Fixed vs. Variable Rate Student Loans
When searching for private student loans, you may find some lenders offer both a fixed and a variable rate option. What does this mean, and what are the pros and cons of each?
Fixed Interest Rate - A fixed rate loan is exactly as it sounds – the interest rate is fixed, or stays the same, for the entire life of your loan. Rates are currently low, so this could be a good time to choose a fixed option and lock it in.
Pros: You’ll know what your interest rate is and won’t have to worry about fluctuations down the road.
Cons: The tradeoff for knowing what your rate will be for the long haul is that it is often a higher rate to start with than a variable rate option.
Who should consider a fixed rate: In general, most borrowers will benefit from a fixed rate loan. But know that if interest rates decrease later, you’ll be stuck with the rate you locked in unless you refinance your loan(s).
Variable Interest Rate - When you select a variable rate loan, your interest rate will fluctuate over time based on the current index rate. (The Prime index provides the base rate for most loans.) Your lender adds a percentage to that base according to your credit score and history, and there is usually a limit or “ceiling rate” on how high your rate can go if the Prime index increases.
Pros: Variable rate options are typically lower than fixed rate at the start of your loan. Additionally, if the index decreases in the future, so will your interest rate.
Cons: There is risk involved; while your rate could go down, it could also increase, meaning you will pay more in interest over time.
Who should choose a variable rate: If you feel confident in your ability to continue to make payments regardless of a potentially higher interest rate, or you plan to pay your loans off quickly, you might want to consider a variable rate.