What is the difference between fixed and variable rates for student loans? While the details of each loan type are fairly simple, determining which is the better option is a bit more complicated. If you’re still undecided, we’re here to help you understand how fixed- and variable-rate student loans work so you can make an informed choice.
Here are the primary differences between fixed and variable rate student loans, their pros and cons, and who each might be best for.
Fixed vs. Variable Rates: A Quick Comparison
If you’re trying to decide whether a fixed- or variable-rate student loan is a better option, here’s an at-a-glance comparison that can help you understand how each works. We’ll also discuss these options in-depth shortly.
One important thing to note is that all federal loans have fixed rates.
| Fixed Rate | Variable Rate | |
| Loan types (federal or private) | Available with private or federal student loans | Only available for private student loans |
| Interest rates | Same interest rate throughout the life of the loan Tend to have higher initial interest rates | Changing interest rate, up or down, over the life of the loan Tend to have lower initial interest rates |
| Monthly payments | Monthly payments don’t change based on market fluctuations | Monthly payments change frequently based on market fluctuations |
| Risk and savings | Less risky, but generally lower savings potential over the life of the loan | More risky, but generally higher savings potential over the life of the loan |
| Protections | Fixed rate protects borrowers from changing rates | Interest rate caps protect borrowers from rates going too high |
How Fixed-Rate Student Loans Work
A fixed-rate student loan has an interest rate that does not change over the life of the loan. This
means your payments will be level and predictable for your loan’s entire term.
As mentioned, all federal student loans have fixed rates, while private student loan rates may be fixed or variable. In general, federal student loans tend to offer lower rates and perks for new student borrowers, including the potential for student loan forgiveness or income-driven repayment plans.
Pros of Fixed-Rate Student Loans
- You’ll always know your exact monthly payment amount
- It’s easy to plan ahead for future payments
- If interest rates rise, your loan won’t be affected
Cons of Fixed-Rate Student Loans
- Fixed-rate student loans can have slightly higher starting rates than variable-rate loans
- Even if student loan interest rates drop, your rate will remain the same
Who Are Fixed-Rate Student Loans Right For?
If you’re a new borrower:
Since federal student loans offer low fixed rates and potential perks for borrowers, they’re generally the best option for new graduates starting college. That said, fixed-rate private student loans could help fill the gap if your federal financial aid package isn’t enough.
If you’re refinancing:
The U.S. Department of Education (DE) doesn’t offer an option to refinance federal student loans, though you can consolidate them with a Direct Consolidation loan. This is often a good alternative to refinancing with a private lender if you’re concerned about sacrificing the potential benefits that federal loans offer.
If you’ve weighed the pros and cons of refinancing with a private lender and decide to go that route, a fixed interest rate could be a more reliable choice if you prefer predictable payments. Additionally, if you’re on a tight budget and can’t risk higher interest, a fixed-rate student loan could be for you.
How Variable-Rate Student Loans Work
Variable-rate loans have interest rates that change during a loan’s term. These fluctuations are directly linked to changes in common financial indexes.
Compared to fixed-rate loans, variable-rate loans tend to have lower starting interest rates for the same term, but this can change (and increase) after your loan closes. However, most lending institutions, including ELFI, put an interest rate cap on variable-rate student loans.* If you’re trying to decide between fixed and variable-rate loans, then consider these benefits:
Pros of Variable-Rate Student Loans
- If student loan interest rates drop, then your monthly payment will decrease
- Variable-rate student loans can have slightly lower starting rates than fixed-rate student loans
Cons of Variable-Rate Student Loans
- If student loan interest rates rise, your monthly payment and overall interest total will also rise
- It may be more difficult to budget your monthly payments knowing that your interest rate may change
Who Are Variable-Rate Student Loans Right For?
If you’re a new borrower:
As mentioned, federal student loans have fixed rates, and are generally the best option for borrowers heading to college. But variable-rate private student loans could help fill the gap if your federal financial aid package isn’t enough.
If you’re refinancing:
Variable interest rate student loans may be a good choice if you have a bit more flexibility in your budget. That way, you’ll be prepared if interest rates rise, but can also enjoy lower payments if rates fall. Another benefit if rates fall: You may be able to repay your loan faster by making more than the minimum monthly payment.
Fixed- or Variable-Rate Student Loans: Which Is Right for You?
Whether fixed- or variable-rate student loans are better for you depends on several factors. If you’re a new borrower, fixed-rate federal student loans are likely the best choice. But if you’re trying to fill a gap to pay for school or refinancing with a private lender, you have a bit more flexibility.
Note that you’ll likely need good credit or a cosigner with good credit to qualify for certain private student loans, so keep this in mind before applying. Learn more about ELFI’s student loan eligibility requirements.
Here’s what to consider as you compare fixed- and variable-rate options:
Income
If you have some wiggle room in your budget, refinancing to a variable-rate student loan might work in your favor. These loans generally have higher long-term savings potential; you just need to ensure that you can afford the higher payments if interest rates increase, which is where your income factors in. Borrowers on a stricter monthly budget might prefer the level payments a fixed-rate loan provides.
Risk Tolerance
If you’re risk-averse, refinancing to a fixed-rate student loan could be a better option. You’ll end up with predictable payments, making it easier to budget. But if you’re comfortable with risk, a variable-rate loan with a lower initial interest rate might be best, as you can often save more over the long term.
The Bottom Line
Both fixed and variable interest rate loans have pros and cons. Weigh those benefits and drawbacks and consider your personal situation before you move forward.
If you’re a new borrower, learn more about ELFI’s private student loans. If you’re refinancing, check out ELFI’s Student Loan Refinance Calculator to see how student loan refinancing may affect your loans. Our expert Customer Care team would also love to speak with you. Contact us today to get started.
