Fixed vs Variable Student Loan Rates

Choosing between a fixed and a variable student loan interest rate can significantly impact your long-term financial situation. Fixed rates remain the same throughout the loan term, while variable rates can fluctuate, affecting your monthly payments. Understanding the differences will help you select the right option based on your financial goals and risk tolerance.

06.03.2023

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18 min.

How Student Loan Interest Rates Work
Current Student Loan Interest Rates
Federal Student Loans vs Private Student Loans
Fixed-Interest-Rate Student Loans
Fixed-Rate Student Loans Pros and Cons
Variable-Interest-Rate Student Loans
Variable-Rate Student Loans Pros and Cons
Variable vs Fixed-Rate Student Loans
Conclusion

When looking into student loans to help pay for college, one of the biggest factors you’ll come across is whether the loan has a fixed or variable interest rate. Federal student loans always have fixed rates, while private loans can have either. The main difference is how the interest rate behaves: a fixed rate remains the same for the life of the loan, while a variable rate can change over time and impact how much you pay back in the long run. Understanding these differences will help you make a more informed decision about your borrowing options.

How Student Loan Interest Rates Work

Federal student loans have a fixed interest rate set by the government, and all borrowers get the same rate for the same loan type in a given year. Private loans have rates based on the borrower’s credit score. Those with higher credit scores get lower rates and those with lower scores get higher rates.

Interest rate determination. Congress sets the interest rates for federal student loans yearly.
Fixed rates. All federal student loans have fixed interest rates, meaning the rate doesn’t change for the life of the loan.
Loan fees. Federal loans have fees charged as a percentage of the total loan amount, deducted from each loan disbursement. So you’ll get a little less than what you borrow.
Unsubsidized loans. Most students, regardless of financial need, qualify for unsubsidized federal loans, which accrue interest while in school.
Subsidized loans. Students with financial need may qualify for subsidized loans where the government pays the interest while they’re in school, making them a better deal.

Credit-based interest rates. Interest rates for private student loans are typically based on the borrower’s credit score and financial profile.
No origination fees. Most private lenders don’t charge origination fees, so you get the amount you borrow.
Fixed or variable rates. You can choose between fixed or variable interest rates.
Variable rate changes. Variable interest rates can change monthly, quarterly, or annually depending on the lender’s terms.
Co-signer option. If you don’t meet the lender’s credit requirements, you can apply with a co-signer who does.

Current Student Loan Interest Rates

Federal student loan interest rates are set by Congress each spring based on an economic benchmark and apply to loans disbursed between July 1 and June 30 of the following year. Private student loan rates are set by banks, credit unions, or schools and can sometimes be lower than federal rates. Private loans can fill funding gaps after federal loans are exhausted but don’t have the same benefits as federal loans such as built-in forbearance options and income-driven repayment plans.

Federal student loans (fixed). Undergraduate loans 6.53%, graduate loans 8.08%, PLUS loans (Parent and Grad) 9.08%.
Private student loans (fixed). 3.47% to 17.99%.
Private student loans (variable). 4.81% to 23.0%.
Refinance student loans (fixed). 3.95% to 9.99%.
Refinance student loans (variable). 4.86% to 9.99%.

The average student loan interest rate across all households with student debt is 6.87%, according to the Education Data Initiative.

Federal Student Loans vs Private Student Loans

It’s generally best to max out your federal student loan options before going to private loans. Federal loans have more borrower protections, flexible repayment plans, income-driven options, and even forgiveness programs which private lenders don’t provide.

If you do need a private loan, it’s important to shop around to get the lowest rate possible. If your credit doesn’t meet a lender’s requirements, you can apply with a co-signer.

Private loans can have either fixed or variable interest rates. Fixed rates remain the same for the life of the loan, while variable rates can change monthly, quarterly, or annually.

Private loans can sometimes have lower rates, but federal loans are usually the better option due to the extra benefits. Only after exhausting federal loan options should you consider private loans for remaining educational expenses.

Fixed-Interest-Rate Student Loans

A fixed interest rate means the rate stays the same for the life of the loan. It won’t change unless you refinance or consolidate. This stability is one of the biggest advantages of a fixed-rate student loan since you know exactly what to expect and can budget for your monthly payments.

Those who prefer predictable payments. Fixed-rate loans are best for borrowers who want a stable, consistent monthly payment and a clear repayment plan that doesn't change over time.
Borrowers concerned about rising rates. If interest rates are expected to increase, a fixed-rate loan offers security since your rate will remain the same, protecting you from any future hikes.
Long-term loan payers. If you expect your student loans to take a long time to pay off, a fixed-rate loan could provide peace of mind with a consistent interest rate throughout the repayment period.

Fixed-Rate Student Loans Pros and Cons

Predictable payments. With a fixed-rate student loan, your monthly payment will be the same for the entire loan term, so you can plan your budget without worrying about fluctuations.
No risk of increasing rates. One of the big benefits of a fixed rate is that your rate is locked in, so it won’t go up over time regardless of economic changes.
Good option in low-interest environments. If interest rates are low now, locking in a fixed rate can help you save in the long term by avoiding potential future rate hikes.

Higher initial rates. Fixed-rate loans tend to have higher initial rates compared to variable-rate loans, which can mean higher payments at the beginning.
Missed opportunities for rate drops. While a fixed-rate loan offers stability, it also means you won’t get the benefit of any rate drops - your rate will stay the same.
Refinancing challenges. If you take out a fixed-rate loan during a high-interest rate environment, you may struggle to refinance to a lower rate later if your credit situation doesn’t improve.

Variable-Interest-Rate Student Loans

Variable-interest-rate student loans can change over time, unlike fixed-rate loans, which stay the same for the life of the loan. The interest rates on variable loans are tied to an index rate, such as the Secured Overnight Financing Rate, and can change monthly or quarterly. While variable-rate loans often have lower initial rates than fixed-rate loans, they come with the risk of rate increases, which can increase both your monthly payment and the total cost of the loan. Since variable-rate loans are unpredictable, you can’t forecast how much you’ll pay over time. Some lenders may cap the interest rate, so ask about these caps to estimate the maximum interest you could be charged.

Those who expect interest rates to drop. A variable-rate loan can be a good option if interest rates are going down. Borrowers can get lower rates and save money over time.
Borrowers who will pay off the loan quickly. If you expect to pay off your student loan in a short time frame, a variable-rate loan may work in your favor, allowing you to lock in a low rate before it increases.
Those who are comfortable with fluctuations. A variable-rate loan is best for borrowers who have flexibility in their budget to handle potential changes in monthly payments, as rates can go up and down over the life of the loan.

Variable-Rate Student Loans Pros and Cons

Lower initial rates. Variable-rate loans start with lower interest rates than fixed-rate loans, so you save on interest payments right away.
Lower monthly payments. Because of the lower starting rates, your monthly payment may be more affordable initially and give you more wiggle room in your budget.
Benefit from rate drops. If market rates go down, your rate may follow, and you won’t need to refinance to get a lower rate.

Can’t budget for payments. Since variable rates change, it’s hard to predict your future monthly payments, so budgeting is more challenging.
Rates can increase payments. If rates go up over time, your monthly payment may become unaffordable, especially if the rate changes are big.
Unpredictable long-term costs. The total cost of your loan is hard to estimate since interest rates can change, so you can’t know how much you’ll end up paying over the life of the loan.

Variable vs Fixed-Rate Student Loans

When applying for a private student loan, many lenders give you the option to choose between a fixed interest rate and a variable interest rate each with its pros and cons.

In most cases, a fixed-rate student loan is the better option especially if you want stability and don’t want to deal with fluctuating payments. However, a variable-rate loan might be good if you plan to pay off the loan in a few years, expect market interest rates to decrease, or if your income is high enough to absorb the risk of rising rates.

Ultimately, the choice between fixed and variable rates depends on your risk tolerance, budget, and long-term financial plans. Take time to research and fully understand the implications of both options to make an informed decision.

When refinancing, the goal is to get a lower rate and pay off the loan faster. If you plan to aggressively pay off the loan, a variable rate can give you more savings if rates decrease.

However, the difference between the lowest fixed and variable rates is often small. So you may not pay much more with a fixed rate while getting predictable payments and protection if your repayment plans change.

For many borrowers, a fixed rate is more stable, especially if repayment will take longer or if you’re concerned about rising interest rates. While variable rates may give you initial savings, fixed rates give you a safer and more consistent option.

If you want to switch between fixed and variable rates, you can refinance your private student loan with your current lender or a new one. While refinancing may have an origination fee, it’s rare for private loans.

For federal loans, you can’t directly switch a fixed-rate direct loan to a variable-rate one. You can refinance your federal loan into a variable-rate private loan, but you’ll lose federal student loan benefits like repayment plans and forgiveness programs.

Refinancing can give you a lower rate and savings, but be cautious with federal loans. Refinancing them into private loans means you’ll forfeit valuable protections. And you can’t refinance a private loan into a federal loan.

Conclusion

When choosing between fixed and variable interest rates, borrowers should consider their situation and goals. Fixed-rate loans give you stability with predictable payments so it’s ideal for those who want certainty but may have higher initial rates. Variable-rate loans while starting lower have the risk of fluctuating rates that could increase payments later. The best choice depends on your risk tolerance, repayment term, and financial flexibility. Take time to assess both options carefully considering your circumstances and market conditions.

FAQ

Pay interest before your grace period ends. If you pay off the interest during your grace period, it won’t be added to your principal loan balance, so you’ll save more in the long run.
Avoid income-driven repayment plans if possible. These plans can lower your monthly payments but will charge more interest over time. If you can afford the standard repayment plan, it’s better to save on interest.
Watch your overall financial health. Before paying extra on your student loans, prioritize building an emergency fund and paying off high-interest debts like credit cards. This will put you in a stronger financial position overall.

Refinancing your loans might be a good option if you have good credit as it can lower your interest rate and the overall amount you pay throughout the loan’s term. But remember refinancing federal loans with a private lender will make you lose access to certain borrower protections like income-driven repayment plans and loan forgiveness programs. Another way to reduce your interest rate is by setting up automatic payments. For federal student loans, this can save you 0.25% and many private lenders also offer the same discount for automating your payments.

Complete the FAFSA. Start by submitting the Free Application for Federal Student Aid (FAFSA). This is needed to access federal student loans, grants, and work-study programs.
Determine borrowing needs. Figure out how much you need for your education, and be mindful of the maximum borrowing limits on federal student loans.
Consider private loans. Once you’ve reached your federal loan limits, look into private lenders to cover any remaining financial gaps.

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