Fixed Rate Student Loan or Variable: Which to Choose?

BIG Ideas:

• Fixed interest rate student loans offer predictable monthly payments, while variable interest rate student loans may increase or decrease. 
• Federal student loans offer only fixed interest rates, while many private student loans are available with fixed and variable interest rate options.
• Deciding between a fixed interest rate loan and a variable interest rate loan depends on your budget, repayment timeline, and comfort with risk.

Having choices is a great thing in life, especially when it comes to something as important as college. Along your college journey, you’ll have plenty of important decisions to make, like how much you should borrow, who will contribute toward college expenses, and whether you’ll need a student loan. 

And if you do need a student loan, you’ll face another important choice: Should you choose a fixed interest rate loan or a variable interest rate loan? The difference can greatly impact your monthly payment and the interest you must pay over the life of your loan.

Understanding how fixed interest rate loans and variable interest rate loans work can help you choose the student loan that best fits your financial needs and long-term goals. So, if you want to learn more about a variable interest rate vs. fixed student loan to help you make the right decision for you, read on.

But only if you choose. 

What is a Fixed Interest Rate Student Loan?

If you’re not comfortable with change, a fixed interest rate loan may be the right choice for you. With this type of interest rate, your payments won’t change for the entire term of your loan.

The benefits of fixed interest rate loans:

• You’ll know exactly what you owe, making budgeting easier. 
• You’ll know how much principal and interest you’ll pay over the life of the loan. 
• You’ll have protection if interest rates rise. 

The drawbacks of fixed interest rate loans:

• A fixed interest rate student loan may start with a higher rate than a variable interest rate student loan.
• If interest rates decrease, you can’t capitalize on them and reduce your monthly payments and overall interest costs.  

Make sense? Now let’s look at your other choice – a student loan with a variable interest rate.  

What is a Variable Interest Rate Loan?

Interest rates are a lot like life. They’re unpredictable and may go up or down. A student loan variable interest rate is usually based on a financial index plus a margin. The most common index for a variable interest rate student loan is the SOFR (Secured Overnight Financing Rate), which is the cost of overnight borrowing using U.S. Treasury securities as collateral. Another index sometimes used for a variable interest rate loan is the Prime Rate, which is frequently used for other types of loans.

So, if the SOFR rate is 4.25% and the margin is 3.50%, your variable interest rate would be 7.75%. But if you have a variable interest rate loan based on the SOFR, and the SOFR changes, your payments will change. 

The benefits of variable interest rate student loans: 

• Variable rates often start lower than fixed rates. 
• If rates drop, you can get a lower rate, which will help lower your monthly payments and interest cost. 

The drawbacks of variable interest rate student loans:

• Your payments could increase.
• Budgeting is more difficult.
• Increased uncertainty.

Variable Interest Rate vs. Fixed Student Loan

The chart below summarizes the differences between a fixed interest rate loan and a variable interest rate loan.

Understanding the Types of Interest Rates on Federal and Private Student Loans

Now that you understand fixed interest rate loans and variable interest rate student loans and how they work, it’s important to know how they apply to federal and private student loans.

• Federal student loans, which are loans available from the U.S. government, offer only fixed interest rates. So, your interest rate and payment will stay the same for the life of the loan. Federal student loan interest rates are determined each year using a formula established by Congress. However, the rate you receive when your loan is disbursed won’t change. 
• Private student loans, which are offered by banks, credit unions, and nonprofit lenders like Brazos, may offer both fixed interest rate loans and variable interest rate loans. Variable interest rates are typically based on the SOFR plus a margin.

The margin, which is added to the index, is determined by the lender and may be based on factors such as your creditworthiness, income, and whether you apply with a co-signer.

With a fixed interest rate, your monthly payment will remain the same. With a variable interest rate, your monthly payment may increase or decrease over time as the underlying index changes.

Brazos offers both fixed and variable rate private student loans, giving borrowers the flexibility to choose the option that best fits their budget and financial goals. Learn more about the difference between federal and private student loans. 

Which Interest Rate Type is Right for You? 

Now that you know the benefits and drawbacks of fixed interest rate student loans and variable interest rate student loans, you must decide which option makes the most sense for you. Here’s a quick cheat sheet to help you:

A fixed interest rate loan may be a good choice if you:

• Want predictable monthly payments. 
• Don’t want to have to worry about rising interest rates. 
• Want to know exactly how much you will owe in principal and interest. 
• Expect to pay your loan off over many years. 

A variable interest rate loan may be worth considering if you:

• Want the potential of a lower interest rate to start.
• Plan to pay off your loan sooner. 
• Are willing to take on the risk that your payments may go up. 

Choosing between a fixed and variable interest rate comes down to your comfort with risk, your budget, and how long you expect to repay your loan. Knowing your options now can help you borrow with confidence and avoid surprises later.

Brazos has Private Loans to Help Make College Affordable

For more than 50 years, Brazos Higher Education has helped students and parents finance the cost of college. As a Texas nonprofit, we offer competitive rates, no fees, flexible repayment options, and co-signer release to help parents and students reach their financial goals.  Contact us today to learn more.