Fixed or Variable Student Loans – What to Choose?
Are you considering taking out private student loans? If so, you will come across a few options for student loan interest rates.
Many private student loan providers will offer students a choice between fixed or variable student loan interest rates. This is an important decision and can potentially save you thousands of dollars. Keep on reading to learn about the pros and cons of these interest rates so you can pick the best student loans options.
Fixed Student Loans
A fixed student loan interest rate is one that is consistent for the entire duration of the student loan. If you are paying 4% now, you will be paying 4% for the entire lifecycle of the loan.
Now, let’s get into the benefits and drawbacks of fixed student loans:
The biggest benefit of fixed interest rates is the predictability. You will know exactly how much you owe at all times. The biggest drawback of fixed interest rates is that they tend to be a bit higher than variable student loans (which we will get to next). Additionally, if a loan provider’s fixed interest rates go down in the future, you will still be locked into your current rate.
Both types of federal student loans–Direct Stafford Loans and Direct PLUS Loans–offer fixed interest rates. Students who take out private student loans will have the option to take out either fixed or variable interest rates.
Variable Student Loans
A variable student loan interest rate is an interest rate that can fluctuate according to the broader economic market.
The benefit to this is that variable interest rates can offer lower interest rates than fixed interest rates, at least initially. The drawback is that the loans can fluctuate and may end up being higher than the fixed rates over the duration of the student loans.
The biggest opportunity for student is if the pay off their variable student loan in a short timeframe (taking full advantage of the lower interest rate).
Are fixed interest rates or variable interest rates better?
Fixed interest rates are consistent and safer for students. For most students, fixed rate student loans are going to be a safer option, because variable rate student loans can be a bit of a gamble as far as how the interest rates fluctuate.
Are federal student loans fixed or variable?
Federal student loans are always fixed at a specific interest rate. For most students, federal student loans are going to be the absolute best type of student loan and should be prioritized first. Generally, federal student loans offer more competitive interest rates, more repayment options, and other benefits such as loan forgiveness that other types of student loans don’t offer.