Variable vs. Fixed Interest Rates on Student Loans: Which Is Best for You?

Variable-rate student loans can be an attractive option, but most students (as a practical matter) stick with fixed-rate student loans. When looking at variable- versus fixed-rate student loans, here are six things to know about both.

Variable vs. fixed interest rate student loans

A variable interest rate fluctuates over time, while a fixed interest rate remains the same over the life of a loan.

If you borrow private student loans, you can choose between variable or fixed. If you borrow federal student loans, you can only have a fixed interest rate.

Variable interest rate student loans: 6 things to know

1. Choices
2. Starting interest rates
3. Index movements
4. Savings
5. Possible higher payments
6. Rate changes and caps

1. Choices

As a reminder, you’ll only have to decide between a variable rate and a fixed rate if you borrow a private student loan. Private student loan lenders can choose to offer both options.

2. Starting interest rates

A variable-rate student loan typically comes with a low-end interest rate that is below that of a fixed rate — and sometimes significantly lower.

Variable APRs for College Ave undergraduate student loans start at 4.74%, for example, while fixed APRs start at 4.74%.

3. Index movements

Many private student loan lenders tie variable interest rates to the one-month or three-month Libor Interbank Offered Rate, a market benchmark. Sallie Mae, for example, uses the one-month Libor.

The Libor is often impacted by the Federal Reserve federal funds rate, said Mark Kantrowitz, publisher of Savingforcollege.com. If the Federal Reserve announces a quarter-point increase, the Libor will often change within three months, Kantrowitz said.

Federal Reserve officials have indicated that they want to hold rates steady through 2020.

4. Savings

A variable-rate loan could save you money compared with a fixed-rate loan if the initial rate is lower and the borrower is confident that they can pay it off before the midpoint of the loan term, Kantrowitz said.

For instance, let’s assume you borrowed a seven-year private student loan but pay it off in three-and-a-half years. Despite possible increases in those early years, Kantrowitz said your weighted average interest rate at the midpoint would likely be close to the fixed rate you would have received.

5. Possible higher payments

A variable-rate loan could make sense if rates seem to be heading lower or holding steady.

A one percentage point increase in the interest rate on a variable loan, Kantrowitz said, can increase the monthly loan payment by as much as 5% on a 10-year term, 10% on a 20-year term and 15% on a 30-year term.

6. Rate changes and caps

If you’re exploring a variable-rate loan, ask lenders how often their rates change. Some lenders will adjust the rate monthly (such as Earnest), while others will adjust every three months (such as Education Loan Finance).

Also, find out if your variable student loan rates are capped. For example, SoFi private student loan variable rates were capped at 13.95% as of Jan. 29, 2020.

Fixed interest rate student loans: 6 things to know

1. Same monthly payments
2. Interest rate ties
3. Factors
4. Advertised rates
5. Repayments
6. Shorter loans, better rates

1. Same monthly payments

Fixed-rate federal and private student loans provide peace of mind because you will always know what your monthly payments will be. This can be especially important if you intend to pay off a student loan over a longer period of time, such as 10 to 25 years.

2. Interest rate ties

Fixed interest rates for federal loans are tied to the 10-year U.S. Treasury note. The interest rates for federal loans are announced each May and go into effect on July 1.

Here are the fixed interest rates for federal loans disbursed on or after July 1, 2019, and before July 1, 2020:

• 4.53%: Direct subsidized and direct unsubsidized loans for undergraduates
• 6.08%: Direct unsubsidized loans for graduates and professional students
• 7.08%: Direct PLUS loans for parents, graduates and professional students

3. Factors

While federal loans have the same interest rates for everyone, private loans come with different interest rates depending on a variety of factors, including the credit score of the borrower or cosigner. The rate might also depend on a student’s major.

4. Advertised rates

When you look at advertised interest rates for private loans (fixed or variable interest), the ranges can be huge. Kantrowitz estimates that less than 10% of borrowers get the best-advertised interest rate, so keep that in mind when you are rate shopping.

5. Repayments

Kantrowitz said 10-year repayments used to be common for fixed-rate private student loans, but now you’re seeing lenders offering a wide range of repayment periods.

Citizens Bank undergraduate student loans, for example, offer five-, 10- and 15-year repayment terms, while MPower Financing student loans come with one option: 10 years.

6. Shorter loans, better rates

Shorter fixed-rate loans have lower starting interest rates built in, Kantrowitz said, since they are less risky for lenders in brief periods. Most of the savings from a short-term fixed-rate loan will come from the condensed repayment period rather than a lower interest rate, Kantrowitz said.

Refinance your student loans to switch between variable, fixed

If interest rates are rising (or dropping), it could make sense for borrowers to refinance their student loans.

To refinance, you’ll need to meet certain requirements:

• Credit score
• Annual income
• Savings
• College degree (or certificate of enrollment if you’re still a student)

If you’re switching from federal student loans to private loans, be aware of the protections you’ll lose, such as income-driven repayment plans and the possibility of loan forgiveness.

To help decide if refinancing is right for you, try using our student loan refinancing calculator.