A fixed-rate student loan offers a predictable monthly payment, with an interest rate that doesn’t change over the life of the loan. A variable-rate student loan, on the other hand, has an interest rate that can fluctuate, increasing or decreasing depending on market conditions. Generally, fixed-rate student loans are a safer choice.
Your student loan’s interest rate affects your monthly payment and how much interest you pay overall. Both fixed and variable student loans have benefits and drawbacks. Weigh the two options carefully because the choice you make can have a serious effect on your short- and long-term financial future.
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Fixed-Interest-Rate Student Loans
A fixed interest rate is somewhat self-explanatory: The rate remains constant for the duration of the loan. It will only change if you refinance or consolidate your loan.
“A fixed-rate student loan is positive because you know what to expect,” says Whitney Barkley-Denney, deputy director of state policy and senior policy counsel for the Center for Responsible Lending, a nonprofit research and advocacy group for consumers.
You can know upfront how much you will ultimately pay in interest on your fixed-rate student loan. Using a student loan calculator such as this one from FinAid.org, enter the interest rate, the starting balance, the minimum payment and the term of your loan to determine the final cost. For example, if your loan has a 4.99% fixed rate, you borrowed $30,000 and the term is 10 years, the total interest will be $8,165.99 if you make a fixed monthly payment of $318.05.
If that amount of interest seems excessive, you could reduce the loan term. Because the interest rate stays steady, calculating how much you could save with a shorter repayment term is easy. With a five-year term and the same fixed rate, the interest would drop to $3,959.97. However, your monthly payment would be larger, at $566.
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The primary source of student loans is the U.S. Department of Education, which offers fixed-rate direct loans.
According to Federal Student Aid, an office of the Department of Education, the fixed rates for loans disbursed between July 1, 2022, and July 1, 2023, are:
- 4.99% for both direct subsidized loans and direct unsubsidized loans for undergraduates.
- 6.54% for direct unsubsidized loans for graduate or professional students.
- 7.54% for Direct PLUS Loans for parents and graduate or professional students.
Rates for federal student loans adjust annually. Consequently, if you take out a new loan every year, each one may have a different interest rate. This can get confusing, and it is one of the reasons borrowers may decide to consolidate their loans after graduation.
Of course, the federal government isn’t the only place to get a fixed-rate student loan. Private lenders also offer them, and private student loan companies commonly offer both fixed- and variable-rate student loans.
Factors such as your credit rating, debt-to-income ratio and employment history aren’t considered with federal direct loans, but private lenders carefully weigh them. The rate you receive from a private lender will depend on your credit history and repayment ability.
Variable-Interest-Rate Student Loans
The other type of student loan interest rate is variable. As the name suggests, the rate can fluctuate. The federal government does not offer variable-rate student loans; only private lenders offer them.
Lenders don’t randomly set variable interest rates. They’re tied to an index rate such as the prime rate or the Secured Overnight Financing Rate. As these financial indexes change, lenders may adjust interest rates.
A private lender offers a variable student loan rate based on the index it uses, plus percentage points. This percentage is known as the margin. For example, if the 30-day SOFR is 3.39%, and the margin is 5%, the rate would be 8.39%.
Depending on the lender, a variable interest rate – sometimes called a floating rate – might change monthly, quarterly or annually.
In general, variable-rate student loans start with lower interest rates than fixed-rate loans, which can be alluring. But the risk of the rate rising can be off-putting. As a borrower, you have to weigh that risk. If the rate increases, so too will your monthly payment and the total cost of your loan.
Because of the unpredictable nature of variable-rate loans, forecasting exactly how much one will eventually cost you is impossible. Some lenders cap the rate at a certain percentage. When looking into variable-rate loans, ask about caps so you can calculate your maximum possible interest charges.
Who Can Benefit From a Variable-Rate Student Loan?
If you feel confident that you will pay off the loan before the rate escalates, a variable-rate loan may be a good choice for you, says Frankie Rendón, media outreach specialist for Student Loan Hero, a website for managing education debt. As long as the variable rate remains lower than what you’d receive with a fixed-rate loan, you will come out ahead financially.
Also, consider your own personality and comfort level when deciding between variable- or fixed-rate terms. Rendón recommends asking yourself if the lower variable interest rate will save you enough money to make the uncertainty worthwhile. If it will, then a variable-rate student loan is right for you.
Who Can Benefit From a Fixed-Rate Student Loan?
Fixed-rate loans are a better fit than variable-rate loans for some borrowers. “If you prefer a more straightforward, consistent repayment plan, a variable rate might not be wise for you,” Rendón says.
In that case, a fixed-rate loan will be more advantageous. You won’t have to rush to pay off your loan before the rate increases. Paying off student loans quickly may not be realistic for borrowers because these loans tend to be long-term commitments. Private student loan terms typically range from five to 15 or 20 years.
Additionally, fixed-rate loans can provide more stability when rates are increasing in response to inflation.
Keep in mind that all federal student loans have fixed rates. Other differences between federal and private student loans include better hardship assistance with federal loans.
Refinance to Switch Between Fixed and Variable Rates
If you later change your mind about having a fixed or variable rate for your private loan, you can refinance the loan either with the same lender or a different one to switch the type of rate. A new loan could require an origination fee, but these fees are rare for private student loans.
Although the federal government can’t swap your fixed-rate direct loan for a variable-rate loan, you can refinance your fixed-rate direct loan to a variable-rate private student loan. If you do this, you will no longer have access to federal student loan benefits. On top of that, payments on federal student loans are paused through Dec. 31, 2022.