Fixed vs. Variable Student Loan Rates: Why It Matters

Written by: Kristyn Pilgrim
Updated: 6/02/20

According to CollegeBoard estimates, the average amount borrowed by 2017-2018 academic year Bachelor’s Degree recipients was $29,000. While paying off the initial balance is already an intimidating task, interest rates increase the total payoff significantly. Fortunately, borrowers have the choice between fixed and variable interest rates, with each impacting the overall cost differently.

Both forms of these interest rates will vary by lender, as well as the borrower’s credit history. However, both bode their own unique advantages, drawbacks, and financial ramifications. Evaluate them carefully with the help of our guide below.

Fixed Interest Rate Student Loans

As the name would lead you to believe, fixed interest rate student loans remain, well, fixed. Unless you decide to consolidate or refinance your loan, the rate remains unchanged and predictably constant for the duration of your payment period. Having this fixed rate is nice for people who want to maintain a constant level of predictability and routine.

While decreased rates are also nice, the last thing you want as a borrower is to be hit with a drastic rate increase amidst some unforeseen financial struggles. With fixed rates, one way to reduce the overall cost of interest is to shorten the loan term. This may decrease the amount of interest owed over the life of the loan, but it will increase your monthly loan payment.

Fixed rates may offer the luxury of certainty, but trying to calculate the overall cost of interest and how it impacts monthly payments can be confusing. 

Luckily, countless fixed-rate calculator tools are available online. Take this one by SmartAsset: following their example calculation, for instance, a $28,400 loan with a 4.66% fixed interest rate paid over a decade would equate to $297 a month and $35,583 in total. Knowing this information ahead of time can help you determine if a fixed interest rate is right for you and how much you can expect to pay in the future.

Variable Interest Rate Student Loans

Like fixed rates, variable interest rate student loans are also fairly self-explanatory: the rate changes based on an increased percentage margin that may evolve monthly, quarterly, or annually. For example, if you have a 1.71% interest rate and a 2.29% margin, your total rate would ultimately add up to 4%. 

Unlike fixed interest rate student loans, however, variable rates are only offered by private lenders, and generally start at significantly percentages than fixed rates.

The cheaper rate can be appealing in its own right, but you will need to remain more careful and vigilant with paying variable rate loans than you would with fixed-rate loans. Because private lenders are under less regulatory scrutiny than the federal government, they have more freedom to adjust rates at their discretion. This may be an unappealing risk, so you’ll have to carefully evaluate whether or not it’s a worthy gamble. 

While calculating your monthly and overall payment is straightforward with fixed interest rates, there’s no one way to calculate payments with variable interest rates. Your best bet is to run your debt and interest payments through the gamut of every conceivable increase, decrease, or remaining neutral percentage it could be subject to. This can be done through utilizing the same tools that you’d use to calculate fixed-rate payments, like the SmartAsset one above.

How Do You Choose?

The choice between fixed and variable interest rates ultimately boils down to a matter of personal preference. You may prefer the luxury of having a more consistent and predictable plan, or you may need to start with a far more discounted plan, and are willing to take the risk of a future increase.

One type of interest rate is not inherently better than the other, and that’s okay. If you’re having second thoughts about a student loan’s payment plan and interest rate that you once felt sure about, that’s okay too. You can simply refinance the loan with the same or different lender and opt for an alternative plan. Student loan servicers are willing to work with you.