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If you are looking for an international student loan to study in the US, one of your first considerations is whether you should get a fixed or variable rate student loan. But there is a lot of confusion about the difference between these two types of student loans and what they mean in terms of future payments and financial risk.
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The good news is that you've got us covered - read on for everything you need to know!
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Fixed rate loans are exactly what they say they are - fixed, meaning your rate never goes up! A fixed interest rate, for example, will simply be listed as "12%" or "10.5%".
Variable interest rates, also known as variable or adjustable interest rates, change based on market fluctuations. They are determined by two components:
The standard benchmark for variable student loan rates used to be LIBOR or, to give it its full name, the London Interbank Offered Rate. It has now been largely replaced, at least in the United States, by the SOFR (Secure Overnight Funding Rate).
A variable interest rate is listed with a benchmark and a range, for example, "SOFR + 8%." The loan agreement will also specify how often your rate will adjust (eg monthly or quarterly, based on changes to the base benchmark rate). .
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The short answer is that it depends on your risk tolerance. The initial interest rate for variable rate student loans is usually lower than for fixed rates, but if and when market rates rise, the interest rates on these loans can exceed fixed rates.
That said, there is one big advantage to variable-rate student loans: If market rates remain low, you may end up paying less for a variable-rate loan than a fixed-rate loan.
Of course, if the benchmark rises high enough, you'll end up paying significantly more. And if you're lucky and land it, you'll pay even less than the introductory rate.
No one can say with certainty whether the SOFR or other reference rates will rise. However, Kiplinger's interest rate forecast states that "...expectations of the future path of interest rates... showed a gradual upward trend over the next two to three years." Historically, LIBOR rates have been very volatile, rising to nearly 11% in 1989.
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Let's say you borrow $30,000 and pay the student loan principal and interest over 10 years, paid monthly at a fixed interest rate of 12%.
Using a student loan repayment calculator or a simple Excel formula, you can calculate that your monthly payment will be $430.31 (assuming interest is calculated monthly, not daily). You will pay the same amount every month for ten years. The only thing that will change is the relative proportion of each payment that goes to interest or principal. At the beginning of your loan, a higher percentage of the payment goes to interest, and in later periods a larger part of this payment goes to the repayment of the principal.
For example, in the first month you still owe $30,000, so the interest payment will be $300. You calculate this by multiplying the amount owed by the annual interest rate quotient divided by the number of payment periods in a year. So, since payments are made monthly and there are 12 months in a year, the monthly interest paid in the first month is $30,000 x (.12/12) = $300. The difference between your $430.31 payment and the $300 interest is $130.31, so your principal is reduced by $130.31.
Next month you earn interest on the new principal of $29,869.59. While the payment remains constant at $430.31, now only $298.70 can be attributed to interest, increasing the amount of principal paid to $131.72.
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Assuming you make your payments on time, don't pay off the loan early, and don't get a discount on the lender's interest rate, you'll pay a total of $51,649.54 over the life of the loan—and that won't change regardless of market conditions!
Let's take the same $30,000 10-year student loan from the fixed-rate example, but assume it's a variable-rate loan of "SOFR + 8%."
This means that you will initially pay 10% interest (because 2% + 8% = 10%). The lender calculates the monthly payment as if the rate will remain constant (even though it won't!), so the initial monthly payment will be $396.45 (assuming the interest is compounded monthly, not daily). So for that first month, you'll save about $34 more than you would pay to borrow the same amount with a 12% fixed rate loan (see the fixed rate example above).
However, if the SOFR rises to 4%, your interest rate will rise to 12% (because 4% + 8% = 12%). You now pay the same interest rate as in the fixed rate example above. The lender will then recalculate your monthly payment based on three factors: (a) the new 12% interest rate, (b) the number of months you have left on the loan, and (c) the amount of principal you still owe .
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If the SOFR rises to 8%, your interest rate will rise to 16% (because 8% + 8% = 16%). Let's say this happens at the end of year 4, so you have 72 months left on the loan. Let's say you have $22,106.17 in outstanding principal. (This is the principal amount that would be outstanding if interest rates rose at a constant 1.5% per year over these four years and the rate was only adjusted at the beginning of each year.) Your new monthly payment will be $479.52 , about $50
On the other hand, let's say SOFR rates drop to 1% at the end of the first year, so you have 108 months left on the loan and $28,159.74 in outstanding principal. (This is the principal that will be outstanding after 12 months of paying $396.45 at 10% interest, as described at the beginning of this section.) Your new interest rate will be 9% and your monthly payment will then drop to $381, 36... and stay there until rates rise again.
The bottom line is that only you know if you're willing to risk your payments suddenly jumping in exchange for a lower introductory rate.
A fixed rate loan means that the interest rate on your loan does not change over time. A variable rate loan is where the interest rate on your loan can change over time (based on an "index")
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Variable interest rates can start at a lower rate than a fixed interest rate, but depending on market conditions, the variable interest rate can increase over time and add to your monthly payment.Media Domino: Student Debt Blog Private student loans: New report sheds light on need for borrower protection an opaque $130 billion market
Private student loans: New report sheds light on need for borrower protection in opaque $130 billion market
Today, the SBPC released a new report examining the private student loan market. The report provides an overview of recent lender trends and outcomes in the space, pointing to a critical need for stronger borrower protections at the federal, state and local levels.
For years, the private student loan market has been overshadowed by the much larger federal student loan market. However, as our new report shows, the private student loan market is growing rapidly as many vulnerable borrowers struggle under the weight of their debt. Furthermore, because this market lacks many of the transparency and reporting requirements found in other consumer financial markets, borrowers face a significantly increased risk of harm. Significant accountability and consumer protection reforms are needed to protect the millions of borrowers whose lives this market touches.
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Students at for-profit schools are more likely to rely on private student loans and are more likely to experience student loan distress.
Tens of thousands of private student loan complaints and ongoing lawsuits in courtrooms across the country point to widespread consumer harm in the private student loan market.
Private student loans lack the same transparency and public reporting requirements that exist in many other consumer financial markets, increasing the risk of consumer harm.
As policymakers and law enforcement at all levels in the financial markets work to protect consumers, the private student loan market requires attention and reform. There is no time to waste in advancing the oversight measures, transparency rules, and strong enforcement mechanisms highlighted in this report to protect private student borrowers.
Private Student Loans: New Report Sheds Light On The Need For Borrower Protection In An Opaque $130 Billion Market
Ben Kaufman is a research and policy analyst at the Student Borrower Protection Center. He joined SBPC from the Consumer Financial Protection Bureau, where he served as the director's financial analyst on student loan issues. Although a college education is a priority for many people, rising costs threaten to put it out of financial reach. If you don't have the savings to cover the cost of your college education, look into loan options.
Private college loans can come from many sources, including banks, credit unions, and other financial institutions
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