Fixed Vs Variable Rate - Which Is Best For My Student Loan?

After choosing a school and a program of study, it is common to find yourself in the position of lacking the resources to pay for it. And for most students in our current financial climate, student loans will pick up the slack in making that happen. Student loans are easy to get and readily available to aspiring and current students on most college campuses (whether in person or online.) However, be wary when choosing your loan program. It may seem like repayment is lightyears away, but the time comes up fast, and at some point, those debts will have to be repaid. You may also be looking at refinancing your student loans and are unsure of what rate type is best for you. So for today, let’s look at the question of fixed-rate student loans vs. variable rates student loans and some of the info surrounding them.

Fixed Rate Pros:

  • 1. Predictable payments that won’t fluctuate based on the market. When locking in a fixed interest rate loan, you will not see a fluctuation in rate for the entire life of the loan. Even if rates skyrocket, you will not be in a position to have your payments increase as a result.
  • 2. You can plan your expenses more accurately and figure out solutions to your financial future with more ease. By knowing, predictably, what your payments will be for the life of your loan, you can make a faster repayment possible and clear the debt without the surprise of a major rate hike that sets your repayment schedule back.

Fixed Rate Cons:

  • 1. In cases where the rate drops, you would miss out on the benefit of interest saved at a lower rate. If you have a high-risk tolerance and would love the opportunity to wait for a lower rate, this may be a drawback for you.
  • 2. Just like a mortgage, fixed rate repayment terms will likely translate into a slightly higher rate. You can view this as a slightly higher rate for the built-in rate assurance.
  • 3. If you have a comfortable payment, you may be encouraged to take it slow on repaying your debt, rather than working toward a faster repayment. This has more to do with mindset and this thinking should be avoided when it comes to any debt.

Variable Rate Pros:

  • 1. You can take advantage of rates that drop during your loan repayment period. Lower rates mean paying less interest, which is the aim of most borrowers. Lower rates can mean lower payments- so if you keep making higher payments and add some more in for additional principal, you could be on your way to paying your loan off faster (assuming your loan allows this.)
  • 2. You save money for the introductory period with your lower rate. If you plan to only hold your loan for a short time and have it paid off before the first increase, you could potentially save yourself a decent amount of interest. The trick is making sure you can have the loan paid or refinanced before you see increases that would counteract the savings you see initially.

Variable Rate Cons:

  • 1. For those with a low-risk threshold, variable rate loans can be stressful to use. There is little predictability and the possibility for a rate increase beyond what your fixed rate would have been is very possible over the loan term. When fixed rates are low to begin with, it is reasonable to think that rates may increase in the future, leaving you paying higher interest over the life of the loan.
  • 2. Changing payments could make budgeting and payoff more difficult. If your payments fluctuate, budgeting appropriately for the future and coming up with a plan for repayment can get more involved or tricky.
  • 3. The future is uncertain, and if you find yourself on hard times down the road, a higher interest rate could spell trouble for your finances.

So which is better?

Just like in most personal finance related questions, the right answer is up to you. Many people will opt for fixed rates for their reliability, and currently, their low rates. However, there may be situations where a variable makes a ton of sense. You will have to gauge this for your own personal scenario to decide what option is best for you. Remember to go with your gut- regardless of what well-meaning friends and family may say, at the end of the day, you are the one paying it back, so make that decision based on your values and needs and enlist the help of a professional if you see fit.

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