When it comes to your student loans, one number you should be paying attention to is the interest rate. This will vary from loan to loan and could affect which offer you accept. In addition to varying numbers, you may also be offered a variable interest rate on one, and a fixed interest rate on another. You might have to choose between the two. A variable interest rate changes with the market, but a fixed rate stays the same for the entire length of the loan. Here are some questions to ask yourself before picking between fixed or variable rates:
Do You Want the Payment to Be the Same Every Month?
A fixed interest rate gives you the knowledge of knowing exactly what your repayment amount will be every single month. There won’t be any worry about it being more than the month before.
However, a variable interest rate may change, month to month, and can be a bit more difficult to plan for. But it’s generally thought to be the best choice financially. You could end up paying much less if you choose a variable rate and keep up with the changing payments.
How Long Is Your Loan For?
The length of your loan should also affect your final decision. Generally, for shorter terms, including 10 years or less, variable interest rates are the best bet. However, you could end up paying more if you choose variable for a longer loan.
Fixed interest rates are a good choice for those longer loans.
Do you Have an Option?
Some loans don’t actually give you a choice between variable and fixed interest rates. For example, most federal student loans that undergraduates qualify for are fixed interest rates to begin with for all students. They won’t offer you the option of a different rate or variable rates. Third parties, such as banks and credit unions, will be the ones that may offer you both variable and fixed options.
You could have more options though when you’ve graduated and are considering refinancing your loan or are looking at other repayment options. The Department of Education, for example, offers income based repayment plans. You will pay more as your income goes up. While this isn’t the same as a variable interest rate, it could be the better choice for you to make sure you’re financially comfortable and staying within a budget.
Choosing between a variable interest rates and fixed rates depends entirely on your own situation. You may not even be offered the option to choose right away, but it’s good information to have in case you ever need to refinance or take out a private loan. Remember though to take a close look at your own finances if you do have to choose between variable and fixed. Your loan term and financial situation should tell you which route is best for you. If you’re still not sure, talk to a professional or your school’s financial aid office.
Check out also how are student loan interest rates calculated.