Whether you’re borrowing a private student loan or refinancing your student loans, you have a choice to make. Do you go with a variable or a fixed interest rate loan?
Variable student loan interest rates can change multiple times per year as the market changes. Many private student loan lenders set rates based on the London Interbank Offered Rate (LIBOR). To determine your variable rate, the bank takes the LIBOR plus a margin based on your credit evaluation.
Why would anyone go with a variable rate student loan? Variable interest rates are risky, so creditors incentivize you to choose a variable rate over a fixed rate by offering a low initial rate.
Don’t let that low initial rate suck you in, though. Choosing a variable rate can make sense in some situations, but you need to be careful. Below, we’ll discuss four things to watch out for with variable student loan interest rates.
4 Things to Watch Out for With Variable Student Loan Interest Rates
Advertised rates can be misleading
When you look at a lender’s advertised rates, the variable rate ranges are almost always lower than the fixed-rate ranges. Why? Because borrowing a variable rate loan is riskier. Your reward for taking the risk is starting out at a lower rate.
Of course, that doesn’t mean that a variable interest rate is always lower than the fixed interest rate. Every lender uses its own criteria when determining what interest rate you qualify for. It’s possible that one lender could offer you a 3.5% variable interest rate while another offers you a 3% fixed interest rate.
Even if you’re okay with the risk associated with variable interest rate loans, don’t assume that the variable rate will be lower. Instead, ask for fixed and variable rate quotes from every lender you’re considering. Those numbers—not the advertised rates—are what actually matter.
The best deals are often tied to the shortest loan terms
Variable interest rates often work out better for borrowers interested in a short repayment term. Why? Because repaying your loan over five years rather than 10 or more gives the rate fewer opportunities to change. Plus, many lenders only offer their best rates to borrowers who choose a short loan term.
For example, CommonBond’s lowest variable rate is only available to borrowers who choose a five-year repayment term.
Also, keep in mind that a five-year loan term means larger monthly payments. If you’re offered a low rate on a five-year loan, use a loan repayment calculator to see what you’ll owe each month. Make sure your budget can handle it.
You can’t predict how much rates will change
With a variable rate loan product, it’s safe to say rates will change over the life of the loan. However, there’s no way to predict just how much they’ll change.
A rate change affects your payment because your monthly payment is based on the principal and accruing interest. If you’re living paycheck to paycheck, an increase could strain your finances.
Historically, LIBOR rates fluctuate substantially. You can see LIBOR rates over the years on MacroTrends. Looking at historical rates gives you an idea of just how much the rate could fluctuate month to month and year to year.
Before borrowing a variable interest rate loan, make sure you know how the bank or financial institution sets its rates. Ask how often rates change. Some lenders change rates monthly. Others do it quarterly or annually. Find out what the rate cap is for the loan. A rate cap is the highest the lender can raise the interest rate to.
If you borrow student loans with a shorter repayment plan or if your lender only changes rates annually, there are fewer opportunities for that rate to change. That lowers the risk of borrowing quite a bit compared to a longer-term loan or a lender who changes rates every few months.
You could get stuck with the variable rate loan
Some student loan borrowers go with a variable rate loan because the initial interest rate is too low to pass up. They bank on paying off the loan quickly before the interest rate can spike. Or they bank on refinancing their student loans if the rate increases.
Unfortunately, this can be a risky strategy. What started out as a low-interest variable student loan could turn into a high-interest rate variable student loan that you can’t afford to pay.
You might face unexpected financial circumstances like medical debt or job loss. You might not graduate from college—something that happens to 40% of college students. Any of those situations would make it harder for you to pay off your loan early or to refinance to a lower rate.
Carefully consider that possibility when deciding between fixed and variable interest rate student loans.
Is a Variable Rate Student Loan Right For You?
Borrowing student loans might be the only way that you can afford to go to college, but borrowing student loans also makes college more expensive. Your interest rate determines just how much more expensive.
Right now, student loan rates are at an all-time low because of actions the Federal Reserve took in response to the coronavirus. The Federal Reserve set the federal funds rate to 0 to 0.25 percent, reaffirming on November 5, 2020, that it will stay there until labor market conditions improve. Private lenders account for this rate when setting their own rates.
Variable-rate student loans are always risky, but they’re arguably riskier when rates are this low. The only direction the rates can go is up. Fixed interest rate student loans are also at low right now, so although they might be higher than a variable interest rate loan, they’re still a lot lower than they were in previous years.
In fact, if you did recently borrow a variable or a fixed-rate student loan, now’s the perfect time to refinance your student loans to a fixed interest rate loan. Lock in a low rate before the market bounces back and your variable interest rate increases.
Ultimately, whether or not you should choose a variable rate student loan depends on your individual circumstances.
Before you borrow a variable rate student loan, ask yourself the following questions. Your answers will paint a picture of your personal financial situation in relation to private student loan borrowing.
- Is your job/income stable?
- Do you have a plan for repaying your student loans?
- Can you afford the loan you’re borrowing based on expected earnings for your major?
- Can your budget or expected budget afford an unexpected monthly payment increase?
- Have you compared fixed and variable rate loan products from multiple lenders?
- Did you use a student loan repayment calculator to compare those rates?
- Did you ask your lender how often they change variable interest rates and what the rate cap is?
- Have you maxed out your available federal, state, and college financial aid?
- Aside from the low variable interest rate, what other borrower benefits (flexible repayment, autopay discount, academic deferments) does the lender offer?
Here are some other articles to read as you make decisions about paying for college:
- What are the 2021 Federal Student Loan Interest Rates?
- Which is Better: Subsidized or Unsubsidized Student Loans?
- Student Loans & Capitalized Interest: What You Should Know
- 8 Things a Parent Should Ask Themselves Before Taking Out Parent PLUS Loans
- What is a Private Student Loan? Everything You Need to Know
- Saving for College: Short & Long-Term College Saving Tips
- Student Loan Lenders with Cosigner Release
Compare the Best Student Loan Refinance Rates
Here are our top student loan refinance picks for 2019
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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. (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. (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. Information advertised valid as of 1/27/2021. Variable interest rates may increase after consummation.
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.
Ascent: Ascent’s undergraduate and graduate student are funded by Bank of Lake Mills or DR Bank, each Member FDIC. Loan products may not be available in certain jurisdictions. Certain restrictions, limitations; and terms and conditions may apply. For Ascent Terms and Conditions please visit: www.AscentFunding.com/Ts&Cs. Rates are effective as of 11/1/2023 and reflect an automatic payment discount of either 0.25% (for credit-based loans) OR 1.00% (for undergraduate outcomes-based loans). Automatic Payment Discount is available if the borrower is enrolled in automatic payments from their personal checking account and the amount is successfully withdrawn from the authorized bank account each month. For Ascent rates and repayment examples please visit: AscentFunding.com/Rates. 1% Cash Back Graduation Reward subject to terms and conditions. Cosigned Credit-Based Loan student must meet certain minimum credit criteria. The minimum score required is subject to change and may depend on the credit score of your cosigner. Lowest APRs require interest-only payments, the shortest loan term, and a cosigner, and are only available to our most creditworthy applicants and cosigners with the highest average credit scores.
*The minimum amount is $2,001 except for the state of Massachusetts. Minimum loan amount for borrowers with a Massachusetts permanent address is $6,001.