How Fixed Rate Student Loans Work (Pros & Cons)

Written by: Kristyn Pilgrim
Updated: 5/28/20

When deciding how to fund your college journey, there are different avenues to explore and consider. One factor is whether to choose a fixed or variable rate student loan. Here are the details to consider when exploring a fixed rate student loan and the pros and cons of this pathway. 

The type of interest rate associated with your loan will not only affect your monthly payment – it will also determine how much you pay in total interest over the course of the loan. Fully understanding your loan options is crucial, since paying back your loan on time can have a considerable impact on your financial future.  

What Is a Fixed Rate Student Loan?

Interest is the money paid to a lender as your “fee” for borrowing the money. As its name suggests, a fixed rate student loan carries an interest rate that does not increase or decrease over the life of the loan. The only time that the rate changes is when a loan is consolidated or refinanced. A fixed rate student loan provides the borrower with a high degree of financial certainty so that they can calculate how much their loans will ultimately cost them. 

Choosing a fixed rate loan is ideal if you are uncertain about what your future earnings will be, and you want to establish a manageable monthly budget after graduation. This option is also a good choice if you will need a long time to pay back what you borrowed. Since the interest rate is fixed, it is easy to calculate the cost of your loan. You can determine if you will be better served financially by paying the loan back quicker, thus saving on interest, or by drawing out the length of the loan for lower monthly payments. 

Types of Fixed Rate Student Loans

Both federal and private lending institutions offer fixed rate loans. For most people, the Department of Education is their primary source of student loans. Financial variables such as creditworthiness, debt-to-income ratio, and employment history are not considered with federal loans. However, if you are considering a loan from a private lender, these variables are heavily considered by lending institutions. 

For federal lending, there are additional categories that different borrowers will fall into. Keep reading to learn more about these types of federal fixed rate loans and what kind of interest rate to expect with each one.

How Federal Student Loan Rates Work

Interest rates for fixed rate student loans are established by Congress. These rates are standardized so that any eligible applicant taking out a federal student loan will have access to the same interest rate. However, it is important to know that interest rates can change from year to year, so always check current interest rates before borrowing. This rate is set and divided into three borrower type categories. These are the 2019-2020 academic year interest rates for each borrower type:

  • Undergraduate (Direct Subsidized and Unsubsidized Loans): 4.53%
  • Graduate or professional (Direct Unsubsidized Loans): 6.08%
  • Parents and graduate/professional (Direct PLUS Loans): 7.08% 

More repayment options exist for federal student loans versus loans from private lenders. Borrowers of federal student loans can qualify for income-driven repayment options, loan deferment or forbearance, and in some cases, a forgiveness program. A private lender does not always extend these types of repayment options to their clients. The borrower is expected to pay back the loan under the original terms and conditions. Federal loans also tend to have more options where interest does not accrue during college, with some exceptions. 

How Private Student Loan Rates Work

Borrowing from a private lender is another option to consider when applying for a student loan.  While a loan from the federal government comes with a fixed interest rate for every borrower, a loan from a private lender does not always come with a guaranteed interest rate on the loan. 

Since private student loans are credit-based, private lenders weigh your credit score, employment history, and debt-to-income ratio when calculating the interest rate they will extend to you. Those with no credit history, or bad credit, may not qualify for the lowest interest rate that a lender can provide. Thus, you may pay considerably more interest without a good credit score.

If you are a student or a co-signer who does have a good credit score, you may be able to capitalize on interest rates that are lower than what is being offered by the federal government. You may, therefore, not pay as much money in interest over the length of the loan. 

However, as previously stated, there are fewer repayment options with private student loans. This means that you will be responsible for paying the loan in full, without the financial relief that is often afforded to those who borrow from the government. 

Pros of Choosing a Fixed Rate Student Loan

For most borrowers, choosing a fixed rate student loan may be the smartest financial move.  Below are some of the pros of choosing a fixed rate loan.

  • You can enjoy the predictability of this type of loan. The interest rate does not change; therefore, the monthly payment does not change. This provides a helpful degree of stability when planning your monthly expenses.
  • You can explore both federal and private student loans. Since all federal student loans are fixed, and private student loans come in either fixed or variable rates, exploring a fixed rate loan will give you more options overall.
  • The interest rate is fixed for the life of the loan. You can see upfront the exact amount of interest that you will pay over the long haul, giving you insight into how to budget and plan for this ongoing expense.  
  • The monthly payment of the loan does not change. This also gives you foresight for planning for the future. What career do you plan to pursue after graduation, and does the associated salary support these monthly payments within the context of your overall budget?
  • It is ideal for people who may take a long time to repay the loan. Unless you plan to pay off the loan in a lump sum, this option allows you to take the full length of time needed for repayment. You have the luxury of consistency to plan for the long-term repayment of this loan.

Cons of Choosing a Fixed Rate Student Loan

It may not be beneficial to some borrowers to seek a fixed rate loan. Below are some of the cons of choosing a fixed rate loan.

  • You may be stuck with a higher rate if interest rates decline. The interest rate is fixed for the life of the loan. Compared to variable rate loans, the rates are set by what the financial market dictates. If interest rates decline as a whole, but you have already locked in a higher rate, you will not have a chance to take advantage of that. The caveat to that is you could potentially refinance your student loans to take advantage of lower interest rates should a dip in rates occur.
  • You will likely pay a higher interest rate in the beginning. If you were to compare fixed and variable loan rates side by side, variable loans typically offer a lower interest rate at the beginning. With fixed rate loans, you do not get to enjoy lower initial payments before the rate increases. For this reason, some may consider variable rates to be a better fit, as most college students plan to increase their income after graduation. 

Deciding on a Fixed Rate Student Loan 

When deciding how to pay for college, it is always best to explore all of your lending options. If you enjoy the predictability and certainty of being able to pay a specific interest rate and monthly payment over the course of your loan, then a fixed rate student loan may be ideal.  

However, if you want to capitalize on potentially lower interest rates and do not mind a little financial uncertainty, then exploring a variable rate loan may be the better option for you. Either way, be sure to educate yourself on your options so that you can make the right choice for you and your future. 

At College Finance, we are your one-stop shop for all your questions about funding your education. Explore our resources and helpful guides today to learn all you need to know about making the best financial decisions to fund your academic future.