Smart Money Podcast: The Wealth Gap, and How to Cope With Variable-Rate Student Loans

Sean Pyles
Liz Weston, CFP®
By Liz Weston, CFP® and  Sean Pyles 
Edited by Kathy Hinson

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Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.

This week’s episode starts with a discussion about wealth and opportunity inequality in the U.S., based on a New York Times article headlined “The Gaps Between White and Black America, in Charts.”

Then we pivot to this week’s question, from Wren. They say, “I have a few student loans with various rates, a couple of which are variable. And I have a hard time trying to predict even roughly their total amounts due in the future. How do I figure that out?”

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Our take

Variable-rate student loans are usually from private lenders, although some older federal loans — those made before 2006 — may have variable rates as well. The rates typically can change every month or every three months. Variable rates are based on some kind of benchmark interest rate, such as the London Interbank Offered Rate, plus a “margin.” If the Libor is 2%, for example, and your loan’s margin is 3%, your interest rate will be 5%. Your loan will also have an interest rate cap, which is the maximum rate you would pay. Your loan documents spell all this out, or you can ask your loan servicer.

Once you have this information, you can roughly predict what your rate is likely to be at least in the near future by using a student loan payment calculator. Although benchmark rates go up and down, they usually don’t change a huge amount month to month or quarter to quarter.

If you want certainty, though, consider refinancing your variable-rate private loans into a private consolidation loan. Rates currently are low, especially if you have good credit, although you’ll also need a steady income. Note that it’s generally not a good idea to refinance federal student loans into a private consolidation loan, since you lose important protections such as income-driven repayment programs, more generous forbearance and deferral options, and the possibility of loan forgiveness. Those protections could be especially helpful if you lose your job or income to the COVID-19 pandemic.

Our tips

Know your loans. Understand how your rate is calculated and how often it can change so you know what to expect.

Consider consolidating variable-rate loans. Rates are low now, so you can lock in a better deal and have some predictability.

But don’t refinance federal student loans into a private loan. You lose important benefits, such as income-driven repayment options, more generous forbearance and deferral, and the possibility of forgiveness.

More about student loans on NerdWallet:

Have a money question? Text or call us at 901-730-6373. Or you can email us at [email protected]. To hear previous episodes, visit the podcast homepage.

Sean: Welcome to the NerdWallet Smart Money Podcast, where we answer your personal finance questions and help you feel a little smarter about what you do with your money. I'm your host, Sean Pyles.

Liz: And I'm your other host, Liz Weston. As always, be sure to send us your money questions. Call or text us on the Nerd hotline at 901-730-6373. That's 901-730-NERD. Or email us at [email protected].

Sean: And while you're at it, please rate, review and subscribe wherever you're getting this podcast. This episode, Liz and I are talking with one of our student loan Nerds about how to manage loans with variable interest rates. But first, in our This Week and Your Money segment, we're going to dig in to the racial wealth gap and what it means for opportunity in this country.

Liz: The jumping-off point for this discussion was a recent piece in the New York Times. It's headlined "The Gap Between White and Black America, in Charts." It's an interactive feature, which means you can put your city in and see the differences in homeownership rates, incomes, life expectancy. The differences can be enormous. And I've recently realized I've been looking at statistics like this for literally decades, without knowing the real why, why this is happening. How about you, Sean? What did you think when you saw those numbers?

Sean: Yeah. Well, it's interesting because we've seen these numbers for a long time now. And for a while, I think there wasn't much discussion, at least in white America, of the why behind this. Right? And so now we're doing a process of self-educating around what it means to have this sort of inequity and what it means to do anti-racist work, in our communities, in ourselves and in our nation. And so I wasn't super surprised by seeing all those stark numbers, because at this point, I understand how deeply racism permeates every facet of our society. But you really raise an interesting point about why we didn't even consider this. Because after Obama was elected, I think a lot of people thought that that was the end of racism, right? But we've actually seen a huge backlash. And we're seeing the culmination of that now for a number of reasons and in a number of ways.

I think part of that is because, as a white person, it was pretty easy to ignore all of this. We live in a very separate America to some degree. But the more I began to listen, especially to a huge diversity of voices that I follow on social media and the more that I began to read books and articles, and really interrogate myself about my upbringing and attitudes that I was taught to have growing up, I began to really think about how I haven't even thought about my privilege and how other people haven't had the same access to opportunity as I've had. So I think that it's a matter of kind of waking yourself up, getting woke a little bit as they say, to what's going on around us and to the things that we don't see. There's a reason why a lot of people don't understand why privilege is because they're the ones who are the benefactors of it, right?

Liz: Yes. Exactly.

Sean: So that's a very long-winded way of saying, like, it just takes a process of educating yourself about the why.

Liz: I have a little story about something that happened in our neighborhood. We have a nice neighborhood in Los Angeles and somebody put up some flyers around the neighborhood detailing the history of redlining, and for our neighborhood. And I overheard someone say, "Well, what am I supposed to do about it?" And I thought, "That's really interesting." I mean, on one hand I can understand, yes, it's really hard to get over your privilege and think about this stuff.

Sean: Right.

Liz: And it's really tempting to think it happened before I was born, I wasn't involved. Therefore, it's not my problem. And obviously it is.

Sean: Yeah, and you're not accountable.

Liz: Yeah. Well, and just on a pure ... my background is economics, and just on a pure basis of economic opportunity, it helps everybody. I don't get less if you go get a college education, if you start a business. You'll be paying more taxes because you're earning more income. If you buy a house, the neighborhood gets more stable. It's just good. And if nothing else, we can bring it back to, if you can't see why you need to do something about this, just use self-interest. It really is better for all of us to have this, to change the situation.

Sean: Yeah. There's plenty of pie for everyone.

Liz: Exactly. And I don't think — if you've grown up in a world where maybe your parents helped you with college expenses or with a down payment, or even your parents had a college education or owned a home, those are real, huge legs up. And I don't think we fully account for that in white America. And if you don't have that, it makes a big difference, and the differences can just multiply.

Sean: Yeah. And this stuff is so important to talk about because people's lives, literally, and their livelihoods are at stake. And the more that we can do as individuals to educate ourselves, the more we can turn to what's next, how can we reimagine the systems that have been in place for a long time to tackle these issues and improve the lives and opportunities of everyone in America, because we all have this great romantic vision of the American dream. And it's something that I am enamored with as a idea. But we know that the reality of it is that it's just not accessible to so many people. And for us to get to where we are as individuals in our lives, it's a huge privilege. We've been very, very lucky. But we know that there could be dozens of other people that would love to be in just our spots, doing a great job doing this. But we need to see what we can do to make this more accessible to them.

Liz: Well, in the personal finance world, there was a real undercurrent — and it has been for a long time — that if you were having financial problems, it's all your fault. And when we saw that so many people, 40% of adults didn't have $400, our response was, "Well, save more money." And we didn't really look too deeply.

Sean: As if it's that easy.

Liz: Yes. And we didn't look too deeply into what was happening in America. And when I started looking at wealth numbers and wealth gaps, I focused mostly on working class and middle class versus the upper 10, 20%. And those differences were huge. And I think that was because I grew up in rural Washington state and I know a lot of people who are working class, members of my family, and so that resonated. But of course, those people are all white and it never occurred to me, let me take another look at the racial disparities as well, and see what's behind that. Because I knew with working class, it had a lot to do with not getting college educated and losing ground over time because of mechanization, globalization, whatever, all those factors were going on. And I wish now I'd spent as much time looking into the racial differences. Have you looked at the way that you've written personal finance advice in a different way, or have you been woke from the beginning?

Sean: Well, I feel very lucky that, well, first of all, I had help. But I went to a liberal arts college in Vermont where this stuff is just kind of hammered into you from the beginning.

Liz: Oh, OK. Got it.

Sean: Growing up, I went to high school in the Chicago suburbs and there wasn't really a lot of talk about this stuff at all, of course. We all had our blinders on us as white folks.

Liz: Northern Chicago or Southern Chicago? I know there's a difference.

Sean: It was the Western suburbs.

Liz: Western, OK. All right.

Sean: Yeah. Anyhoo, so it wasn't really part of an upbringing that I had. And then in college I was really just like shaken of, OK, here's the real world that we're living in here. You're extremely lucky to be at this fantastic institution, RIP Marlboro College, just closed down actually. But that's all to say that — and I've been doing this process of reeducating for a while now, and it's very gradual. And to tie it back to what we're trying to do on the show and as a company, we're trying to empower people. And that's one of the main goals of what I'm trying to do in my own personal education, is how can we work to make sure that there's more opportunity for more people to make financial decisions with confidence, because there isn't a level playing field. And without that, many people are left with some pretty tough decisions to make.

Liz: Yeah. Some of these problems can seem so overwhelming that you just want to throw up your hands and walk away. But I feel like as a white person, and I've heard this from other people, that part of my job is educating other white people so that Black people don't have to do it. This is the job that I can take on, that I can do.

Sean: Right.

Liz: So we're giving it a shot.

Sean: Yeah. And it's hard. I've had those conversations with family members that haven't gone well, and it makes me really frustrated to be like, you live in a different reality. Yeah. I come back to this song that's so corny. It's by Gwen Stefani and Andre 3000, it's called "Long Way to Go." And that's just the truth of the matter. We've got a long way to go and we've all got a part to do in that.

Liz: Absolutely.

Sean: Well, I hope that that reference wasn't too niche for non-Gwen Stefani fans. But with that, I think that we can move on to this episode's money question.

Liz: All right, sounds good.

Sean: All right. So this episode's question comes from Wren. Liz, can you please read their question?

Liz: They say, "I have a few student loans with various rates, a couple of which are variable, and I have a hard time trying to predict even roughly their total amounts due in the future. How do I figure that out?"

Sean: This is an answer I had never really liked giving to listeners or to anyone. Wren, you're going to have to do some math here and also some investigating to pin down how your variable rates change. So that is the bad news here. But the good news is that we're going to be talking with Ryan Lane, a Nerd for all things student loan related, to help answer this question.

Liz: All right, let's get to it. Hey Ryan, welcome to the show.

Ryan: Thank you for having me back.

Sean: All right, Ryan, let me set you up here. Our listener Wren has student loans with different interest rates, some of which are variable, and they're having a hard time predicting what they owe on an ongoing basis. And that, as you can imagine, would make it pretty tricky to budget at all. So that all brings me to my first question, which is what's an easy way for Wren to predict their loan payments.

Ryan: So the first thing that Wren would want to do is just to understand how often that rate can change. Now typically, variable rates on private student loans, which presumably this loan is, those are going to change monthly or quarterly. Now we collect data from a lot of lenders at NerdWallet. So I dug into about 20 student loan products that we have. Now, more than half of them change their variable rates monthly, but a handful did opt for quarterly updates instead. So really the first thing to note is when you might get hit with a rate change, because then you can hopefully prepare your budget accordingly for that dollar amount to change.

Sean: All right. So the onus is on the borrower, in this case Wren, to know how frequently their rate changes so they can try to figure out what they might owe. And there is a way to figure out how much their payment can change over time, right?

Ryan: Yeah. So it's really like a two-step process, right? So the first step is figuring out how often that rate can change. And then the second step then is figuring out how that rate changes. Now, most private student loans, they're going to tie their rates to some type of indexed fund or something like an overnight exchange rate or something like that. Then they're going to add what's known as a margin, which is essentially what they increase that rate by, to determine the actual interest rate that you pay. So if that monthly index rate was 2% and your margin was 3%, then your interest rate would then be 5%. And if that index rate dropped to one and a half percent, then your rate could fall in kind to four and a half percent. Now you're going to have an interest rate cap as well, so you never pay more than that amount. But this would sort of give you the idea, if you can track that information, to see how your rate might change and then what result that might have on your payment.

Sean: OK. So this is the number part of the homework that Wren has in store. How can they figure out this information? Where can they get this?

Ryan: Yeah. So at least if it is homework, I do have a cheat sheet for you. So that would be your loan disclosure statement. So that would be the statement that you got from your lender when you first took out your private student loan. That should indicate how often your variable rate can change, what your margin is, what it's tied to, everything like that. Certainly now, if you don't still have that paperwork, you can obviously call your lender and ask them for that information just as easily as well.

Liz: And I wanted to insert here, we're talking about private student loans for the most part. But there are some federal student loans that have variable rates, right Ryan?

Ryan: Yeah. So there are some federal loans with variable interest rates. Now, those would be from before 2006. I actually had loans like these back in the day. Now those rates, they change annually, every year on July 1. So you're not going to see a month-to-month fluctuation in your payment, but it is something where those loans are out there. And if you would prefer them to have a fixed interest rate, then you can consolidate them with the federal government.

Liz: You can also refinance private student loans, right?

Ryan: Yes, definitely. And that's probably the best way for Wren to get a set payment, would be to take that private student loan and refinance it into a fixed-rate loan. And now to refinance your loans in general, you're going to need a credit score in at least the high six hundreds and steady income. Or perhaps, if you can't meet those criteria yourself, you can enlist a co-signer who's going to meet that criteria.

Sean: I also want to talk about how the coronavirus pandemic and its myriad economic repercussions are impacting student loans and repayments. On the federal side, loan payments are on hold through September, which I'm personally loving. But so far, there hasn't been any legislation to help people with private loans. Ryan, I'm wondering what options these borrowers have to make their loans a little bit more manageable if maybe they have a big drop in income or otherwise having a hard time financially right now.

Ryan: Yeah. So if you have private student loans and you're having a hard time financially right now, the best thing that you can do is reach out to your lender to discuss what options you might have to either temporarily pause your payments. Many lenders are offering what they're calling a disaster-related forbearance for 60 days, 90 days, however long like that, that will allow you to pause payments during that time period so that you can stay on top of your loans and put that money toward other more pressing expenses right now. And then I guess like the other side of it also as well, is that if you are managing to make your loan payments currently, and you haven't lost your job or experienced a change in income, now is a good time to refinance those private loans as well. Because of the economic climate that we're in, those rates are very low right now. So especially if you have a variable rate loan, which is what we've been talking about here, this is a good opportunity to lock in a fixed rate and get long-term savings from it.

Sean: Do you know if lenders are being any more stringent with who they are approving for a refinance?

Ryan: I haven't heard that specifically. So federal student loans make up the vast majority of the student loan marketplace. Somewhere between 85% and 90% of student loans are federal student loans. And it really doesn't make sense for borrowers right now to refinance those loans and lose those federal benefits. And that's not just me saying it. We've had refinance companies come out very prominently and say, "Hey, don't refinance your federal loans right now." So really the overall demand for refinancing isn't necessarily that huge because there's that giant portion of the market that probably shouldn't be considering it right now. So I don't think the qualifications overall have probably changed because you're really looking at that sliver of the market that already has private loans where it makes the most sense for them to refinance right now.

Sean: I wanted to circle back to Wren's question. The crux of it really was that they're having a hard time trying to predict their payments with these variable rates. Short of doing these calculations on their own, is there any other easy way to predict these costs, or is the best advice get into a loan that is a little more predictable?

Ryan: Yeah. I would say the best advice is to get into a loan that is a little bit more predictable. Again, the variable rate loan, it might come with potentially a slightly lower interest rate than the fixed rate loan. But because of the environment that we're in currently, it can definitely make sense to lock in the long-term savings of a fixed rate loan and to understand what your rate's going to be and your payments are going to be moving forward.

Sean: Great. OK. Do you have any final tips for Wren?

Ryan: For Wren, I would just reiterate what type of qualifications lenders are looking for if you do choose to refinance. So it is typically going to be a credit score in at least the high six hundreds. It is going to be steady income and it is going to be that you're going to have to have a debt-to-income ratio under 50% or so. That's typically what refinance lenders are looking for.

Sean: Great. Well, thank you so much, Ryan. Really appreciate your time.

Ryan: Yeah. Thank you guys.

Sean: All right. Well with that, let's get to our takeaway tips.

Liz: First of all, know your loans. Understand how your rate is calculated and how often it can change so you know what to expect.

Sean: Next, consider refinancing variable rate loans into a fixed [rate] consolidation loan. Rates are low right now, so you can lock in a better deal and have some predictability.

Liz: Finally, don't refinance federal student loans into a private loan. You lose important benefits, such as income driven repayment options, more generous forbearance and deferral, and the possibility of forgiveness.

And that's all we have for this episode. Do you have a money question of your own? Turn to the Nerds and call or text us your questions at (901) 730-6373. That's (901) 730-NERD. You can also email us at [email protected]. You can even email us voice memos of your questions. However you want to send them to us is just fine. Also visit for more info on this episode. And remember to subscribe, rate and review us wherever you're getting this podcast.

Sean: And here's our brief disclaimer, thoughtfully crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This Nerdy info is provided for general educational and entertainment purposes, and may not apply to your specific circumstances. And with that said, until next time, turn to the Nerds.