Are Fixed or Variable Student Loans Better?

Few students can get through school without borrowing to pay for rising tuition costs. When choosing a student loan, it's important to understand the difference between variable and fixed rate loans. Choose your student loan terms based on what is likely to work best for you and your finances.

Variable Rate Student Loans

Variable rates change based on market conditions, and that means your payment can change as well. However, variable rates are often lower – at least initially – than fixed rates. When rates are low, you can save money on your student loans. If rates rise over time, your monthly payment will go up. Higher payments can strain your monthly budget, making it more difficult to live within your means.

With a variable rate on your student loan, you might save money initially, but your cost could be higher in the long run. Unlike many variable rate mortgages, there are no caps on student loan rates. This means that rates can keep rising as long as market conditions point to these increases. It constitutes a bigger risk over time.

Fixed Rate Student Loans

With a fixed rate loan, the rate remains stable the entire term of the loan, no matter how the market changes. You don't have to worry about the payment changing because it will be the same throughout the life of the loan. One of the advantages of a fixed rate loan is the stability. You can plan your payments, and make sure that your loan is likely to fit your budget. However, a fixed rate loan usually comes with a higher interest rate than what you initially pay on a variable rate loan.

If rates go lower, a variable rate can be useful because it will save you money. However, if rates head higher the fixed rate is advantageous because you don't have to worry about higher payments as a result. A variable rate can be a risk, especially if you obtain your loan in a low-rate environment.

How Long Will You Have Your Student Loans?

Another consideration is the length of time involved with student loans. Student loan terms range from 10 to 30 years. Over that period of time, rates may rise and fall many times. In many cases, a fixed rate represents an eventual evening out of cost. You might pay roughly the same amount total whether you choose a variable loan or a fixed loan, but the stability of a set payment can smooth your cash flow.

The longer your loan term, the more likely it is that a fixed rate loan is a better choice. While there is the chance that variable rates will remain low for long periods of time, that's a big risk to take when you consider the potential variability in loan rates over a long time frame.

Refinancing and Student Loan Discounts

Starting with one type of loan doesn't mean that you can't get another loan later. It's possible to refinance your student loans if the terms no longer work for you. If you choose a variable rate loan, and rates appear to be heading higher, you can refinance to a fixed rate to avoid loan payment increases and higher costs.

Another possibility is to look for discounts to your interest rate. If you want to take advantage of a lower rate, but don't want the variability that comes with a lower rate, you can comparison shop discounts. Some student lenders offer a reduction in rate if you have good grades or if you sign up for automatic withdrawals from your checking account to make payments. These discounts can reduce a fixed rate to the point where it's more competitive with variable rates.

Study your options and consider what is likely to work best with your individual situation. Choose a student loan that will be manageable for your situation, and cost as little as possible.

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