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

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The type of interest rate you get on a student loan is just as important as the rate itself. Fixed interest rates stay the same throughout the loan term, which means you’ll have predictable monthly payments. Variable interest rates, on the other hand, can fluctuate in response to market changes. Your monthly payments could rise and fall accordingly.

The right choice between the two 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.

What is the difference between fixed and variable student loans?

The main difference between fixed and variable student loans is whether the interest rate can change.

Fixed student loans

Fixed rates remain constant for the duration of the loan term, which means that 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 advertised variable rates, they provide stability because the payment won’t change. When you receive your loan, you’ll know exactly how much you’ll pay every month and how much interest you’ll pay overall.

Variable student loans

Variable interest rates are tied to market conditions, so your 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 Libor index.

While you might start off with a lower payment than you would with a fixed-rate loan, there’s a chance that your rate — and monthly payment — could rise later on.

When to choose a fixed-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. 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.

All new 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. Although fixed rates are typically higher than advertised variable rates, they are consistent — 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. Student loans are typically repaid over the course of 10 or more years, but your monthly payment won’t change. This is especially helpful if you face income challenges.

When to choose a variable-rate student loan

Variable-rate student loans are a good option if you qualify for the lowest rates available. And if you plan to make extra payments, you could pay off your student loan early — before rates have a chance to rise. If your budget has room for these fluctuations, you could end up saving a lot of money over the life of your loan.

Private student loans tend to offer variable interest rate options, but federal student loans don’t come with variable rates.

Consider the main benefits of variable rates before applying:

  • Rates are typically lower. Variable interest rates often start off much lower than fixed interest rates.
  • Benefit from some market shifts. A drop in interest rates, like what happened in 2020, could push down your monthly loan payment. This could help you direct more money toward the principal and potentially pay off the loan quicker.

Final considerations

It’s important to gather all the information you can before choosing your student loan.

If a lender offers variable-rate student loans, ask how often the rate can change. Some lenders adjust variable rates monthly, while others adjust the rate every quarter. The lender might also cap the rate increase to keep your costs under control. These details can help you figure out whether your budget can accommodate a variable-rate loan.

You might decide to instead get a fixed-rate student loan if you prefer predictability. This is generally a good option for recent college graduates who are still figuring out their budgets. If you want to take advantage of lower student loan rates later on, you might be able to refinance your student loans.

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 and borrower protections — which is why they’re typically the best place to start your search. Private student loans, on the other hand, 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.

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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