Fixed vs. Variable student loan rates


Just as important as the rate itself is the type of interest rate you get on a student loan. Fixed interest rates stay the same for the life of the loan, which means you’ll have predictable monthly payments. Variable interest rates, on the other hand, can fluctuate in response to changes in the market. Your monthly payments could increase and decrease as a result.

The right choice between the two depends on the type of borrower you are, your future income, and what you can reasonably afford to repay. Here is the breakdown of variable interest rates versus fixed interest rates for student loans.

What is the difference between fixed and variable student loans?

The main difference between fixed and variable student loans is whether the interest rate can change.

Fixed student loans

Fixed rates remain constant throughout the life of the loan, which means your monthly student loan payments will be predictable as you pay off your debt. The only way to change a fixed interest rate is to refinance the loan.

Although fixed rates are generally higher than advertised variable rates, they provide stability as the payment will not change. When you receive your loan, you will know exactly how much you will be paying each month and how much interest you will be paying overall.

Variable student loans

Variable interest rates are tied to market conditions, so your payment could go up or down based on an adjustment in your interest rate. Lenders typically tie the variable rate on the loan to a benchmark rate, such as the prime rate or the Libor index.

While you can start off with a lower payment than a fixed rate loan, your rate – and your monthly payment – may go up afterwards.

When to choose a fixed rate student loan

Fixed interest rates are good for borrowers who don’t have much leeway to accommodate an interest rate adjustment. This is ideal for low-income people who can only spend a certain amount of money per month on student loan repayments and can’t afford to pay extra in case their interest rate (and monthly) would increase.

All new federal student loans have fixed interest rates, and fixed rates are generally an option with private lenders.

Here are some of the benefits of a fixed rate student loan:

  • Interest never changes. Although fixed rates are generally higher than advertised variable rates, they are consistent. So even if student loan interest rates increase due to market conditions, you will still benefit from the rate you originally purchased.
  • The repayment plan is consistent. Student loans are typically paid off over 10 years or more, but your monthly payment won’t change. This is especially useful if you are facing income issues.

When to choose a variable rate student loan

Variable rate student loans are a good option if you qualify for the lowest rates available. And if you’re planning on making extra payments, you can pay off your student loan sooner, before rates have a chance to rise. If your budget allows for these fluctuations, you could end up saving a lot of money over the life of your loan.

Private student loans tend to have variable interest rate options, but federal student loans do not have variable rates.

Consider the main advantages of variable rates before applying:

  • The rates are generally lower. Variable interest rates often start much lower than fixed interest rates.
  • Take advantage of certain market developments. A drop in interest rates, like what happened in 2020, could lower your monthly loan payment. This could help you put more money into the principal and potentially pay off the loan faster.

Final considerations

It is important to gather all the possible information before choosing your student loan.

If a lender offers variable rate student loans, ask how often the rate can change. Some lenders adjust variable rates monthly, while others adjust the rate quarterly. The lender can also cap the rate increase to keep your costs under control. These details can help you determine if your budget can accommodate a variable rate loan.

You might decide to get a fixed rate student loan if you prefer predictability. This is usually a good option for recent college graduates who are still figuring out their budget. If you want to take advantage of lower student loan rates later, you may be able to refinance your student loans.

Next steps

If you are thinking about taking out or refinancing a student loan, the type of interest rate can be a determining factor in where you borrow.

The first thing you’ll want to do is look at your overall financial situation and decide what type of student loan might be right for you. Federal student loans only have fixed interest rates, along with a variety of repayment terms and protections for borrowers – which is why they’re usually the best place to start your search. Private student loans, on the other hand, tend to offer both fixed and variable interest rates, giving you the flexibility to take advantage of the one that best fits your finances and repayment plan.

Whatever type of student loan you decide to get, be sure to get quotes from a few student lenders. This will help you pay as little interest as possible.

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