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How did we get here?
In 1965, the U.S. government enacted legislation to make student loans easier and cheaper to obtain. The result was a huge increase in borrowing capacity among students. In 1970, only 1% of students borrowed money for college. By 1980, the number skyrocketed to 44%. Today, about 70% of undergraduate students take out some sort of loan.
What are Variable Rates?
Variable rate (VR) loans began as program offerings offered by banks and credit unions, and were later taken over by Federal Student Loan Programs. VR loans have two major components – fixed interest rates and variable rates. Fixed rates apply regardless of changes in market conditions, while variable interest rates change daily based on financial risks posed by both borrowers and lenders. In addition, borrowers pay higher interest if they borrow larger amounts than expected. According to the Consumer Financial Protection Bureau’s Office of Credit and Education, “The average variable-rate refund period is approximately 36 months. However, depending upon the borrower’s repayment history, the term may vary anywhere from 12 to 60 months.”
Where do I find these loans?
You can find these loans at almost any bank or credit union, online lender, and even private companies. The best place to start searching for them is your local university’s website. Most schools offer their own loan programs.
Are these loans good or bad?
These loans are good for students who cannot afford to pay high interest rates. While many people look down on these loans because they appear to encourage irresponsible behavior, the truth is that these loans are necessary for students to receive an education. Furthermore, the risk associated with these types of loans encourages higher quality lending standards – making sure that students actually repay the money. Students who do not pay back their loans often receive poor grades and lower GPAs. If they default, however, they end up losing access to future educational opportunities.
Is there a way to avoid taking out these loans?
Unfortunately, no. To make matters worse, the federal government does not allow students to defer payments on their loans. Therefore, the sooner you begin paying off your loans, the better off you will be.
Variable Rate Student Loans
What Are Variable-Rate Student Loans?
A variable rate student loan is a type of student loan where the interest rates change periodically. A fixed rate student loan, on the other hand, keeps the same interest rate throughout the repayment period. If you have any questions about what a variable rate student loan is, then keep reading. You will find out everything you need to know about these loans here!
Who Can Get a Variable-rate Student Loan?
You can apply for a variable-rate student loan if you meet the following requirements:
You are at least 18 years old;
You attend school full time (at least 20 hours per week);
You are enrolled in a degree program full time;
You don’t already have any private student loans outstanding;
Your parent(s) co-sign the loan.
How Much Could I Earn From Working While Repaying My Loan?
As long as you make 120% or less than your monthly payments, then you should not face any financial problems while repaying your variable rate student loan. However, if you want to earn a higher salary, then you should look for scholarships for college students, grants, and fellowships.
How Long Will It Take to Pay Off My Loan?
The length of how long it takes to pay off your variable rate student loan depends on several factors, including your payment plan, your current income, and whether or not you opt to get a consolidation loan. You might even end up paying more money if you decide to consolidate your payments into one single payment each month instead of making separate payments. To learn more about how much money you could save, read our guide on “How to Consolidate Student Loans.”
Should I Choose a Fixed-Rate or Variable-Rate Loan?
Variable Rate Student Loans
What is a Variable Rate Loan?
A variable rate loan is a type of student loan where your interest rates fluctuate based on changes in market conditions. A variable-rate student loan is one where the interest rate does not always remain the same. That means even though the lender says your interest rate remains constant, it’s actually changing each month.
How long do I have to repay my loans before making payments?
The term length of your repayment varies depending on the amount borrowed. Here’s how a $10,000 loan with an APR of 5% looks:
Periods to Repayment Amount Repaid Monthly* 10K 5 years $350 6 months $360 2 months $365 1 month $370 0 months $375
Calculated using an 18-month amortization schedule and assuming no prepayments. Your actual period may vary.
Do I pay taxes on my variable rate loan?
No! You don’t need to worry about paying any taxes because your variable-rate loan doesn’t count as taxable income.
Can I get a deferment on my variable rate loan if I’m having financial troubles?
Yes! If you qualify for federal student aid, you can apply for a deferment while you’re repaying your loan. But keep in mind that if you miss a payment or default on your loan, you’ll lose any potential financial assistance. So it’s best to make sure you can afford to repay your loan before applying for a deferment.
What happens if my school closes?
If you attend school at a closed college or university, you may still have access to some federal student loans. These loans are called private alternative education loans, and they can help cover tuition costs until the school reopens.
How much money can I borrow if I have a variable rate loan?
You’ll be able to borrow as much as the cost of attendance minus your other financial obligations (like rent) divided by 12. In other words, you could borrow up to $12,650 per year. However, if you use your entire maximum borrowing limit right away, you won’t be able to take advantage of many financial aid programs.
Variable Rate Student Loans
A variable rate student loan is a type of federal student loan where the interest rates change based on either market rate changes or whether the borrower’s credit score rises or falls. A variable rate loan will sometimes be referred to as a direct lender or an indirect lender depending on how the interest rate is determined and communicated to borrowers. If the interest rate increases or decreases, the borrower will not receive any notification until they make their monthly payment.
If you are currently enrolled or planning to enroll in school, start saving money and building an emergency fund today.
studentloancrisis studentloans universityloans educationfinance collegefinances collegecosts
The Federal Reserve Bank Of St Louis – www.stlouisfed.org
The Federal Reserve Bank of St. Louis (FRED) makes economic data available to the public at stlouisfed. org. Data included may be freely downloaded and redistributed. Questions regarding this dataset should be directed to FRED.
The following variables were obtained from FRED, accessed March 20th, 2014:
Federal Funds Effective Mkt Rate
-Data Series Description:
Effective market rates of loans extended by primary dealers to other banks. Primary dealers are firms that buy and sell securities for their own accounts. These rates are published daily at 4 p.m. Eastern Standard Time. To get the effective market rate of funds lent by the Federal Reserve Banks, divide the sum of the primary dealer discount rate plus the reserve requirement ratio times 1,000 by 2.
Source: FRED Economic Data
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