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

2 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change and state law restrictions. Loans are offered through CommonBond Lending, LLC (NMLS #1175900).

  1.  Rates are as of July 1, 2019 and include auto-pay discount. All loans are eligible for a 0.25% reduction in interest rate by agreeing to automatic payment withdrawals once in repayment. Variable rates may increase after consummation.

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 9/3/2019. 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. Lowest rates shown are for the undergraduate loan and include an interest-only repayment discount and a 0.25% interest rate reduction while enrolled in automatic payments. The interest rate ranges represent the lowest interest rate offered on the Discover Undergraduate Loan 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 visit discover.com/student-loans/interest-rates for more information about interest rates.
Discover's lowest rates shown are for the undergraduate loan and include an interest-only repayment discount and a 0.25% interest rate reduction while enrolled in automatic payments.

5 Important Disclosures for Citizens.

Citizens Disclosures

  1. Undergraduate Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of September 1, 2019, the one-month LIBOR rate is 2.14%. Variable interest rates range from 3.24% – 11.50% (3.24% – 11.35% APR) and will fluctuate over the term of the loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a co-signer. Fixed interest rates range from 4.72% – 12.19% (4.72% – 12.04% APR) based on applicable terms, level of degree earned and presence of a co-signer. Lowest rates shown requires application with a co-signer, are for eligible applicants, require a 5-year repayment term, borrower making scheduled payments while in school and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens Bank is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of the loan.
  2. Citizens Bank Student Loan Eligibility: Borrowers must be enrolled at least half-time in a degree-granting program at an eligible institution. Borrowers must be a U.S. citizen or permanent resident or an international borrower/eligible non-citizen with a creditworthy U.S. citizen or permanent resident co-signer. For borrowers who have not attained the age of majority in their state of residence, a co-signer is required. Citizens Bank reserves the right to modify eligibility criteria at anytime. Interest rate ranges subject to change. Citizens Bank private student loans are subject to credit qualification, completion of a loan application/consumer credit agreement, verification of application information, and if applicable, self-certification form, school certification of the loan amount, and student’s enrollment at a Citizens Bank- participating school. 

    Please Note: International Students are not eligible for the multi-year approval feature.

  3. Co-signer Release: Borrowers may apply for co-signer release after making 36 consecutive on-time payments of principal and interest. For the purpose of the application for co-signer release, on-time payments are defined as payments received within 15 days of the due date. Interest only payments do not qualify. The borrower must meet certain credit and eligibility guidelines when applying for the co-signer release. Borrowers must complete an application for release and provide income verification documents as part of the review. Borrowers who use deferment or forbearance will need to make 36 consecutive on-time payments after reentering repayment to qualify for release. The borrower applying for co-signer release must be a U.S. citizen or permanent resident. If an application for co-signer release is denied, the borrower may not reapply for co-signer release until at least one year from the date the application for co-signer release was received. Terms and conditions apply. Borrowers whose loans were funded prior to reaching the age of majority may not be eligible for co-signer release. Note: co-signer release is not available on the Student Loan for Parents or Education Refinance Loan for Parents.
3.25% – 10.65%*,1Undergraduate and Graduate

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3.52% – 9.50%2Undergraduate and Graduate

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3.70%
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3.37%
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3.24% – 11.50%5Undergraduate 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.