Understanding Variable vs. Fixed Interest Rate Student Loans

Variable vs. Fixed Student Loans

If you are considering refinancing your federal or private student loans, you should understand the various types of refinancing rates and options.

A confusing decision, when refinancing, can be choosing between a variable and fixed interest rate student loan.

So what exactly is a Fixed Interest Rate Student Loan?

A fixed interest rate loan has an interest rate that doesn’t change once the loan is originated, or first disbursed. This type of loan is “locked” at the same rate over the period of repayment.

A fixed interest rate loan is viewed as a more conservative financial option, that can protect you against rising interest rates and additional interest costs accrued.

Okay, so what is a Variable Interest Rate Student Loan?

A variable interest rate student loan has an interest rate that increases and decreases periodically with an industry rate set by global financial institutions.

If the underlying rate goes up, your interest rate on your student loan will increase as well.

Variable rates currently offer lower interest rate options, resulting in additional interest savings, but keep in mind – variable rate student loans are often higher risk for borrowers than fixed interest rate student loans.

What type of loans do you currently have?

Federal and private education loans are a mix of variable and fixed student loans. Also, federal student loans are typically based on T-Bills, which are short-term Treasury Notes issued by the government.

Most private student loan lenders base their rates on LIBOR, which stands for the London Interbank Offered Rate, a rate estimated by leading financial institutions in London.

Student Loan Hero Recommends:

Before you refinance your student loans or switch loan types, be sure to ask the right questions!

For example, does the variable interest rate have a cap? A cap places a maximum limit on how high a variable interest rate can go. This type of mechanism can be a great protection against rising interest rate risk.

Also, be sure to calculate the savings difference between variable and fixed rate student loans. Are the potential savings worth taking a risk?

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