Fixed vs variable rate student loans
Introduction
The difference between a fixed-rate student loan and a variable-rate student loan is essentially the same as the difference between a fixed-rate mortgage and an adjustable-rate mortgage. Your interest rate stays the same on a fixed interest rate loan, but changes with market conditions on a variable interest rate. One of the first things you’ll have to decide when getting your student loans is whether you want them to be at a fixed or variable interest rate. Here’s what you need to know about each type of loan so that you can make an informed decision for yourself.
What is a fixed-rate loan?
A fixed-rate loan means your rate is locked in for the life of the loan. The amount you pay each month will remain consistent, even if interest rates fluctuate. As a result, your monthly payment will be lower than with an adjustable rate student loan.
This also means that if interest rates rise over time, which they generally do as the economy improves and inflation increases (as measured by CPI), then your payments will increase too; but if they fall lower than expected due to economic conditions or other factors such as deflation, then so will your payments (but never below what it would have been had there not been any change).
What is a variable rate loan?
A variable rate loan is one based on the prime rate. The prime rate is a benchmark interest rate set by the Federal Open Market Committee (FOMC), which is comprised of members of the Federal Reserve Board and then published in newspapers such as The Wall Street Journal and USA Today.
Variable Rate Loans Change Monthly
The best part about this type of loan is that it’s easy to track how much you are paying each month. Your payment will be exactly what it was last month until the current prime rate changes again. You can find out what your new monthly payment will be by checking your credit report or calling up your lender directly—they’ll tell you!
Variable Rate Loans Can Change at Any Time
When interest rates change, so does your monthly payment amount; but there are no set rules for how often this might happen. Sometimes it’ll happen more than once per year, sometimes less than once every decade—there’s no way to know for sure when or why these changes might occur unless we start traveling through time again (which isn’t recommended). This gives borrowers peace of mind knowing that someone else’s whims aren’t dictating their finances; however with great power comes great responsibility: these loans are riskier than fixed ones because they come with higher penalties if missed payments occur during periods where creditworthiness drops significantly due to unforeseen circumstances outside someone’s control like illness/injury/job loss etcetera!
Which type of student loan should you get?
It’s important to understand the difference between fixed-rate and variable-rate student loans because there are pros and cons of each.
Fixed-rate student loans
Fixed-rate student loans are generally for those students who need to borrow less than $8,500. These types of loans have a fixed interest rate over the course of your repayment period. The advantages are that you know exactly how much interest you’ll pay on your loan (compared with variable-rate loans), and you don’t have to worry about rising or falling interest rates affecting your payments. If you plan on having paid off your loan within a year or two, then this type is better suited for your needs; otherwise, consider a variable-rate product instead.
When should you refinance your student loans?
You’re probably wondering if refinancing your student loan is right for you. The answer depends on a few factors which we’ll list here:
- If you can get a lower interest rate. You should absolutely refinance if you can get a lower interest rate and still afford the monthly payment. That’s because paying less in interest each month will save you thousands over the life of your loan, so even small savings add up quickly!
- If you have a large balance. Student loans typically have variable rates that adjust with inflation, which means they go up every year or two depending on how much inflation has gone up since when the loan was taken out (or at least that’s what happens with federal student loans). Unless there’s been some unusual downturn in inflation recently, this means that eventually, most students will be paying back their loans at higher rates than they borrowed them at—and it could be decades before those high-interest payments are done making! But if all goes well, then having more flexibility in how much money goes towards principal vs interest monthly might mean being able to pay off faster without sacrificing too much comfort now by stretching out payments longer into retirement age where wages are likely higher overall anyway thanks to compound interest over 40+ years time horizon.”
Fixed-rate loans have the same interest rates throughout the life of the loan. Variable-rate loans fluctuate based on market conditions.
Fixed-rate loans have a fixed interest rate over the life of the loan. Variable-rate loans, on the other hand, have an interest rate that changes over time depending on market conditions. The monthly payment on this type of loan will be higher or lower depending on where you start and where you end up in relation to current rates.
Fixed-Rate Student Loans
Fixed-rate student loans offer more stability than their variable counterparts because they provide a predictable cost throughout your repayment period. This can be particularly appealing for those who want to know exactly what their payments will look like each month before taking out a loan (and having room in their budget for them).
Conclusion
We suggest that if you are planning on paying off your loans within a short period of time, you should look into a variable interest rate loan. If you have no plans to pay off your student debt over the next few years and want to plan for the future with certainty, then a fixed interest rate loan is right for you.