Are Variable Rate Student Loans the Best Option for You?

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Variable rate student loans are a common product offered by private lenders 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.

Whether you’re taking out a loan or refinancing for new terms, 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 rate student loans are defined mainly by how their interest rates are set. Remember, only private student loans have variable rates. All federal student loans have a fixed rate.

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. However, since the Fed raised its rates in Dec. 2015, the LIBOR has risen.

For instance, the one-month LIBOR was as low as .197% in mid-Nov. 2015 and has since grown to 1.59%, as of Feb. 2018.

Variable rates tend to start lower than fixed rates

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.

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.

How much lower is a variable rate than a fixed rate for student loans? That all depends on the terms of your student loan.

Typically, choosing a variable over a fixed rate student loan would result in an initial interest rate that is 1.25% to 1.75% lower.

When variable rate student loans are a smart option

Because a variable rate student loan starts with a lower interest rate, there can be potential for savings.

If you’re considering taking out private student loans or refinancing student loans, here are some reasons a variable rate student loan could make sense.

You think interest rates will remain low

The variable rate for a loan will be tied to general interest rates. Although these have been historically low, they have been ticking up in the past couple of years. What’s more, many economists are forecasting multiple interest rate increases in 2018.

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 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.

You’re looking for lower initial payments

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 a 1.25% on a variable rate student loan, monthly payments will be about $10 to $12 less per month for each $10,000[c] 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 year to come.

On average, workers see big wage growth in their 20s. Most 30-year-olds are earning 60 percent 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.

You’re choosing a short repayment period

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.

You’re going back to school and want to refinance private student loans

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.

Are variable rate student loans right for you?

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 calculate 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.

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* 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 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.

2 Important Disclosures for Earnest.

Earnest Disclosures

  1. Rates include 0.25% Auto Pay Discount
  2. Explanation of Rates “With Autopay” (APD)
    Rates shown include 0.25% APR discount when client agrees to make monthly principal and interest payments by automatic electronic payment. Use of autopay is not required to receive an Earnest loan.

    Available Terms
    For Cosigned loans – 5, 7, 10, 12, 15 years. 
    Primary Only – 10, 12, 15 years

    In school deferred payment is not available in AL, AZ, CA, FL, MA, MD, MI, ND, NY, PA, and WA).


3 Important Disclosures for College Ave.

CollegeAve Disclosures

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.

(1)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.

(2)This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.

(3)As certified by your school and less any other financial aid you might receive. Minimum $1,000.

Information advertised valid as of 7/1/2019. Variable interest rates may increase after consummation.


4 Important Disclosures for Discover.

Discover Disclosures

  1. Students who get at least a 3.0 GPA (or equivalent) qualify for a one-time cash reward on each new Discover undergraduate and graduate student loan. Reward redemption period is limited. Please visit DiscoverStudentLoans.com/Reward for any applicable reward terms and conditions.
  2. View Auto Reward Debit Reward Terms and Conditions at DiscoverStudentLoans.com/AutoDebitReward.
  3. Aggregate loan limits apply.
  4. The interest rate ranges represent the lowest and highest interest rates offered on Discover student loans, including Undergraduate, Graduate, Health Professions, Law and MBA Loans. The fixed interest rate is set at the time of application and does not change during the life of the loan. The variable interest rate is calculated based on the 3-Month LIBOR index plus the applicable Margin percentage. The margin is based on your credit evaluation at the time of application and does not change. For variable interest rate loans, the 3-Month LIBOR is 2.50% as of July 1, 2019. Discover Student Loans will adjust the rate quarterly on each January 1, April 1, July 1 and October 1 (the “interest rate change date”), based on the 3-Month LIBOR Index, published in the Money Rates section of the Wall Street Journal 15 days prior to the interest rate change date, rounded up to the nearest one-eighth of one percent (0.125% or 0.00125). This may cause the monthly payments to increase, the number of payments to increase or both. Please click https://www.discover.com/student-loans/interest-rates.html
    for more information about interest rates

5 Important Disclosures for CommonBond.

CommonBond Disclosures

A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.

Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.

Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
If you are unable to pay your government loan, the government can refer your loan to a collection agency or sue you for the unpaid amount. In addition, the government has special powers to collect the loan, such as taking your tax refund and applying it to your loan balance.

A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If you refinance your government loan, your new lender will use the proceeds of your new loan to pay off your government loan. Private student loan lenders do not have to honor any of the benefits that apply to government loans. Because your government loan will be gone after refinancing, you will lose any benefits that apply to that loan. If you are an active-duty service member, your new loan will not be eligible for service member benefits. Most importantly, once you refinance your government loan, you will not able to reinstate your government loan if you become dissatisfied with the terms of your private student loan.

If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you are a borrower with a secure job, emergency savings, strong credit and are unlikely to need any of the options available to distressed borrowers of government loans, a refinance of your government loans into a private student loan may be attractive to you. You should consider the costs and benefits of refinancing carefully before you refinance.

If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.

Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.


6 Important Disclosures for PNC.

PNC Disclosures

  1. Annual Percentage Rates (APRs): APRs from 4.52% to 11.11% are for the fully deferred repayment option, include the 0.50% interest rate discount for automatic payment and encompass the full range of APRs for the three repayment term options (5, 10 and 15 year). APRs within this range may vary based on the repayment term chosen. See break down of APR ranges by repayment terms below.
  2.  

  3. Fixed Annual Percentage Rates (APRs): APRs range from 4.52% to 9.58% for a 5-year term. APRs range from 5.05% to 10.26% for a 10-year term. APRs range from 5.55% to 10.84% for a 15-year term. Fixed rates are based on the creditworthiness of the borrower and co-signer, if any. Loan Payment Example: The monthly payment per $10,000 borrowed at a fixed rate range of 5.05% APR to 10.26% APR for 10 years means you would make 120 payments which may range from $131.94 to $207.24. For the fixed rate loan, the monthly payment will remain fixed for the term of the loan. Payments may vary for other repayment term options.

    Variable Annual Percentage Rates (APRs): APRs range from 4.90% to 9.92% for a 5-year term. APRs range from 5.38% to 10.57% for a 10-year term. APRs range from 5.85% to 11.11% for a 15-year term. Variable rates are based on the London Interbank Offered Rate (LIBOR) index plus a margin depending on the creditworthiness of the borrower and co-signer, if any. The LIBOR index, adjusted quarterly, is equal to the average of the one-month LIBOR rates as published in the “Money Rates” section of the Wall Street Journal on the first business day of each of the three (3) calendar months immediately preceding each quarterly adjustment date. The LIBOR index is currently 2.47%. If the index increases or decreases, your rate will increase or decrease accordingly. Loan Payment Example: The monthly payment per $10,000 borrowed at a variable rate range of 5.38% APR to 10.57% APR for 10 years means you would make 120 payments which may range from $135.93 to $212.65. For the variable rate loan, the monthly payment may increase or decrease if the interest rate increases or decreases. Payments may vary for other repayment term options.

    APRs and loan payment examples are for the fully deferred repayment option for the Undergraduate & Graduate loan programs and include the 0.50% interest rate discount for automatic payments. The lowest APR is available to well qualified applicants. Your actual APR will be based on your credit qualifications, selection of fixed or variable rate option, loan program, repayment term, repayment option and whether you elect the automatic payment feature. Loan payment examples assume 30 days to first payment after the deferment period (45 months in school and 6 month grace period). Payments vary for other rates, repayment terms and repayment options.

    In addition to Undergraduate and Graduate loans, PNC offers loans for Health & Medical Professions, Health Professions Residency and Bar Study. Rates may vary by loan program and are subject to change at any time. Visit pnconcampus.com for current rates, additional loan payment examples and more details about the Solution loan products.

  4. Automatic Payment Discount: During repayment, an interest rate discount of 0.50% is available for automatic payments. Borrower must be making scheduled payments that include both principal and interest. Interest only payments do not qualify for the 0.50% interest rate discount. Automatic payment can be established through the loan servicer American Education Services (AES). Advertised rates include the 0.50% automatic payment interest rate discount. The rate discount will be applied at the time automatic payment is established. If automatic payment is not established, the available rates will be 0.50% higher than the advertised rates. If automatic payment is established and discontinued at any time during repayment, the borrower will no longer receive an automatic payment discount and the rate will increase by 0.50%. Discount may also be suspended during periods of forbearance or deferment. Payments may be made from a checking or savings account. A federal regulation limits the number of transfers that may be made from a savings or money market account. Please contact your financial institution for more information on transfer limitations on savings accounts.
  5. Repayment Options: Immediate, interest only payments while in school and full deferment of principal and interest options available. Interest will continue to accrue during periods of deferment. You will receive quarterly interest statements during this deferment period. Paying the interest as it accrues each quarter will save you money over the repayment term of the loan because any accrued interest that you do not pay will be added to the principal balance at the end of the deferment.
  6. Co-Signer Release: A request to release a co-signer requires that, as of the date of the request, you have made at least forty-eight (48) consecutive timely payments of principal and interest with no periods of forbearance or deferment within the forty-eight (48) month timeframe. “Timely payment” means each payment is made no later than the 15th day after the scheduled due date of the payment. “Consecutive payment” means the minimum monthly payment must be made for the most recent forty-eight (48) months straight without any interruption. To qualify for a co-signer release, the borrower must submit a request, meet the consecutive, timely payment requirements, provide proof of income and pass a credit check.
  7. Tax Deductibility: Interest may be tax deductible. Consult a tax advisor.

Please note: PNC reserves the right to modify or discontinue the terms of these program at any time without notice. You are encouraged to explore all scholarship, grant and federal borrowing options before applying for a private loan. Private loans are subject to credit approval.

PNC is a registered service mark of The PNC Financial Services Group, Inc.
© 2019 The PNC Financial Services Group, Inc. All rights reserved. PNC Bank, National Association.

3.98% – 11.35%*,1Undergraduate and Graduate

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3.99% – 11.44%2Undergraduate and Graduate

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3.96%
11.98%
3
Undergraduate, Graduate, and Parents

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4.72%
11.87%
4
Undergraduate and Graduate

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3.66% – 9.64%5Undergraduate and Graduate

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4.90% – 11.11%6Undergraduate and Graduate

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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. 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 to help you understand what you are buying. Be sure to consult with 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.