Fixed vs. Variable Rate: How to Make the Right Choice for Your Student Loans

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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.

variable interest rate

When it comes to student loans and student loan refinancing, interest rates are a huge factor. Your interest rates can affect how much money you end up paying back over time, and high rates can make it difficult to keep pace in repayment.

And when it comes to interest rates, you might have a very important choice to make between a fixed or variable student loan. Which one you pick could have significant consequences, and there are different factors to consider, depending on whether you are getting new student loans to pay for college or are looking to refinance your current debt.

A fixed interest rate means never changes for the life of your loan. Having fixed-rate loans can help you predict how much you’ll pay in interest and can keep your interest payments at manageable levels. A variable interest rate, meanwhile, can rise and fall with market conditions.

So, how do you choose between fixed-rate student loans and loans with a variable interest rate? We’re here to break it down for you. Click on one of the links below, or scroll down to get the lay of the land for both situations:

New student loans to pay for college

College is a big expense, and many students can’t afford an education on their own. Student loans can help put that higher education within reach, but how long they take to repay — and how much that repayment adds up to — can depend in large part on the interest rate.

The type of rate you receive (fixed interest rate or variable interest rate) is, in turn, connected to whether you have federal or private loans. Let’s take a look at both:

Federal student loan = Fixed-rate loan

If you get a federal Direct loan, you won’t have the choice of a variable interest rate. Your interest rate will be fixed for the life of the loan. Congress sets interest rates on federal loans each year. For the 2017-2018 school year, the fixed rate on undergraduate Direct loans (subsidized and unsubsidized) is 4.45%. The rate for graduate or professional Direct unsubsidized loans is 6.00%. Direct PLUS loans have an interest rate of 7.00%.

However, that doesn’t mean all your debt has the same interest rate. Each year you attend school means a new student loan and a new interest rate. By the time you finish school, you might have several different loans — each a different fixed-rate student loan.

If you decide to consolidate your federal loans after you graduate, your interest rate will be an average of your loan rates, and it too will remain fixed during your repayment term.

What about private student loans?

These are a different story. You can choose a variable interest rate instead of a fixed interest rate, if you think it will work better for your situation.

Interest rates have been at historic lows in recent years, allowing borrowers to enjoy relatively cheap debt (with the lowest rates reserved for those with excellent credit scores). For example, student loan candidates with good credit could potentially score a variable interest rate below 4.00%.

However, interest rates can rise. When this happens, a low-interest loan could jump to a higher rate and affect your monthly payments.

The London Interbank Offered Rate (better know as LIBOR) is a key market benchmark for everything from mortgages to credit cards to, yes, student loans. LIBOR fell in the wake of the Great Recession in 2008, and only began to rise by the end of 2015. Recently, global interest rates have been on the rise, with LIBOR doubling between mid-2016 and mid-2017, according to historical data from Macrotrends.

Committing to a variable rate means committing to the market’s ebbs and flows.

Federal or private student loans: Which is right for you?

If you can qualify for a low variable interest rate, it can be tempting to take the private student loan rather than go with the federal loan. However, one of the issues you run into is when that interest starts accruing.

When you only qualify for unsubsidized federal student loans, your interest starts piling up immediately — just like with private student loans. With subsidized federal loans, however, the government pays your interest while you’re in school; you can save thousands of dollars just in interest.

Let’s say you borrow $12,000 for school expenses. With a subsidized loan, you don’t have to worry about interest charges over your time in school. However, with a private student loan, the interest is accruing during that four years.

Using our student loan payment calculator, you can see that you would pay right around $1,000 in interest over that four years if you have a 3.98% APR. Of course, that assumes your variable interest rate hasn’t risen, adding to your charges.

Another consideration is that some private lenders require you to start repaying your loans immediately. So even though you are in school, you might have to find a way to make your payments. When you have federal loans, you don’t have to start repaying them until you actually graduate. (Parent PLUS loans are a different story, though.) You might even be eligible for a six-month grace period when you finish your degree. If you can’t afford to start making student loan payments while you’re in school, federal loans can make sense.

Federal student loan protections

Sometimes it’s not just about a fixed or variable student loan. Federal student loans come with protections you might not see with private student loans. With federal loans, there are income-driven repayment and loan forgiveness programs that can protect you during times of economic hardship. Your private loans might not provide that. On top of that, federal deferment and forbearance programs are often easier to access than similar options offered by private lenders.

On the other hand, you can save thousands of dollars in interest charges if your private variable-rate loans come with lower interest than your federal loans, especially if those federal loans are unsubsidized. Plus, private student loans often come with shorter loan terms, so you could potentially pay off your debt in five years if you can afford the monthly payments. The shortest term for a federal loan is 10 years (although you can always pay off your federal loans early).

4 questions to ask about your options

When deciding between fixed-rate student loans from the federal government and variable interest rate private loans, it’s important to ask yourself the following questions:

  1. Do I qualify for federal subsidized student loans to help me avoid accruing interest while I’m in school?
  2. Can I afford to make student loan payments while I’m in school?
  3. Is there a chance I will need the protections that come with federal student loans?
  4. Do I have good enough credit to qualify for the lowest private student loan variable interest rate?

Start by filling out the Free Application for Federal Student Aid (FAFSA) to see what federal programs you qualify for. After you submit the FAFSA, your schools of choice will send you financial aid offers that can help you sort through your options.

For some students, it makes sense to take what you can from the federal government and only use private student loans if there is still a college funding gap. This is especially true if you want access to more flexible payment plans and hardship options when you finish school.

If you reach graduation and are concerned about your federal fixed-rate student loans, it’s possible to refinance them privately if you decide that’s the right thing for your situation.

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1 = Citizens Disclaimer.

2 = CollegeAve Autopay Disclaimer: All rates shown include the auto-pay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.

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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.

Refinancing your existing student loans

When you refinance your student loans, you take out one new loan (hopefully with a lower interest rate) and use it to pay off an existing loan or group of loans. You can refinance federal and private student loans.

It’s possible to choose which loans to refinance — you don’t have to refinance all your loans if there’s a benefit to keeping some as they are.

One thing you’ll have to decide when you refinance, though, is what type of interest rate you want. Maybe you didn’t get to choose between a fixed or variable student loan when borrowing, but if you’re applying for student loan refinancing now the choice is yours.

If you’re refinancing fixed-rate student loans, then you’ll need to consider the tradeoffs between fixed and variable interest rates. With fixed interest rates, you know what your exact payment will be until you pay off the loan. On the other hand, a fixed rate can sometimes be higher than a variable interest rate, costing you more.

On top of that, if rates drop during your loan term, you’ll miss out if you have a fixed interest rate. The flip side, though, is that a fixed-rate loan protects you from rising interest rates. You need to consider the tradeoffs as you make your decision.

This second consideration can be vital. Although interest rates have hovered near historic lows recently, the LIBOR benchmark rate, on which most variable interest rate loans are based, more than doubled in the year through July 2017, dragging payments for variable interest rate student loans up with them. And these rates could rise further in the near future.

Fixed or variable student loan refinance: Which is right for you?

If you have federal student loans, chances are you have fixed interest rates — which can be a blessing or a curse. Depending on when you consolidated, you might have undergraduate loans at the low rate of 2.30%. However, your graduate PLUS Loans could be either 6.80% or 7.90% (and maybe you have a loan at each rate), depending on the year you took them out. That’s a big difference.

This is why student loan refinancing is an attractive option for so many borrowers. Through refinancing, you have the potential to drop your interest rate, effectively saving you thousands of dollars. If you can refinance to a fixed interest rate that’s lower than your current rate, so much the better.

Even if you decide to refinance to a variable interest rate that can fluctuate at any time, you might still come out ahead. As long as rates stay low, you can save thousands of dollars in interest charges over the life of your loan.

Because you can choose which loans to refinance, it’s a good idea to consider which ones make the most sense. If you have low-rate federal loans, refinancing to a variable interest rate probably doesn’t make sense. However, if your federal loan rates are high, and you aren’t concerned about accessing income-driven repayment, you can save money by refinancing to a private loan — even if it comes with a variable interest rate.

3 questions to ask about your options

There are a few things to consider before deciding if refinancing to a fixed or variable interest rate is best for your student loans. First, ask yourself these questions:

  1. How long will it take you to pay off your loans?
  2. What type of interest rate feels most comfortable to you?
  3. Does the variable-rate loan have an interest-rate cap?

If you want to see the whole picture of your loan situation, these questions are important to answer. A variable interest rate might be a good option if you can pay off your loans in a few years or less, before rates climb too high. On top of that, you can reduce the risk associated with a variable interest rate if the lender caps how high that rate can go.

Second, consider the non-mathematical aspect of the equation. Choosing the rate type that you’re most comfortable with might make repayment easier in the future. If the greater uncertainty of variable interest rates is going to add to your stress level, for example, put one point in the column of fixed rates.

On the other hand, if you can get a low variable interest rate and can afford to make higher payments for a shorter loan term, that might be the way to go. This is especially true if just having debt makes your cringe and you want to get rid of it as quickly as possible.

Also, consider what type of interest rates you currently have. Perhaps you have private student loans with variable rates and are looking to gain the stability of a fixed rate. Refinancing those private student loans to a single fixed-rate loan can make a big difference in the long run.

How much your choice could save you?

Lastly, you should look at the overall savings. How much will you save by refinancing in general? How much will you save in interest by choosing a variable interest rate over a fixed rate?

Here’s an example showing your total interest and total payment for three scenarios:

Fixed Rate Variable Rate (No Change) Variable Rate (Rising Rate)
Loan Amount $35,000 $35,000 $35,000
Interest Rate 6.30% 5.09% 5.75% (average)
Repayment Term 10 years 10 years 10 years
Monthly Payment $394 $373 $384 (average)
Total Interest $12,264 $9,733 $11,103 (estimated)
Total Payment $47,264 $44,733 $46,103 (estimated)

This example took average rates from Laurel Road and used our Student Loan Hero monthly payment calculator to do the hard part. As you can see from the results, variable rates can save you money. This is especially true if you have a shorter repayment term — even if rates increase.

On the flip side, while the Laurel Road example above favors variable interest rate loans, the situation could certainly be reversed in a high-rate environment. Plus, rising rates can hinder your ability to budget month to month. The initial monthly payment ($373) and the increased monthly payment ($384) for the variable rate aren’t all that different. But when you sign up for a variable-rate loan, you are taking the chance that your recurring payment will rise, putting a potential strain on your budget.

Before you choose which option is right for you, look closely at your repayment term and consider your level of risk tolerance. If your repayment period will be 20 years and you like stability, a fixed-rate loan might be a better option for you. If, on the other hand, you believe the savings of a lower, fluctuating rate outweigh the risk that it could skyrocket, go with the variable rate.

Andrew Pentis and Melanie Lockert contributed to the reporting for this article.

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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.