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Variable Vs Fixed Rate Student Loans

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Fixed Rate Loans Explained

Variable vs Fixed Rates: Whats the Difference?

On fixed rate loans, interest rates stay the same for the entirety of the loan’s term. This means that the cost of borrowing money stays constant throughout the life of the loan and won’t change with fluctuations in the market. For an installment loan like a mortgage, car loan or personal loan, a fixed rate allows the borrower to have standardized monthly payments.

One of the most popular fixed rate loans is the 30 year fixed rate mortgage. Many homeowners choose the fixed rate option because it allows them to plan and budget for their payments. This is especially helpful for consumers who have stable but tight finances, as it protects them against the possibility of rising interest rates that could otherwise increase the cost of their loan.


  • Fixed rate loans have interest rates that stay the same for the life of the loan
  • Consumers who value predictability tend to prefer fixed rate loans

Choose Afixed Or Variableinterest Rate

Interest is the cost youre charged for borrowing money. When you pay back a loan, you pay it back with interest, so you end up paying back more than you borrowed.

Fixed interest rates stay the same for the life of the loan.

BenefitGet predictable monthly payments with an interest rate that doesnt change over time.

ConsiderationYour total student loan cost may be higher because the interest rate may be higher than the starting variable interest rate.

Variable interest rates may go up or down due to an increase or decrease to the loan’s index.

BenefitYour interest rate may be less than a fixed interest rate, resulting in a lower total student loan cost.

ConsiderationYour interest rate can rise or fall as the market index changes, so your student loan payments may vary over time.

James compares variable and fixed interest rates

Final Considerations: Is It Better To Refinance With A Fixed Or Variable Student Loan

If you are thinking about refinancing your student loans, the interest rate you receive may determine where you borrow.

Private lenders typically offer both fixed and variable interest rates, allowing you to choose the one that best matches your finances and repayment plan.

If a lender provides variable-rate student loans, find out how frequently the interest rate might fluctuate. Some lenders alter variable rates on a monthly basis, while others do so every three months.

The lender may limit the rate increase to keep your spending under control. These specifics might help you determine if your budget can support a variable-rate loan.

If you choose consistency over upfront savings, you can consider a fixed-rate student loan.

This is a good alternative for fresh graduates who are still trying to figure out their finances.

If you wish to take advantage of reduced student loan rates, you may be able to refinance your student loans as your financial situation improves.

Make sure to receive quotations from a few different student loan providers, regardless of whatever form of student loan you decide to take out. That way, youll be able to pay the least amount of interest feasible.

Read Also: What Type Of Student Loan Do I Have

How Are Fixed Rates Calculated

A fixed interest rate is one thats locked in at the time you sign your loan agreement. This rate stays the same for the lifetime of the loan regardless of what happens with your own finances, the economy or other market benchmark rates, your loans APR will not change.

With federal student loans, fixed rates are determined by law, set each year by Congress according to 10-year Treasury Note rates. These fixed rates apply to any federal loans originated that year.

For private student loan lenders, fixed rates arent usually tied to any economic indicators or benchmarks. Instead, these rates are set by the private lenders themselves based on their own assessment of the current market conditions.

Your personal financial details can also affect your fixed loan rates. As a borrower or cosigner, things like your income, credit history/credit score, and even your loan term can affect the interest rate youre offered.

What Is The Danger Of Taking A Variable Rate Loan

How Does an Interest Rate Change Affect My Student Loan?

Although some studies have shown that most borrowers pay less over the long-term with variable rate than they do with fixed rate loans, they might not always be the best option for everyone. Although the interest rates applied to variable rate loans are benchmarked, they can still move by a percentage or two with sudden changes in the market. This will impact those whore borrowing significant amounts of money considerably.

If youre looking at getting a long-term loan, then looking at anamortization schedule of the loan might help you to understand which option might be best. This schedule what percentage of each monthly payment is going towards the interest rather than theprincipal of the loan. Typically, the amount contributed towards interest drops over time. For long-term borrowers, this might make variable rates a better option.

However, if you prefer the reassurance of having the same loan repayment being taken from your account monthly or are borrowing for the short-term, then a fixed rate might be the option to go for. Taking the type of loan into account is also important. For example, choosing an adjustable-rate mortgage, where interest rates are fixed for five years before being made variable, is a great way to ensure security and potentially take advantage of a decreasing interest rate in the long-term.

Alternatively, for borrowers looking to get a student loan, then the options available for you to save in the long term are slightly different.

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How Variable Rate Loans Work

Most variable rate consumer loans are tied to one of two benchmark rates, the London Interbank Offered Rate, known as LIBOR, or the Prime Rate. Most simply, these two benchmarks serve as an easy way for financial institutions to determine the price of money. Lenders use LIBOR and the Prime Rate as baselines for variable rate loans, adding a margin on top of the benchmark rate to calculate the rate received by a consumer.

As with other forms of debt, the margin and interest rate that a borrower receives on a variable rate loan are heavily dependent on , lender and loan product. For example, credit card companies tend to use the Prime Rate listed in the Wall Street Journal at the end of each month to determine interest rates a consumer receives in the next month. With a Prime Rate of 4.25% and an added margin of 7% to 20%, a consumer with good credit might have a 10% margin addedâreceiving an interest rate of 14.25%. Margins tend to be higher for riskier loans, less creditworthy borrowers, and shorter term loans.

Why You Can Trust Bankrate

Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.

Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.

Our loans reporters and editors focus on the points consumers care about most the different types of lending options, the best rates, the best lenders, how to pay off debt and more so you can feel confident when investing your money.

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Rising Wages Can Make Repayment Easier In The Future

James Anderson, who is the Director of Financial Aid at Montclair State University, pointed out another way inflation can be a boon for borrowers who have to repay their student loans either way â through higher wages.

In periods of high inflation, he says, it is not unusual for salaries to increase to keep pace. Not only that, but many industries are paying more than ever right now in order to recruit qualified talent within a number of fields.

“If an individual has fixed rate loans and earns a higher salary, they may be better equipped to make payments on their student loan,” says Anderson.

Even so, he said you cannot deny that higher prices for other commodities, such as food, rent and transportation, may offset that advantage.

What Are Libor And Sofr

Fixed vs. Variable Interest Rates

A lender might use several indexes to determine your variable interest rate. For a long time, the London Interbank Offered Rate , which is based out of the United Kingdom, was the most common index used for determining variable interest rates. However, this index is scheduled to be discontinued as of June 2023.

Private student loan lenders will generally be required to pick a replacement index thats comparable to LIBOR. Lenders will likely choose the Secured Overnight Financing Rate , as this is the index recommended by the Federal Reserves Alternative Reference Rates Committee. SOFR charts the average rate of interest that U.S. banking institutions borrow money from other institutions overnight, using U.S. Treasury bonds as collateral.

In other words, the SOFR rate determines the cost of borrowing for banks, and it helps banks decide how much interest to charge borrowers.

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Fixed Or Variable Student Loan

All federal student loans have fixed interest rates. Its typically best to max out federal student loans before turning to private student loans because borrowers with federal loans qualify for income-driven repayment plans and loan forgiveness programs borrowers with private loans won’t.

If you opt for a private student loan, or if you refinance your existing student loans through a private lender, you can typically choose a fixed or variable rate. Here’s how to decide between them:

Variable Student Loan Rates Are A Gamble

Variable rates are subject to change throughout the life of the loan. Student loan lenders typically set variable rates based on an economic indicator known as the London Interbank Offered Rate, or Libor. Lenders determine variable rates by adding the Libor rate to a base rate. If the Libor goes up, your rate goes up exactly that much.

» MORE:Even near 1%, are variable rate student loans worth the risk?

Before getting a variable-rate student loan, ask lenders how often the rate is subject to change. Some adjust variable rates monthly, while others adjust every three months. Also, find out about the overall rate cap. Variable rates are often capped, but the caps can be as high as 25%.


  • Rates typically start out lower than fixed rates.

  • You could save on interest if variable rates dont rise by too much.


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Fixed And Variable Interest Rates Defined

As mentioned, there are two primary types of interest rates that you will encounter when taking out a student loan. Depending on your lender and the type of loan, youll have either a fixed or variable interest rate.

  • Fixed interest rates remain the same for the entirety of the loan period, giving you a consistent and predictable interest rate regardless of market changes. On average, fixed rates tend to be slightly higher than variable rates at the time in which you apply for your loan.
  • Variable interest rates may change over the course of the loan, rising or falling with factors such as market rates. Borrowers may find this unpredictable, but variable rates tend to start lower than fixed rates.

When Should You Refinance A Student Loan With A Variable Interest Rate

Student Loan Basics: Fixed &  Variable Interest Rates

If you qualify for the lowest rates, variable-rate student loans are an excellent alternative.

The following are some instances in which a variable rate loan makes sense:

  • You have exceptional or good credit, which allows you to get the best rates and conditions.
  • You have some leeway in your budget in case interest rates rise.
  • You intend to repay your student debt before interest rates climb significantly.

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New Students Face A Double

Of course, fixed rate loans from the last few years are a better deal than loans that will be taken out this year. In fact, federal student loans taken out for the 2022-23 academic year come with exceptionally high rates â4.99% for undergrad, 6.54% for graduate direct unsubsidized loans, and 7.54% for PLUS loans.

Unfortunately, this means borrowers taking out federal student loans this year are being hit in every direction. They’re going to pay higher fixed interest rates when they eventually begin repaying their student loans, but they’re also paying more for food, housing, and all their regular bills.

Financial advisor Daniel J. Milan of Cornerstone Financial Services agrees that inflation decreases the purchasing power of individuals regardless of their student loan debt status. Unfortunately, this means today’s borrowers are facing rising prices when it comes to eventually servicing their debt on top of everything else.

“So, if other costs are increasing, then that means the borrower may feel more stress when it comes to maintaining their student loan payments.”

Fixed Vs Variable: How To Determine Which Student Loan Rate Is Best For You

by Anantya Sahney | In Financial Empowerment| 18 June 2018

Are you willing to accept unexpected interest rate changes in return for a lower starting rate? This is the trade-off one must consider when choosing to pursue a variable vs. fixed rate loan.

Variable interest rate loans, also known as floating rate loans, are loans in which interest rates change based on market fluctuations. Variable interest rates are determined by two components: a benchmark and a spread. A variable benchmark is used to price macroeconomic risk, and a fixed spread is used to assess the risk of lending to an individual borrower.

Lenders usually peg the benchmark to an index such as the London Interbank Offered Rate or an internal rate like the . Both are used to price market risk and transfer it to the borrower. As the economy overheats and rates rise, so does the cost of a variable rate loan.

Benchmark rates fluctuate based on local and global economic factors. Below is an example of 3-month LIBOR rates and how they have changed since 2000. Usually, rates rise in the build-up to a major economic event such as the 2008 financial crisis. After the crisis, LIBOR dropped and was consistently low from 2010 to 2017. However, rates then more than doubled in a single year: from around 1.15% in April 2017 to 2.3% in April 2018.


What determines variable interest rates?

Is variable rate better than fixed?

Do variable rates ever go down?

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Private Student Loans: Variable Vs Fixed Rate

Now that we have federal loans out of the way, lets review the five things to know about variable vs fixed rate private student loans.

  • Most private student loan lenders today are offering both variable and fixed rate loans. The LoanFinder only includes variable interest rate programs. We do this because its a bit less confusing for borrowers when they are first evaluating their options.
  • A private student loan with a fixed rate will always have a higher interest rate than a variable rate loan from the same lender. Since student loans are repaid over a relatively long period of time, lenders set rates such that if they do increase in the future, they arent losing out on the margin they could earn had the loan been variable.
  • Theres no way to know if interest rates for a variable rate loan will increase. With some research about historical trends and an understanding of the financial markets or, better yet with the help of a financial expert, you can weigh the relative odds that a variable rate loan will increase. But remember: no one can predict the future.
  • When looking at how rates have changed in the past to guess how they might behave in the future, its important to consider your repayment term of a private student loan, it may be 5, 10 or even 15 years in length. How interest rates fluctuate over 5-15 years may be very different.
  • When Should You Refinance A Student Loan With A Fixed Interest Rate

    Variable vs Fixed Interest Rate

    Fixed interest rates are advantageous for borrowers who do not have a lot of wiggle room to accommodate for an altering interest rate.

    Here are several situations where refinancing for a fixed-rate student loan makes sense:

    • Youve chosen a long payback time, which means youll not be subject to market fluctuations.
    • You want to lock in a low-interest rate since you live in a low-interest-rate environment.
    • Your salary is minimal, and you require a student loan payment that will never increase.

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    Federal Student Loan Interest Rates

    All federal student loans have fixed rates that will stay the same throughout the life of the loan. Federal rates are set by Congress and are updated each year. The rate you get on a federal student loan will depend on the type of loan you choose as well as your year in school.


    Additionally, most federal student loans dont require a cosigner or a credit check.

    Here are the rates you can expect for the 2022-23 academic year, as well as how rates have changed over time:

    • Direct Subsidized Loans: 4.99%

    Learn More: Federal vs. Private Student Loans: 5 Differences

    Pros And Cons Of Variable Vs Fixed Rate Loans

    Last editedJul 2021 4 min read

  • What is the difference between variable and fixed rate student loans?
  • From personal loans for a new car to renewing the mortgage on your house, applying for a loan can seem like a daunting and complicated process especially when it comes to choosing the type of interest rate attached to your loan. The two most common types of loans youre likely to come across are variable or fixed rate loans.

    This article will help you to understand exactly what they are, the key differences between the two, explain the dangers of taking a variable rate loan and answer the question is a student loan a variable or fixed rate loan?, starting with some guidance on which type you should choose.

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