Fixed Vs Variable Rate For Student Loans

Fixed Vs Variable Rate For Student Loans

7 min read


Fixed vs variable rate

One of the best things about student loans is they’re fixed rate. If you know how long you plan to live at a particular address, you can lock in a lower interest rate, often for good. However, if you move around a lot because you’re changing jobs or going back to school, then you may not have much control over your interest rate. That’s where variable rates come in.

Term lengths

There are two types of student loan terms: subsidized and unsubsidized. A subsidized loan means the government helps cover a portion of your payments. You pay only 10 percent of the amount you borrowed — instead of paying 15 percent of the whole loan value (which is what happens with unsubsidized). But subsidized loans generally carry less favorable interest rates. Your monthly payment could also go down if you qualify for income-based repayment plans.

You get 30 years to pay off a federal loan. In 2019, private loans are expected to last 10 years longer than their public counterparts. So, if you take out a $20,000 loan now, and graduate in 2029, you’ll owe $30,000 and need 28 years to pay it off. And if you don’t make any payments, you still owe, while your lender gets paid off first.

Borrowing limits

Unsubsidized loans are capped at $31,250 per year. Subsidized loans are capped between $17,500 and $21,550 depending on your income. Public loans are free to borrow. Private lenders charge either 6 or 9 percent.

Annual percentage rate

If interest rates rise, your APR increases. A 2.9 percent APR means you would pay $290 more each month on a $5,000 loan. On a $25,000 loan, your monthly payment would jump nearly $800.

Repayment length

All loans require some kind of graduated repayment schedule based on your income. Most people begin repaying after six months and continue until they’ve paid off the entire debt.

For example, someone who makes $50,000 a year pays 12 percent of her discretionary income toward her loan. Someone making $100,000 pays 25 percent. The higher you make, the shorter your repayment term.

But before you decide on a college major, you should consider loan forgiveness programs. Even though you’re likely going to walk away owning a degree, you might want to start saving extra money to help pay the loan balance back faster.

Fixed Vs Variable Rate For Student Loans

Fixed rate loans

A fixed interest rate loan is one where the interest rate never changes throughout the duration of the term. This type of loan gives borrowers the benefit of certainty, knowing their monthly payments won’t change for the life of the loan. Interest rates for federal student loans are tied to the 10-year Treasury note auctions. These are held twice each year at the start of April and October. Both times, they determine the interest rate for the following 6 months. If the auction results show a decrease in interest rates, lenders raise their offer to students. If the auction shows an increase, lenders lower their offers.

Variable rate loans

Variable interest rates refer to the changing rate charged on variable rate loans. Rather than keeping the same rate for the entire length of the loan’s term, variable rate loans fluctuate based upon market conditions. When interest rate markets are strong, most lenders tend to set higher interest rates to ensure that they make money off the higher interest rates. Lenders often adjust their rates downward if the rates drop below certain thresholds. If the market becomes extremely weak, lenders may even cut their interest rates to reflect the low rates in the marketplace.

Payment plans vs payment option

Payment plans allow borrowers to pay off their student loan over time instead of making lump sums of cash payments upfront. A payment plan typically requires borrowers to pay 20% of the amount due immediately, followed by 30%, 40%, etc. until the entire balance is paid in full. Payment options give borrowers the flexibility to pay their loans back at any time without having to worry about how much they have already paid.

Fixed Vs Variable Rate For Student Loans

Variable rate means the lender can change the interest rates at any time. Fixed rate loans can have no change in rates. A variable rate loan will generally cost less than a fixed rate on the same amount over the lifetime of the loan.

The following video explains the differences between fixed and variable rate student loans. There are pros and cons to both types of loans.

If you need money now, go with a fixed interest loan!


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Fixed Vs Variable Rate For Student Loans

Fixed vs variable rate student loans

Generally speaking, the fixed-rate loan offers borrowers a lower interest rate over its lifetime than the variable-rate option. However, the rate changes periodically based on market conditions (e.g., how much money lenders think the economy is likely to shrink or expand). In fact, the federal government caps the change in rates at no more than 4% per year. That means if Congress were inclined to raise the cap, your interest rate would not go up more than 4%.

The advantage of a fixed-rate loan is that your payment won’t increase when Congress increases the cap. So, if you know you’ll graduate soon and plan accordingly, a fixed-rate loan might save you some cash.

On the other hand, a variable-rate loan may have a higher initial price tag because of the higher starting interest rate. But since the rate can change annually, you could potentially end up saving money over time. And if the interest rate does drop, your balance will grow at a slower rate than the fixed-rate loan thanks to compounding.

What’s the difference between a fixed-and a variable-rate student loan?

A fixed-rate loan stays constant throughout the term of your loan. Your monthly payments never rise or fall, even if Congress raises or lowers the cap on annual changes in interest rates. On the other hand, a fixed-rate student loan generally comes with a longer repayment period compared to a variable-rate option. As a result, the total amount you owe grows larger as you pay off your principal each month.

To determine whether you should choose a fixed-or variable-rate loan, consider these factors:

Interest rates for both options fluctuate and can change frequently. A quick turn in the economy could lead to a drop in interest rates. If interest rates decrease, you’ll probably save money over the long run on a fixed-rate loan.

You’re likely to receive either type of loan after graduation. Once you’ve borrowed the maximum allowable amount (generally $20,500), you’ll need to decide what type of loan you want before you start repaying.

Repayment terms differ between fixed-and variable-rate loans. While a fixed-rate loan lasts for the full length of the loan, you only have a set number of years to repay a variable-rate loan. Typically, a variable-rate student loans come with a shorter repayment term. So if you anticipate graduating early or don’t expect to borrow much during college, a variable-rate option might make more sense.

How do I make sure I get the best loan deal?

If you’re comparing fixed-versus variable-rate student loans, use a lender who specializes in helping students find the best deals. Lenders often offer discounts of 20%-40% or more on fixed-rate loans. Most lenders offer a free consultation to help figure out which type works best for you.

You can also compare your options using a simple online calculator. Just plug in the numbers from your current situation (i.e., your expected family income, expected degree level, etc.) and see which option yields the lowest monthly payment.

How much do student loans cost?

Fixed Vs Variable Rate For Student Loans

This video was designed to give students a basic understanding of what fixed rate student loans are and how they compare to variable rate student loans. Students often ask me if I believe there should be lower rates for student loans. My answer is always yes! Do students need to pay back their loans? Yes! Will they ever be able to get out of school debt free? Very unlikely. However, I do think that having low interest rates on student loans makes the whole loan repayment process easier.

It’s true. Fixed-rate federal student loans (FRPL) have no current interest rates since July 2017. What does that mean for students? FRPLs have been given an extended period of time to adjust to these changes without any interest charges assigned to them.

Variable-Rate Federal Student Loans (VRFL): Currently, variable-rate federal student loans have a 6.8 percent fixed interest rate – subject to change periodically depending on the U.S. Treasury market. VRFLs are offered by either the government guaranteed Stafford Loan Program or non-government guaranteed FFELP program.

Some states offer additional, state-backed loan programs, but these generally follow the same rules as federal student loans. State aid programs differ from federal ones principally in their eligibility requirements and funding sources.

There are many different types of financial aid available to undergraduate college students pursuing higher education today. In this video, we introduce you to some of the most commonly used federal financial aid programs and explain what each one covers. Then we help you understand what you should look for and how to choose the best plan based on your own goals and circumstances.

We begin with scholarships and fellowship opportunities, then move onto student loans. You will learn about income-based and direct subsidized student loans, PLUS student loans, work study funds, loans insured by the Sallie MaeCelicaCare insurance plan, and complete eligibility and application guidelines.

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