Fixed or Variable Student Loan: Which Is Better?

Fixed rates are best for most borrowers, but a variable rate could be a money-saver if the timing is right.

Ryan LaneOctober 15, 2020
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Fixed student loan interest rates are generally a better option than variable rates. That's because fixed rates always stay the same, while variable rates can change monthly or quarterly in response to economic conditions.

All student loan interest rates are currently near historic lows.

If you’re unsure which rate to choose, go with fixed; it’s the safer option. If you're comfortable taking a risk to potentially save on interest — and will be able to pay off your student loan fast — consider a variable rate.

Fixed or variable student loan?

All federal student loans have fixed interest rates. It’s 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:

Fixed student loan rates are the safer bet

Fixed rates are locked in for the life of the loan. The only way to change a fixed interest rate is through student loan refinancing.

Pros

  • There’s no chance that your rate will increase.

  • Predictable monthly payments; the amount due won’t change.

Cons

  • Rates typically start out higher than variable rates.

  • You could miss out on interest savings if variable rates go lower.

Consider a fixed rate if

  • Interest rates are on an upward swing.

  • You don’t expect to pay off your loans anytime soon.

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.

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%.

Pros

  • Rates typically start out lower than fixed rates.

  • You could save on interest if variable rates don’t rise by too much.

Cons

  • The recent trend has been toward rate increases for variable loans.

  • Unpredictable monthly payments; the amount due could change.

  • Your total number of monthly payments could change as the rate changes.

Consider a variable rate if

  • You expect to pay off your loans before periodic rate increases erode any savings. Here's what Libor index movement has looked like in the past.

  • Interest rates are decreasing. For example, a borrower who took a Libor-linked loan at its 2007 peak would have seen the rate fall by over five percentage points two years later.

Which rate is better for student loan refinancing?

Refinancing can help you pay off student loans faster by decreasing your interest rate. If you plan to aggressively repay your refinanced loan, a variable rate may maximize your potential savings.

But do the math first. The lowest fixed and variable rates for refinance lenders typically aren't that far apart. That means you may not pay much more with a fixed rate, and you'll be protected if your repayment plans change.

If you do opt for a variable rate and rates begin to climb, there's little downside to trying to refinance again.

Estimate potential student loan refinance savings

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