fixed rate versus variable rate student loans

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We’ve heard a lot about student loan rates lately.

And with good reason, because the difference between fixed and variable student loan rates can be huge.

Fixed rate loans, which are also known as “closed-end” loans, have a set interest rate throughout the life of your loan. They’re great if you know exactly when you’ll be paying off your loan, or if you don’t expect to have to make any changes to your repayment plan (like deferment or forbearance).

Variable rate loans are “open-ended” and can change over time. This means that if you’re getting a variable rate loan, the interest rate on it will change depending on market conditions—which could go up or down depending on what’s happening in the economy at any given time. If you get a variable rate loan, keep an eye on it every quarter so that you know what kind of impact changes in interest rates might have on how much money you’re paying back each month!

Differences Between Fixed & Variable Student Loan Interest Rates

Last Updated: March 5, 2022 Cite this WebpageBy Melanie HansonFact Checked

The choice between a fixed rate and a variable rate isn’t overly difficult; it comes down to a few key distinctions, including economic influences and your student loan terms.

Stays the same for the life of the loan.Changes monthly or quarterly, increasing or decreasing.
Predictable monthly and total payments.Unpredictable monthly and total payments.
All student loan refinance lenders offer fixed APRs.Not all student loan refinance lenders offer variable APRs.
Rates are usually higher than starting variable rates.Usually the lowest advertised rate.

Fixed vs. Variable Rates

Conventional wisdom is the lower the interest rate, the better the deal. This does not take into account the way interest rate indices change over time, however.

Financial advisors usually recommend a fixed rate over a variable rate; fixed rates aid financial planning and avoid the risk of a spike in interest rate indices.

There are few conditions under which a financial advisor would recommend adopting a variable rate. Such situations may include a low-balance, short-term loan under certain economic circumstances; this is due to how lenders determine interest rates, and in particular, how they use their preferred interest rate index.

Line Graph: 30-Day Secured Overnighht Financing Rate (SOFR) Index, Rates as Posted on the First Day of the Financial Quarter, from 2019Q1 (2.37), 2019Q2 (2.42), 2019Q3 (2.40), 2019 Q4 (2.20), 2020Q1 (1.54), 2020Q2 (1.59), 2020Q3 (0.08), 2020Q4 (0.09), 2021Q1 (0.08), 2021Q2 (0.04), 2021Q3 (0.03), 2021Q4 (0.05), 2022Q1 (0.05)

Variable Interest Rates Explained

Variable interest rates tend to start a little lower than fixed rates, but that doesn’t necessarily mean you’ll save more. Private lenders set variable rates at the time of the loan’s origination. Variable rates then change according to interest rate indices, such as the Secured Overnight Financing Rate (SOFR). Lenders typically adjust their variable rates either monthly or quarterly.

Some borrowers with shorter loan terms still opt for a variable rate; from 2009 to 2015, interest rates were stable and historically low. If you do select a variable rate and it later increases significantly, you may have the option to refinance again at a fixed rate.

Note that interest rate indices have been reset to historic lows in the wake of COVID-19. The Federal Reserve has disclosed plans to raise interest rates in coming months.[1]

Transition From LIBOR

The London Interbank Offered Rate (LIBOR) was once the go-to reference rate for student loan refinance lenders. Due to a global financial fraud scandal, however, the LIBOR will be discontinued in 2023. Refinance lenders that use the LIBOR to calculate their variable rates will switch to an alternative. Some have already changed reference rates while others have stopped offering variable rates altogether.

Line Graph: Prime Loan Rate, Rates as Posted on the Last Day of the Previous Quarter, from 2019Q1 (5.35), 2019Q2 (5.5), 2019Q3 (5.5), 2019Q4 (5.15), 2020Q1 (4.75), 2020Q2 (3.78), 2020Q3 (3.25), 2020Q4 (3.25), 2021Q1 (3.25), 2021Q2 (3.25), 2021Q3 (3.25), 2021Q4 (3.25), and 2022Q1 (3.25)

Alternative Reference Rates

Among refinance lenders that have stopped using the LIBOR, the Secured Overnight Financing Rate or SOFR is a popular alternative. Prime Rate is another common index. It bears noting that indices tend to experience similar peaks and valleys because they are influenced by similar economic factors.

Fixed Interest Rates Explained

Fixed interest rates are generally recommended because they remain the same for the life of the loan. A steady rate lets borrowers determine exactly how much interest they’ll pay and when (provided they make all payments in full and on time).

A fixed rate not only allows you to predict how much you’ll ultimately pay, but it also lets you know exactly how much you’ll save by refinancing. In essence, fixed rates are safer and more conservative. This is ideal for most student refinance loans.

All federal student loans use a fixed rate only. It is possible to refinance federal loans at a variable rate with a private lender, but this is generally not recommended. In addition to the potential for a rate spike, refinancing also invalidates any special protections or benefits for which federal student loans are eligible.

should i do fixed or variable rate student loan

Fixed student loan interest rates are generally a better option than variable rates. That’s because fixed rates always stay the same, while variable rates can change monthly or quarterly in response to economic conditions.

All student loan interest rates are currently near historic lows.

If you’re unsure which rate to choose, go with fixed; it’s the safer option. If you’re comfortable taking a risk to potentially save on interest — and will be able to pay off your student loan fast — consider a variable rate.

» MORE: What do Fed rate changes mean for student loans?

Fixed or variable student loan?

All federal student loans have fixed interest rates. It’s typically best to max out federal student loans before turning to private student loans because borrowers with federal loans qualify for income-driven repayment plans and loan forgiveness programs — borrowers with private loans won’t.

If you opt for a private student loan, or if you refinance your existing student loans through a private lender, you can typically choose a fixed or variable rate. Here’s how to decide between them:

Fixed student loan rates are the safer bet

Fixed rates are locked in for the life of the loan. The only way to change a fixed interest rate is through student loan refinancing.


  • There’s no chance that your rate will increase.
  • Predictable monthly payments; the amount due won’t change.


  • Rates typically start out higher than variable rates.
  • You could miss out on interest savings if variable rates go lower.

Consider a fixed rate if

  • Interest rates are on an upward swing.
  • You don’t expect to pay off your loans anytime soon.

Variable student loan rates are a gamble

Variable rates are subject to change throughout the life of the loan. Student loan lenders typically set variable rates based on an economic indicator known as the London Interbank Offered Rate, or Libor. Lenders determine variable rates by adding the Libor rate to a base rate. If the Libor goes up, your rate goes up exactly that much.

Are Fixed- or Variable-Rate Student Loans Better? | Student Loans and  Advice | US News

is a small business loan a variable or fixed rate

What is a fixed rate loan?

Fixed rate small business loans have an interest rate that does not change during the life of a loan, which means you generally pay the same amount each month. With a fixed rate loan, the interest you owe per month would only change if you refinance your loan. In that case, you’d pay less interest if your monthly payments become smaller, and more interest if your payments become bigger. But the actual interest rate will remain the same.

Examples of fixed rate loans include:

  • Personal loans. Many personal loans will charge you the same interest rate no matter how long it’s been since you first took out the loan. These fixed interest rates may vary depending on your loan issuer, but each provider’s rate should remain constant with time.
  • Auto loans. As with many types of loans, auto loans can come in fixed and variable rate varieties. Fixed rate auto loans may be slightly more common, and they lead to predictable monthly interest debts alongside your standard car payments.
  • Private business loans. Some private business loan rates are constant and independent of changes in the prime rate. Rarely will two private lenders offer the same fixed rate. Plus, variable rate government loans may – as you’ll see below – be better for your business.

Advantages of a fixed rate loan

With a fixed rate loan, you won’t get any surprises. You’ll always know exactly how much interest you owe with each of your payments. Just multiply your payment amount by your interest rate to determine your debt. Even if your payments vary in size, this interest calculation remains quick and simple. Some more advantages include:

  • If the prime rate rises, it won’t impact the overall cost of your loan.
  • Fixed rates mean you can manage your cash flow accurately to protect your business.
  • You will know exactly the total interest that you’ll pay over the life of the loan.

Disadvantages of a fixed rate loan

A fixed rate might not be for you based on some of the following reasons. The first reason isn’t super likely (but isn’t impossible either) given that inflation, and thus the prime rate, typically increases with time. The second may seem counterintuitive but is indeed the prevalent trend when you compare and contrast fixed and variable rate loans. The third reason is perhaps the most straightforward.

  • If the base interest rate goes down, you don’t get the benefits of the reduced rate. Instead, you’ll continue to pay the fixed rate.
  • Fixed rate loans for small businesses tend to have higher interest rates than variable rate loans.
  • Since fixed rate loans present a potential loss for lenders if the prime rate increases, lenders may require higher credit scores to qualify for them.

Choosing between a fixed and variable rate loan

When weighing variable versus fixed rate loans for your small business, weighing a handful of factors can help you come to the right decision. These factors may look different for every loan and every business. Take your time assessing your situation and loan options, and you should be on your way to making the right choice. Some factors to note are:

  • Potential future interest rates. Let’s say you expect the prime rate to rise over time – a reasonable assumption given the nature of inflation. For shorter-term loans, you may prefer a fixed rate loan. However, for longer-term loans, variable rates may prove better. That’s because, as discussed earlier, they often wind up less expensive over time.
  • Loan length. When seeking shorter-term loans, fixed rate loans may prove more reasonable. After all, experiencing a rate shift just two months into a three-month loan may feel jarring. In the long term, though, variable rates often prove more affordable.
  • Current fixed versus variable rates. In lending, the term “spread” is sometimes used to describe the difference between the lowest available fixed rate and lowest available variable rate. You might fare better with a variable rate during times of high spread.
  • Risk tolerance. If the notion of having to pay more interest later on sounds risky, you may fare better with fixed rate loans. However, taking out variable rate loans may help you fund business ventures that bring in enough income to cover loans of any size. And since variable rate loans are often less expensive in the long run, they may ultimately be less risky.

Questions to ask your lender

Make sure you’re working with a trustworthy lender, one that has a track record of successful fundings, with stellar customer service. Some additional questions to consider are:

  1. Is there an initiation fee for getting the loan that’s charged before you get the money?
  2. What is the interest rate for the loan and how is it applied?
  3. What are the repayment terms for the loan?
  4. What is the monthly repayment amount?
  5. What will be the total amount that’s repayable?
  6. Do you need to provide any guarantee or collateral for the loan?
  7. Can you repay the loan early?
  8. Are there any other fees?
  9. Are there any special terms and conditions?
Fixed or Variable Rate Student Loan: Which Is Better? | PNC Insights

The bottom line

Student loans are a necessary part of the college experience, but they can be a little difficult to navigate.

When choosing between a fixed rate and variable rate student loan, it’s important to think about what kind of future you envision for yourself financially. If you expect to earn more money down the line, then getting a fixed rate loan could be your best bet—but if you’re not sure what you’ll be able to afford in the future and want to keep your options open, then the flexibility of a variable rate loan might be better for you.

No matter which option is right for you, there are several other factors that can affect your decision: how long it will take before your loan is paid off; how much money each company charges as interest; whether or not there’s an origination fee; and whether or not you qualify for any special discounts or promotions offered by either company.

Review the entire loan package and determine the best fit to strengthen your finances, and seek out a lender with stellar customer service. You’ll want to work with a knowledgeable loan specialist who can clearly and thoroughly answer all of your questions.

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