Fixed Or Variable Rates For Student Loans: Which Option Is Better?
If you’re contemplating borrowing a student loan, you can opt for either two types of interest rates: fixed or variable. Although each comes with its own set of pros and cons, borrowing a student loan with a fixed rate is your safest option. However, know that all federal loans come with a fixed interest rate de facto. You can choose between fixed and variable interest rates if you’ve opted for a private loan.
Here is a short but succinct guide on the different types of student interest loans.
Fixed-Rate Student Loan
The majority of students prefer opting for a fixed-rate student loan because it isn’t subjected to the fiscal whims of the times. Rates are pre-set and any change of plan can be implemented upon refinancing.
Here’s why opting for a fixed-rate is a good option.
- A fixed interest rate won’t continue to grow with time as opposed to a variable interest rate that increases (or decreases) with changing economic conditions
- Fixed rates offer implementable repayment plans. Unlike variable interest loans, fixed rates are set in stone. Your repayment plan, which takes into consideration your monthly income and other factors before adjusting the interest, makes loan repayment a lot more convenient
- In case your repayment plan with a fixed interest needs a revaluation, you can always opt to refinance
- You’re required to pay a predictable amount which won’t put you out of your comfort zone. Moreover, you can easily be able to predict the total amount that you’ll pay as interest
- The fixed interest rate over a loan only applies to the loan borrowed in a single year. Borrowing multiple loans will come with their separate interest rates which may become overwhelming. In such a case, your best option would be to consolidate your loans
- Although fixed interest rates come with long-term benefits, these are generally higher than variable interest rates, at least in the beginning
- There is always a chance to miss out on potential savings that sometimes result from a variable-interest loan repayment plan. This happens because the latter occasionally offers a decrease in interest in response to better economic conditions
Variable Rate Student Loan
Loans obtained from private servicers give you the option to choose between a fixed or variable interest rate. As the name indicates, variable rates aren’t locked in from start to finish but fluctuate in response to the changing economic conditions.
Here’s what you need to know about variable interest rates.
- In the beginning, variable interest rates are generally lower than fixed interest rates. This can be tempting for novice borrowers
- Frankie Rendon, a media outreach specialist in student loans, claims that for borrowers with confidence in quick-loan repayment, the variable interest rate may be a better option. Since these rates start out lower and may not change drastically for a short term repayment plan, it will almost certainly give the borrower a financial lead in the longer run
- There is a bigger potential for more annual savings with a short term repayment plan that has variable interest rates
- While there is some potential for annual savings with variable interest rates, the uncertainty associated with it is off-putting
- Recently, the economic trend for variable loans is towards increasing rates. This means that the possibility of a decrease in the interest rate is quite slim
- The monthly amount is subjected to change in response to the economic conditions, and the new rates set may backfire
- Interest rates with variable loans are set by private lenders following an external index rate such as the London Interbank Offered Rate or LIBOR. A percentage is then added to it. In the end, the procedure might require you to pay higher interest than previously predicted
Refinance The Loans If You Want To Switch Between The Options
Federal state loans come exclusively with fixed interest rates. Students are often advised to opt for one of these options since federal loans come with easy repayment plans and remain eligible for loan forgiveness policies. If however, you feel the need to revise or change your fixed interest rate, you can opt for refinancing to help pay off previously outstanding debts.
Refinancing loans from private lenders will allow you to switch between the two interest rates. As stated earlier, you can’t opt for a variable interest rate on a federal loan. However, you can refinance a fixed-rate loan by borrowing from private lenders, allowing you to switch to variable rates.
While many characterize variable interest loans as a bit of gamble, the final decision depends on your repayment term, monthly income, and personal preferences. In any case, compare short-term benefits with long-term effects to ensure you remain financially ahead of the game.