Federal – Fixed or Variable Rate Student Loan?
All federal student loans come with fixed rates. Congress sets the loan rates each school year based on 10-year Treasury notes plus a fixed increase. The rates are set in the spring for the upcoming school year and are valid for all federal student loans disbursed from July 1 until June 30. Rates vary based on borrower and loan type. Check out the most up-to-date federal student loan interest rates here.
Federal student loan interest rates for the 2018-2019 school year are as follows:
|Loan Type||Borrower||Fixed Interest Rate|
|Direct Unsubsidized & Unsubsidized||Undergraduate||5.05%|
|Direct Unsubsidized||Graduate or Professional||6.6%|
|Direct PLUS||Parents and Graduate or Professional||7.6%|
Just because the federal government issues fixed rate student loans doesn’t mean that all your federal student loans will have the same interest rate. Each year, your new federal loans will have a new interest rate. This means that upon graduation, you could have loans with four different fixed interest rates.
Federal Fixed Interest Rate Caps
Congress caps the fixed interest rates based on the loan type. This ensures that rates don’t get too unreasonable. Congress uses the following formula to determine the fixed interest rate cap:
Direct undergraduate loans: 10-year Treasury + 2.05%, No higher than 8.25%
Direct graduate loans: 10-year Treasury + 3.60%, No higher than 9.50%
Direct PLUS loans: 10-year Treasure = 4.60%, No higher than 10.50%
Private – Fixed or Variable Rate Student Loan?
Private lenders offer competitive variable or fixed rate student loans. The majority offer both. Why do they offer both? It makes their loans more marketable to borrowers, offer different options to different people.
The Variable Rate Trap
Variable rates start out lower than fixed interest rates, which could make them appear “too good to be true.” But, you have to keep in mind that variable rates change, and can often end up much higher than their starting point. Lenders intentionally choose a starting variable rate that entices customers but still allows them to earn the same relative margin that they could if the loan was fixed. Your first few months or years might accumulate less interest than a fixed rate loan, but the rate could easily increase in the future.
Before committing to a variable rate loan, you need to talk with the lender directly and read through the loan terms. Speaking with a financial advisor or doing financial market research can also help you weigh the pros and cons of going with a fixed versus variable rate student loan. It’s very hard to predict how risky a variable rate is, but thankfully, you have might have options if the rate starts to skyrocket.
Refinancing Your Private Student Loans
Borrowers with strong credit, a good debt-to-income ratio, and a stable income assume a little less risk when taking on variable rate loan. You’d be a strong candidate for a solid refinancing deal. Refinancing your student loans would give you the chance to change your loan from a variable rate to a fixed interest rate if desired. Since private loan companies don’t typically charge origination fees, refinancing is free. You’ll just need to spend some time doing research and filling out some applications.
By refinancing, you could take a riskier variable rate loan up front and if/when rates start to climb refinance to a fixed rate and lock it in. If you time things right, this can save yourself a lot of money. Again, it’s hard to predict financial markets, but doing research and speaking with a financial consultant helps.
Should I Choose a Variable or Fixed Rate Student Loan?
If you’re set on taking out federal student loans, the choice has been made for you. Federal student loans always have a fixed rate. Better yet, the rate tends to be a lot lower than a private student loan fixed interest rate—unless of course you have excellent credit. Plus, if you qualify for subsidized loans, your interest won’t accumulate while you’re in school. This saves you a lot of money.
If you need to take out a private student loan, the fixed or variable rate student loan comparison comes down to how willing you are to take a risk. In the short term, a variable rate is normally lower and will save you money, but it will likely rise throughout the life of your loan. How high will it rise? It’s hard to know. That’s why variable rates are usually better for short loan terms or loans you’ll pay off quickly. If your loan has a longer term—like 25 years—it’s usually a safer bet to go with a fixed rate.
As you can see, there’s no clear answer or rule of thumb to follow. However, there are a few things you should consider as you decide between fixed or variable rate student loans.
Do you qualify for subsidized federal loans?
If so, they’re really your best bet. They have low fixed interest rates and no interest accumulates while you’re in school. Plus, you get federal borrower protections like repayment plans, death and disability discharge, and potential student loan forgiveness. You won’t find that with any private student loan.
What will your financial situation look like while you’re in school?
If you’re able to make student loan payments while you’re still in college, it makes sense to choose a variable interest rate. Since the rate is lower, more of your monthly payments would go toward the principal.
You would have four years’ worth of payments completed by the time you graduate and no capitalized interest. If your interest rate does rise after graduation, you could always consider switching to a fixed rate through refinancing. Either way, you still saved yourself money by starting with the lower variable rate.
What do your potential earnings look like?
What’s your major? Are you majoring in something like engineering or computer science that will likely lead to a higher paying job? If so, you might be better suited to assume the risk that comes with a variable interest rate. For one, a high income makes it more likely that you could pay off your student loans early. The earlier you pay off the loan, the less interest you’ll pay overall and the less time your variable interest rate has to fluctuate.
You’d also have an easier time refinancing if needed. When you refinance, the lender considers your credit score, your income, and even your job type. If you have a stable job and high income, you have a better chance at securing a competitive fixed interest rate on your refinanced loan.
Do you like predictability?
With fixed interest rate loans, you can predict your future monthly payments right now. Unless you make extra payments on your loans, the monthly payment amount won’t change. You’ll know exactly how much money you need each month to stay on track of payments.
With a variable rate student loan, you don’t have that predictability. You can predict monthly payments based on the current interest rate, but you can’t predict how much you’ll pay if the interest rate fluctuates. Some people don’t mind the unknown. Others prefer having a stable monthly payment. It’s really up to preference.
There’s no right or wrong answer when it comes to choosing a variable or fixed rate student loan. You just need to carefully consider your options and figure out which path will save you the most money. If you choose wrong or can’t handle the unpredictability of a variable rate loan, you can always refinance later.
Compare the Best Student Loan Refinance Rates
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Student Debt Relief Loan Refinancing Advertiser Disclosure
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.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). 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.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.