Unlike federal student loans, private student loans offer you the choice between a fixed or variable interest rate.
You might like this freedom when it comes to student loan interest rates. But then comes the question: Is it better to have a fixed or variable loan?
If you’re leaning toward a variable interest rate student loan, you should consider these risks first.
3 reasons to watch out for variable rate student loans
There were variable interest rates on some federal loans as recently as 2006. But nowadays, only private lenders offer variable rates, which are sometimes referred to as “floating” rates.
Unlike a fixed interest rate, which remains the same during your repayment, a variable interest rate could go up or down — or float — based on market changes.
Review your potential lenders’ policies on rate changes before making a decision. Watch out for these three question marks too.
1. Advertised rates might be misleading
When shopping around with private lenders for a fixed or variable interest rate student loan, you’ll notice this right away. The variable rate ranges are (sometimes significantly) lower than the fixed ranges. That’s because with a variable rate you’re taking on some risk that the rate might increase over the life of your loan.
But it’s important to remember that the rate you’ll qualify for is determined by your credit score and other factors.
Also, no two lenders have the same criteria for awarding interest rates. It’s possible, if unlikely, that you receive a lower fixed rate offer from one lender than the variable rate you receive from another lender.
If you’re on the fence about which rate to select, ask the lenders you’re considering to quote you both fixed and variable rates. Compare these numbers, not the advertised ranges you might or might not qualify for.
2. Repayment options might be more limited
A variable interest rate student loan might be especially beneficial if you have a shorter repayment term. If you pay off your loan over five years instead of 10, there’s less time for your rates to dramatically change.
Many lenders will award lower variable rates for shorter terms. At CommonBond, you could score a variable rate ranging from 3.52% – 9.74%, the lowest rate reflecting a 5-year repayment term.
But not all lenders match their lowest interest rates with longer repayment terms. Citizens Bank, for one, reserves the bottom of its variable rate range for borrowers repaying their loans on a five-year term. The bank also requires the borrower to make in-school payments.
Before signing on for a variable rate, be aware of the repayment plans available to you.
You might find that your credit history (or your cosigner’s) qualifies you for the lowest possible variable rate. But if you’re looking to start repayment after you leave school — or have more time to repay it — ensure the lender meets those needs too.
3. Rates might increase at a bad time
When your variable rate changes, your payments change. That’s because you’re making payments on both your loan’s principal amount and its accruing interest. That’s how student loan interest works.
To ensure you can afford to repay your variable interest student loan, you might prepare yourself for the worst. To do that, ask lenders about their rate cap. That’s the maximum amount that a lender can increase the rate based on market changes. At College Ave, where variable rates ranged between 3.79% and 12.66% in January 2018, the cap was 25.00%.
Depending on the lender, your rate could change monthly, quarterly, or annually. Because Discover bases its variable rates on three-month London Interbank Offered Rate (LIBOR) changes, for example, your payment amount could change every three months.
The bank added its 2.99% margin to the three-month LIBOR rate to come up with its variable rates for customers as of January 2018.
Increasing rates could become problematic, particularly if your lender considers LIBOR monthly. It’s possible that your rate could increase every month for a handful of months or more. But it’s unlikely that month-to-month increases would break the bank.
Consider three decades’ worth student loan variable interest rate history. The greatest one-month LIBOR increase over any 10-year period was 4.29%, according to Macrotrends. Rates rose by that amount between July 2003 and July 2006.
That’s the worst-case scenario of a variable rate. To prepare for it, see if you could afford your monthly payments if your rate increased that drastically.
Student Loan Payment Calculator
There are potential consequences of more modest (and realistic) increases in your interest rate. If you don’t have a big margin for error during repayment, a variable rate on the rise could put you in a tough spot.
Not having enough regular income or savings might make even incremental increases difficult to cover. That’s why many borrowers opt for fixed-rate loans. A monthly payment that never changes is easier to plan for.
Make a wise choice when reviewing student loan interest rates
If you’re considering a variable interest rate student loan from top recommended private lenders, it won’t hurt to do some homework. There’s more than meets the eye when it comes to variable rates. So before you claim the reward of a lower rate now, learn about how your rate could rise later.
If you forecast having no problem repaying your loan if it rises right along with LIBOR, a variable rate might be perfect for you. But if you’re not sure, you might take some time to reconsider the safer bet of a fixed rate.
Review more tips to figure out if variable rate student loans are right for you.
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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 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.
(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 11/4/2019. Variable interest rates may increase after consummation.
2 Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
3 Important Disclosures for Discover.
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.
4 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restrictions. Loans are offered through CommonBond Lending, LLC (NMLS #1175900).
5 Important Disclosures for Citizens.
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 December 1, 2019, the one-month LIBOR rate is 1.70%. Variable interest rates range from 2.80% – 11.06% (2.80% – 10.91% 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.
Please Note: International Students are not eligible for the multi-year approval feature.
|2.84% – 10.97%1||Undergraduate, Graduate, and Parents|
|2.75% – 10.22%*,2||Undergraduate and Graduate|
|2.95% – 11.62%3||Undergraduate and Graduate|
|3.52% – 9.50%4||Undergraduate and Graduate|
|2.80% – 11.06%5||Undergraduate and Graduate|