Fixed vs. variable rate student loans: Pros and cons
Fixed-rate loans come with an interest rate that remains the same throughout the life of the loan, meaning you’ll have predictable monthly payments. By comparison, variable-rate student loans have an interest rate that fluctuates based on market conditions.
There are some other areas your rate can affect, including your budget, your student loan payment and how your payment relates to your future income.
Fixed-rate student loans
Fixed rates remain constant during the loan term, which means your monthly student loan payments will be predictable as you pay off your debt. The only way to change a fixed interest rate is by refinancing the loan.
While fixed rates are typically higher than the lowest advertised variable rates, they provide stability because the payment won’t change. You’ll know exactly how much you’ll pay monthly and how much interest you’ll pay overall.
Pros
- Interest rate will never change
- Monthly payments are consistent
- You’ll know how much interest you’ll pay
Cons
- Generally higher starting rates
- No benefit if interest rates drop
Variable-rate student loans
Variable interest rates are tied to market conditions, so your student loan payment could increase or decrease based on an adjustment in your interest rate. Lenders typically tie the loan’s variable rate to a benchmark rate, like the prime rate or the Secured Overnight Financing Rate (SOFR) index, plus a fixed margin.
While you might start with a lower payment than you would with a fixed-rate loan, your interest rate — and monthly payment — could rise later on.
Pros
- Typically lower starting rates
- Benefit from market changes (in some cases)
- Lower monthly payments if interest rates are low
Cons
- Rate can rise over time
- Monthly payment can change
When to choose a fixed- vs. variable-rate student loan
Fixed interest rates are good for borrowers who don’t have a lot of wiggle room to account for an adjusting interest rate. Variable-rate are a good option if you qualify for the lowest rates available.
All new federal student loans have fixed interest rates, and fixed rates are typically an option with private lenders. Private student loans tend to offer variable interest rate options as well.
Here are some scenarios where choosing a student loan with a fixed rate can make sense:
| When a fixed rate makes more sense | When a variable rate makes more sense |
|---|---|
| Your income is low and you need a student loan payment that will never go up. | You plan to pay off your student loan early before rates have a chance to rise too much. |
| You’re in a low-interest-rate environment and want to lock in a low rate. | You have some wiggle room in your budget in case of rising interest rates. |
| You’re choosing a long repayment period and will likely encounter market shifts. | You have good or excellent credit to qualify for the best rates and terms. |
There are several considerations to make before you decide which type of interest rate you choose:
- Consider the type of student loan: If you’re taking out federal student loans, your only option is a fixed interest rate. In contrast, most private lenders offer both.
- Think about how long it’ll take to pay off the loan: The longer your student loan, the more time a variable rate will have to fluctuate. That makes variable rates a better choice for parents or students who are not deferring payment.
- Look at market conditions: Take a look at current economic conditions and whether interest rates are rising or falling. For example, the Federal Reserve has been working to lower its interest rate, but markets are currently uncertain.
- Ask about variable terms: If you’re considering a variable-rate loan, ask the lender how often the rate changes and whether there’s a maximum rate cap.
- Think about your risk tolerance: Consider whether you’d be okay with short-term interest rate fluctuations or if you’d rather have the peace of mind of a fixed rate.
- Look at your credit score: Variable rates are best for those who can get the best rates and terms. If your credit score is lower, you may need student loans for bad credit, most of which have fixed APRs.
Take your time to think about each of these factors and how they might impact you if you were to choose a variable- or a fixed-rate student loan. And remember that you can change your mind later and refinance your loans if you decide the other option is better for you.
Bottom line
A fixed-rate student loan may be the best option if you prefer a longer repayment period and stable monthly payments throughout the life of the loan. Plus, it’s your only option if you’re exhausting your federal loan options first, which experts often recommend.
If you intend to pay off your loan faster and need a private student loan to fill in funding gaps, a variable-rate loan could be a better fit for you. Whichever option you choose, compare rates and terms from as many lenders as possible to get the best deal. You may also have to check into student loans for bad credit.
