College Life

Variable vs. fixed rates in student loan consolidation. What’s the difference and why should you care?

Comparing variable and fixed student loan rates

Consolidating student loans require research, and rate structure is certainly an aspect you shouldn’t skip over. Student loan consolidations are available with either a fixed interest rate or a variable interest rate. Keep reading to learn about the differences as well as the advantages and disadvantages of both types of loans to help you make the decision that’s best for your financial plan.

Fixed Rate Student Loan Consolidation

With a fixed rate student loan, your interest rate will not change for the life the loan. There’s some advantages and disadvantages to a fixed rate.

Advantages of a Fixed Rate Student Loan
  • Your monthly payments will remain consistent. This can be helpful for budgeting and financial planning as your payments won’t increase (or decrease).
  • If you took out a student loan when interest rates were low you hopefully benefited by locking your loan in at a low rate. That means if in 5 years interest rates increase, you’ll be enjoying the lower rate you secured previously. A lower interest rate will save you money over the life of a loan.
Disadvantages of a Fixed Rate Student Loan
  • The disadvantage is the reverse of the scenario above. If you took out a student loan when interest rates were high, chances are you have a high interest rate as well. If rates decrease after you’ve taken out the loan, your interest rate will remain unchanged (and high).
  • Generally, a fixed interest rate will be higher than a variable interest rate in the short term.

Variable Rate Student Loan Consolidation

A consolidated student loan with a variable interest rate means your rate (and your payment) will increase or decrease based on the economy. An iHELP variable rate consolidation student loan is based upon the three month LIBOR (London Interbank Offer Rate) and is rounded to the nearest one-eighth of one percent, 0.125%. The variable rate and APR may increase or decrease based on the changes in the LIBOR. The three month LIBOR rate is published in the Wall Street Journal and is among the most common of benchmark interest rate indexes used to make adjustments to variable rate loans.

As with fixed rate student loans, variable rate student loans also have their advantages and disadvantages.

Advantages of a Variable Rate Student Loan

  • Your rate will be reflective of what’s going on in the economy which means when rates are low you’ll be enjoying a low rate but it also means when rates are high, your rate will be high as well.
  • Generally variable rates start out lower than fixed interest rate options. This is a big reason variable rate loans are appealing and why a person would opt to take the risk that rates may increase. The hope is that in the long run the variable rate will allow a person to save money on payments, when compared to payments on a fixed rate student loan.
Disadvantages of a Variable Rate Student Loan
  • As interest rates change so do your payments which makes budgeting a challenge, especially since interest rate changes aren’t predictable.
  • It is possible that your interest rate will increase in the long term.

So, How do you Decide?

If you knew what the economy and interest rates were going to do during the life of your student loan, it would be easy to decide whether a fixed or variable loan would be best. Unfortunately that’s not something that can be predicted. So, it comes down to your appetite for risk. You may be able to lock in at a lower initial rate but there’s no guarantee rates will stay low. Or maybe they will? That’s the risk you take.

One other consideration is the term you’re considering. If you’re planning to use a longer term, a fixed rate could lock you in at a low rate, if you assume interest rates will increase over time.

If you’re a modern Nostradamus the decision may be an easy one!