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Variable Rate Vs Fixed Rate Student Loans
Edited by Chelsea Wing Edited by Chelsea WingArrow Right The Chelsea student loan editor has been working since early 2020. She is committed to helping students overcome the high cost of college and overcome the complexities of student loans. Connect with Chelsea Wing on LinkedIn Linkedin Chelsea Wing
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Variable Vs. Fixed Student Loan Rates
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Federal Vs. Private Student Loans: What's The Difference?
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The type of student loan interest rate is just as important as the rate itself. Fixed interest rates stay the same for the life of the loan, meaning you'll have predictable monthly payments. On the other hand, floating interest rates can change in response to market changes. Your monthly payments can go up and down accordingly.
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The right choice between fixed and variable student loans depends on the type of borrower, your future income, what you can reasonably repay and market conditions. Here is a breakdown of variable and fixed student loan interest rates.
The main difference between fixed and variable student loans is whether the interest rate can change. However, there are other areas that can be affected by your rate, including your budget, student loan repayments, and how your payments compare to your future income.
Fixed rates remain fixed for the life of the loan, meaning your monthly student loan payments are predictable as you pay off your debt. The only way to change the fixed interest rate is to refinance the loan.
Although fixed rates are usually higher than the lowest advertised floating rates, they provide stability because the payment does not change. When you start paying off your student loans, you know exactly how much you're paying each month and how much you're paying in total in interest.
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Variable interest rates are tied to market conditions, so your student loan may go up or down depending on the interest rate adjustment. Lenders typically tie a variable loan rate to a reference rate, such as a base rate or the Secured Overnight Financing Rate (SOFR) index, plus a fixed margin.
While you may start with a lower payment than with a fixed rate loan, there is a chance your interest rate and monthly payment may increase later on.
Fixed interest rates are good for borrowers who don't have much leeway to accommodate the adjusted interest rate. All new federal student loans have a fixed interest rate, and fixed rates are usually an option with private lenders.
Variable-rate student loans are a good option if you qualify for the lowest rates available. Private student loans typically offer variable interest rates, but federal student loans do not have variable interest rates.
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Take some time to think about each of these factors and how they affect you if you choose a variable or fixed rate student loan. And remember, you can change your mind later and refinance your loans if you decide another option is better for you.
Kim Porter is a former associate of , a personal finance expert who likes to talk about budgets, credit cards, and student loans. Porter writes for publications such as US News & World Report, Credit Karma and Reviewed.com. When she is not writing or reading, she can usually be found planning a trip or training for the next race.
Edited by Chelsea Wing Edited by Chelsea WingArrow Right Student Loans The editor of Chelsea has been working since the beginning of 2020. She is committed to helping students overcome the high cost of college and overcome the complexities of student loans. Connect with Chelsea Wing on LinkedIn Linkedin Chelsea Wing Student Loan Editor
Reviewer Mark Kantrowtiz Reviewer Mark KantrowtizArrow Right Nationally recognized student financial aid expert Mark Kantrowitz is an expert on student financial aid, FAFSA, scholarships, 529 plans, education tax credits and student loans. About Our Rating Board Mark Kantrowtiz Nationally Recognized Expert in Student Financial Aid A floating rate is a rate that changes with the rest of the market. Also known as a floating rate, it moves up or down over the life of the debt obligation. The opposite of a variable interest rate is a fixed interest rate that remains constant for the life of the debt obligation.
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For example, if the borrower takes out a home loan with a fixed interest rate of 4%. They pay the same rate throughout the loan term. Where the loan has a variable interest rate, the borrower may initially pay 4%, but later the interest rate may go up or down depending on the overall financial environment.
Variable rate loans are common among mortgages, but credit card companies may also offer variable interest rates. Banks also offer such loans to large corporate clients.
Typically, the floating interest rate is compared to the main benchmark interest rate in the economy. So any change in this key measure results in a change in the variable interest rate. Some of the most important benchmark indicators are Prime
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