Photo credit: Raquel Martínez
Now that you’ve started getting rate quotes for refinancing your student loans you’ve probably noticed there are two different rates for each refinancing company. Each lender offers both a fixed interest rate and a variable interest rate. What’s the difference? And which one is better for you? Learn what you need to know to choose the best option for you. Estimated read time ~ 8 minutes.
Fixed Interest Rate
An interest rate that remains the same over the entire loan term and does not fluctuate based on market rates.
Practically speaking, fixed interest rates offer stability and eliminate any worry about skyrocketing interest rates. The trade off for stability is often a higher interest rate meaning you may pay more interest.
Best For:
- Borrowers who plan to take their time repaying their student loan debt.
- Borrowers who don’t like the idea of a changing interest rate.
- Borrowers who refinance during a period of rapid inflation.
- If the offered fixed rate is within 0.5% of the variable interest rate.
- If the fixed rate is the lower than the variable interest rate.
Variable Interest Rate
An interest rate that changes over the term of the loan based on a market benchmark rate (such as the LIBOR index).
Practically speaking, variable interest rates are often considerably lower than fixed interest rates and offer the borrower a chance to save big on interest. The trade off for a lower initial interest rate is instability. Your interest rate may rise above the level of your comparable fixed interest rate.
Best For:
- Borrowers who plan to repay their student loans in less than five years.
- Borrowers who won’t be kept awake at night by an increasing interest rate.
- Borrowers who refinance during a period of low inflation.
- If the variable interest rate is at least 1% less than the fixed rate.
Choose Your Best Option
- How much is your fixed rate and how much is your variable rate? If your variable interest rate is within 0.5% of your fixed interest rate, the security of a fixed rate likely outweighs the potential savings of a variable rate. If the fixed rate is lower than the variable rate the fixed rate is the obvious choice.
- How do you feel about your interest rate changing with the market? Your variable interest rate will change over time, there’s no doubt about it. In today’s market your variable rate will likely slowly increase over time. If that makes you feel sick, anxious, or like you’re going to lose sleep then a variable rate isn’t for you.
- How aggressively are you repaying your student loans? If you’re being super aggressive and repaying your student loans within the next 2-5 years a variable rate could make a lot of financial sense. You will start out with a lower interest rate when your debt is at it’s highest. That means your savings will be the biggest early on. Because you’re repaying quickly your debt will decrease quickly so even if your interest rate goes up it will accrue on a smaller amount of debt so it will take you a while to lose your initial savings. If you plan to take longer than five years a variable rate may not be the best for you.
- How stable is the market? Many variable interest rates are based on the LIBOR index which has been slowly increasing recently. The United States is still in a period of low inflation meaning it’s unlikely you will see your interest rates sky-rocket. If the market becomes unstable and inflation starts to shoot up a fixed rate provides much more security. Variable interest rates are often capped at around 8%.
What did you choose when you refinanced your student loans? Leave a comment below, on the Repayable Facebook page or send me an email jeni@repayable.org Cheers to your #debtfreedream and choosing the interest rate that makes sense for you!
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