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Private lenders offer variable rate student loans to borrowers looking to take out a new student loan or refinance their existing student debt. Unlike fixed rates, which stay the same over the life of the loan, variable rates fluctuate over time.
Because they can go up or down, variable rates entail more risk than fixed ones. But they also have the potential to save you hundreds of even thousands of dollars in interest payments.
When you borrow or refinance, you’ll have to choose between a variable and fixed rate student loan. Read on to learn whether variable rate student loans could be right for you.
- What are variable rate student loans?
- Variable rates tend to start lower than fixed ones
- When variable rate student loans are a smart option
- Are variable rate student loans right for you?
A variable rate means that the interest rate you are charged on the debt’s balance can (and often will) change over time. If your interest rate changes, your monthly payment can fluctuate, as well.
However, your lender can’t just raise rates whenever it feels like it to get more money out of you. Instead, rate increases are driven by prevailing interest rates in the financial market.
Most private lenders will set and raise variable rates in step with the London Interbank Offered Rate (LIBOR). This is the average of the interest rates banks charge each other to borrow and lend money between institutions. They usually charge a market rate plus the LIBOR rate.
Historically, LIBOR rates have remained fairly low since plummeting during the Great Recession in 2008. While they rose throughout 2018, rates started falling again in 2019.
Considering the fact that variable rates can increase, you might be wondering why anyone would choose a variable rate over a fixed one. Well, variable rates tend to start out lower than fixed rate student loans (though in a few cases, they could be higher).
So even though you’re assuming a certain level of risk that your rate could go up, you’re also getting a rate that’s lower than the one you’d get on a fixed rate student loan.
Because a variable rate student loan starts with a lower interest rate, there can be potential for savings.
- You think interest rates will remain low
- You’re looking for lower initial payments
- You’re choosing a short repayment period
- You’re going back to school and want to refinance private student loans
The variable rate for a loan will be tied to general interest rates. It’s impossible to truly predict the future of interest rates. But if you look at trends you might decide that the lower interest rate now, particularly in this falling rate environment in early 2020, is worth the risk of it rising later.
If you get an offer for a variable rate that’s a lot lower than your fixed rate offer, you could still save money over the life of the loan.
Another benefit of a variable rate student loan is that with a lower initial rate, you also have lower monthly payments.
With the typical savings of 1.25% on a variable rate student loan, monthly payments will be about $10 to $12 less per month for each $10,000 of the loan.
There are plenty of recent college graduates who have entry-level pay now. However, they may expect big increases in pay in the years to come.
On average, workers see big wage growth in their 20s. Most 30-year-olds are earning 60% more than their entry-level pay, according to a PayScale survey.
If this sounds like you, a variable rate student loan can help you get lower monthly payments now. This is great if you need low monthly bills ASAP.
Just make sure you’re staying on track to earn pay increases. This will help offset the risk of monthly student loan payments becoming unaffordable if your variable rate increases.
A shorter repayment period can also help you minimize the risk of a variable rate increase on your private student loans.
For example, if you have a 10-year repayment period, that exposes you to the risk of rising rates for a long time. But if you are planning to get a two-, three- or even five-year repayment plan, a variable rate student loan starts making much more sense.
That’s because there’s much less time for rates to increase, which makes it more likely that you will keep the savings you get with the initially lower variable rate. Likewise, you can also prepay your student loans and make extra payments to further limit your risk of rising rates.
Of course, a shorter loan term will mean higher monthly payments. So make sure you can realistically afford these monthly costs. After all, a shorter, variable rate student loan has a lot of potential for savings on interest.
Unlike federal student loans, repayment on private student loans typically can’t be deferred if you are returning to college.
This means many students who want to finish their undergraduate or graduate degree will have to figure out how to cover monthly payments for private student loans — while juggling a full course load in college.
That’s where refinancing private student loans can be a major cost-cutter for borrowers returning to school. Many borrowers with private student loans could refinance to get a lower interest rate. And, choosing a variable rate student loan can get them the biggest savings.
If they refinance with a variable rate student loan, this can help them get lower monthly payments while they finish school. These cheaper payments can ease up a lot of the pressure on a student’s already-tight budget.
Then later on, if rates do rise, they will hopefully have a degree that will help them earn more to cover those higher costs.
So should you choose a fixed rate or variable rate student loan when you get a new or refinanced student loan?
First, you should do the math to see what you’d actually be saving on interest. Use one of our student loan calculators to estimate your monthly payments and compare interest rates on multiple loan offers.
Besides doing the math, ask yourself how comfortable you are with the risk of a rate increase, along with how many years you expect it will take you to pay off your debt.
Variable rate student loans aren’t for everybody, but they can be a big money-saver for some. Depending on your circumstances, variable rate student loans could help you save on interest, lower your monthly payments and even pay off your education debt ahead of schedule.
Rebecca Safier contributed to the reporting of this article.
Need a student loan?Here are our top student loan lenders of 2020!
|1.24% – 11.44%1||Undergraduate, Graduate, and Parents|
|1.25% – 11.15%*,2||Undergraduate and Graduate|
|1.24% – 11.98%3||Undergraduate, Graduate, and Parents|
|1.24% – 12.49%4||Undergraduate and Graduate|
|1.80% – 11.89%5||Undergraduate and Graduate|
|2.71% – 12.99%6||Undergraduate and Graduate|
|3.52% – 9.50%7||Undergraduate and Graduate|
|* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers. |
1 Important Disclosures for Earnest.
2 Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
3 Important Disclosures for College Ave.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
Information advertised valid as of 9/24/2020. Variable interest rates may increase after consummation. Lowest advertised rates require selection of full principal and interest payments with the shortest available loan term.
4 Important Disclosures for Discover.
Lowest APRs shown for Discover Student Loans are available for the most creditworthy applicants for undergraduate loans, and include an interest-only repayment discount and a 0.25% interest rate reduction while enrolled in automatic payments.
5 Important Disclosures for SoFi.
UNDERGRADUATE LOANS: Fixed rates from 4.23% to 11.76% annual percentage rate (“APR”) (with autopay), variable rates from 1.90% to 11.66% APR (with autopay). GRADUATE LOANS: Fixed rates from 4.13% to 11.83% APR (with autopay), variable rates from 1.80% to 11.73% APR (with autopay). MBA AND LAW SCHOOL LOANS: Fixed rates from 4.30% to 11.98% APR (with autopay), variable rates from 1.97% to 11.89% APR (with autopay). PARENT LOANS: Fixed rates from 4.60% to 11.26% APR (with autopay), variable rates from 1.90% to 11.16% APR (with autopay). For variable rate loans, the variable interest rate is derived from the one-month LIBOR rate plus a margin and your APR may increase after origination if the LIBOR increases. Changes in the one-month LIBOR rate may cause your monthly payment to increase or decrease. Interest rates for variable rate loans are capped at 13.95%, unless required to be lower to comply with applicable law. Lowest rates are reserved for the most creditworthy borrowers. If approved for a loan, the interest rate offered will depend on your creditworthiness, the repayment option you select, the term and amount of the loan and other factors, and will be within the ranges of rates listed above. The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. Information current as of 07/10/2020. Enrolling in autopay is not required to receive a loan from SoFi. SoFi Lending Corp., licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. NMLS #1121636 (www.nmlsconsumeraccess.org).
6 Important Disclosures for Ascent.
Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB). Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. Loan products may not be available in certain jurisdictions, and certain restrictions, limitations; and terms and conditions may apply. Ascent is a federally registered trademark of Turnstile Capital Management (TCM) and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.
* Application times vary depending on the applicant’s ability to supply the necessary information for submission.
7 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.17% effective Sep 1, 2020 and may increase after consummation.