Myth: Fixed Student Loan Interest Rates Are Always Better Than Variable

Are fixed student loan interest rates better than variable ones

Flickr user KMR Photography

As with anything related to student loans, there is no one option that is best for everyone. The best way to decide whether a fixed student loan interest rates or variable student loan interest rates is a better option for you is by weighing the pros and cons of each.

Pros & Cons Of Fixed Student Loan Interest Rates

Pros

With fixed student loan interest rates, the interest rate on your loan will remain the same throughout the life of the loan. This gives you the advantage of knowing exactly how much you need to keep aside to cover your monthly payments after the grace period. In other words, you’ll never be caught off guard with a higher interest rate. Your interest rate stays the same during your loan’s lifetime, which means potentially paying a lower interest rate.

Cons

The downside of this option is if variable interest rates drop, you will be stuck with the higher fixed rates.

Pros & Cons Of Variable Student Loan Interest Rates

With variable student loan interest rates, the interest rate on your loan fluctuates several times over the loan’s life. There is no way to predict whether the rate will increase or decrease during the repayment term.

Pros

The advantage of this option is that at the outset the rates generally start out much lower than the rates of fixed student loans and if the rates continue to stay low, you benefit from the lower monthly payments. In other words, there’s a chance for lower interest rates throughout the entirety of your loan’s life.

Cons

However, the unpredictability makes it difficult to calculate in advance how much you need to keep aside to cover your monthly payments. Also, the rates could spike overnight, increasing the overall cost of your loan. You never know when interest rates rise, or fall, and the change can be sudden.

Which One is Best For You?

When deciding whether to take a fixed or variable student loan, you must consider the existing and projected market conditions. Most importantly, you must determine your appetite for risk.

If the market conditions are favorable and you are prepared to take the risk of a spike in the interest rates, then a variable student loan may be worth considering. If you have a small loan or you know you’ll pay it off quickly, you may consider variable rates as long as the starting rate is lower. Of course, this is still a gamble. But, you may end up with a lower interest rate while you quickly pay off your loan.

However, if you do not like the uncertainly that is associated with variable loans, or you know you’ll spend a long time paying off the loan, a fixed student loan may be the better option for you. It offers more stability over time, even if that means you’re sometimes paying a higher interest rate compared to the variable rates.

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