A clear understanding of the basic concept of the variable and the fixed rate student loans is very simple. A variable rate of interest changes periodically with time over a term of the loan in case of a fixed rate never changes with time. When it comes to the student loans and the refinancing of student loans, the interest rates are an important factor. The students’ interest rates can affect that how much amount of money he end up for paying back it over a time, and more interest rates can cause it a difficult in repayment. So the student should take a very important choice in between a fixed and variable interest rate. There are many different factors to consider, this choice. Based on the type of student loan that which he or she takes out, the type of loan may be offered an option between a fixed and variable rate of interest on the loan.
What is a variable and fixed rate of interests?
Fixed-rate of interest
The interest rate of fixed means never changes until for the completion of the time period of the loan. Taking a fixed-rate loans will help the debtor to predict how much amount will pay with interest and a borrower can keep his interest payments at the control levels.
Variable rate of interest
In case of variable interest rate, it can rise or fall according to the market conditions. This interest rate is rapidly described by the market, that means it can fluctuate over
The difference between these two types of interest rates is , a variable interest loan will vary over the complete time period of the loan, in case of a fixed rate remains the same unless the borrower refinancing it.
Federal student loans always have a fixed rate of interest
Often Students federal student loans offer a fixed rate of interest and these are very beneficial to the students.
- The rate of interest is set as fixed for a prior to July 1st of every academic year and it applies to the loans made in between July 1st and June 30th.
- If the debtor attend college for three years, for example, he or she may borrow three times during the each of those academic years. The borrower’s rate of interest on each of those three student loans will vary, but it will not change at all over the repayment term.
- If the student attends college for three years and he or she borrows during every academic period, he should wind up with three student loans with the different fixed interest rates. But for each of those student loans, their interest rates do not change over the time period of repayment.
- When the student enters repayment, he should decide whether consolidating those all loans into a single one and with a single fixed interest rate or not. His or her fixed interest rate on the federal consolidation loan is the weighted average of the interest rate on the student loans to be merged. Here the weighted average means that the interest rate on his higher balance loans can count more regard determining the average.
Private student loans have both variable and fixed rates of interest
- Most of the lenders who offer the private student loan today are providing both variable and fixed interest rates on the student loans. The private student loans with a fixed interest rate will be always have a more interest rate than the variable interest rate on the loan offered by the same lender.
- Before going for a variable interest rate student loan, once ask the lenders that how often the interest rate is subject to vary. Some of these interest rates adjust monthly wise, while others adjust once per every three months. Also, check the overall rate cap. Variable interest rates are rapidly capped, but the caps can be as more as 25%..
- At initial the variable rate is very less but later it varies with time to time based on the market conditions. For example the variable rate for the private student loan at the time of loan taken is 4.35% after completion of its total time period of the loan, the rate may drastically vary to 13.25% like that.
Considerable factors while choosing a fixed or variable interest rate
The borrower may get a little bit confusion regards choosing an interest rate about whether a variable or fixed interest rate will be good for him. To help the borrowers, we mention some of the major considerable factors below.
The time period of the loan
The longer the time period of a loan taken, then there is a lot of scope for more changes. which can be caused the interest rates to either increase or decrease significantly. Hence the student can reduce his risk by choosing for a shorter term loan, when choosing a variable interest rate, and getting a fixed interest rate with the longer term loan.
Based on the market conditions
The criteria of the current rate of interest environment can also play a major role in the borrower’s decision. If the interest rates are expected to remain stable or drop, then the variable rate of interest will be beneficial. In case, if it appears like the interest rates are going to rise, then the fixed rate will become better.
Depends on the budget of borrowers
The borrower should need to analyse his budget to determine what amount of payments he can afford. While the variable rates might save the borrower’s money at the beginning and over the long run, but later it may increase for further months, then his payment also raises up. So the student need to figure out if he will be able to afford those increases.
A fixed interest rate is the best choice for most of the borrowers, but the variable interest rate may be a money-saver if the timing is correct. Accordingly, to all these aspects, generally fixed interest rates on student loans are considered as a better option for most borrowers right now.