With a fixed-rate student loan, the interest doesn’t change over the life of your loan. On the flip side, the interest rate on variable-rate loans can increase or decrease based on market conditions.
Several key points differentiate fixed and variable student loans. But you should also consider the similarities.
- What is the difference between fixed, variable rates?
- When to choose a fixed rate
- When to choose a variable rate
- Frequently asked questions
What is the difference between fixed and variable student loans?
Fixed-rate student loans are the safer bet
Federal student loans have fixed interest rates. That means your repayments won’t change over the life of your loan, even if interest rates rise. The interest rate may change, however, if you refinance or consolidate your loans. But keep in mind that if you’re on an IDR plan or if your loan is subsidized or unsubsidized, your payments and interest charges can vary.
Because rates stay the same, fixed student loan rates can be a safer bet if you don’t plan to pay off your loans quickly. But a longer term can mean you’ll pay more in interest over the life of your loan. A fixed-rate loan can also be a safe bet if interest rates look like they’ll increase or if you like the stability of fixed monthly payments.
Variable-rate student loans are a gamble
Interest rates can vary with a variable-rate student loan throughout the lifetime of the loan. For that reason, your monthly payments can also fluctuate. Private lenders are the only providers that offer variable-rate student loans since all federal loans are fixed-rate loans.
Variable rate loans fluctuate based on market conditions, which means the interest rate on your student loans can go up or down. If you plan on taking a long time to pay back your loans, this may not be the best option because you can’t foresee future rates.
You could end up paying more over time. Most private lenders will also look at your credit profile before providing an offer. If your credit is poor, you likely won’t get the very best interest rates or terms.
| Fixed-rate student loans | Variable-rate student loans |
|---|---|
| Most (if not all) federal student loans come with fixed interest rates and federal benefits and protections. | Private student loans and loan refinancing from federal loans to private loans can come with either variable or fixed rates. |
| Fixed rates won’t rise, but they won’t fall either during times of declining interest rates. | Variable loan repayments decrease when interest rates fall. |
| You know exactly what you’ll owe each month. | The amount you pay each month is not always known and can change. |
| Historically, fixed-rate student loans are more expensive than variable-rate loans over the life of the loan. | If interest rates rise, repayments can be more expensive than with fixed-rate loans. |
When to choose a fixed-rate student loan
If you’d rather have the stability of knowing what you’ll pay every month so you can make a budget and stick with it, then a fixed-rate loan is generally best. Variable-rate loans can rise and fall with the market, so you can never be entirely sure your monthly payment won’t also rise or fall.
You might choose a fixed-rate loan if your loan term is long. So, if the market takes a series of unpredictable ups and downs, you won’t be caught off-guard. Also, a fixed-rate loan can give you a better estimate of what you’ll pay over the term of your loan before you even apply, giving you the chance to forecast your finances ahead of time. Keep in mind that in a market with declining interest, you may miss out on interest savings.
When to choose a variable-rate student loan
Generally, interest rates on variable-rate student loans start lower than on fixed-rate loans. Even a slight difference can impact your monthly payment. For instance, for every $5,000 borrowed, saving just 1% in interest would mean a $5 lower monthly payment. Although not a huge amount of savings, if rates continue to fall, you could save even more.
Another point to keep in mind is your repayment plan. If you plan to pay back your student loans quickly, you lower your risk of encountering bigger interest-rate increases. Shorter repayment periods may mean larger monthly payments, so by paying off your loans faster, you’d save a lot in interest charges overall.
Student loan refinancing: Better to get a fixed or variable rate?
Refinancing your student loans can often be a good choice if you have multiple loan payments but want one single monthly payment instead. If you have a stable income and good credit, you can also often qualify for the best interest rates on your new loan. But which is better, refinancing to a fixed or variable-rate loan? That depends.
- Fixed-rate loan. A fixed-rate loan gives you a consistent monthly payment, so if money is tight and you don’t want your payment to jump because of an interest rate increase, then a fixed-rate loan is best. Also, if you’re planning on taking more than three years to pay off your loan, it’s likely you’ll see a jump in rates during that time. That’s why fixed-rate loans tend to be a better option long-term.
- Variable-rate loan. When interest rates are holding steady or falling, you can save money by refinancing to a variable-rate loan. If you plan on paying off your loan in less than three years, a variable-rate loan also makes sense. That’s because you will likely pay less interest to start, and by the time interest rates increase, your loan may be paid off in full.
Either way, you’ll likely need good to excellent credit to refinance your loans at the lowest rates and best terms. Also, if you refinance your federal student loans with a new private loan, you will no longer qualify to participate in federal loan forgiveness, deferment, or forbearance programs.
Fixed vs. variable student loan FAQs
How are fixed and variable rates on student loans calculated?
Student loans accrue interest using a technique called simple interest. That means you only pay interest on the loan amount. So, when you make a payment, you pay both interest and principal on the loan.
However, it’s common that more of your payment will go to principal and less to interest. This is due to the amortization schedule, which is a breakdown of interest and principal for each payment.
Using a student loan calculator is the best way to find out what you’ll pay on either your fixed- or variable-rate student loan.
Which rate type do most borrowers choose?
Most borrowers choose federal student loans because of the protections they offer and the possibility of lower rates. Also, you may have an easier time qualifying for one.
Are fixed-interest rates or variable-interest rates better?
That depends. Both have pros and cons. If you prefer stable payments each month, fixed-rate loans are better. But if interest rates are low, and you plan to pay off your loan relatively quickly, variable rates might be a better choice.
Are federal student loans fixed or variable?
All federal student loans are fixed-rate loans.
What can fixed and variable student loans be used for?
Both types of student loans can be used to cover the cost of tuition, books, supplies, room and board, and other expenses used for your education.
Can fixed or variable interest loans be deferred?
Yes, if you’re still in school, both fixed and variable-rate loans can be deferred. What’s more, both types of student loans can be consolidated, which is helpful if you hold multiple loans with different interest rates to repay.
If you need to take out private student loans, visit Credible to compare private student loan rates from various lenders in minutes.
The companies in the table below are Credible’s approved partner lenders. Whether you’re the borrower or cosigner, Credible makes it easy to compare rates from multiple private student loan providers without affecting your credit score.