Which Interest Rate Is Better for a Student Loan, Variable or Fixed?

If you submitted the Free Application for Federal Student Aid (FAFSA) and are anticipating a gap between your covered financial aid and your tuition expenses, you’re not alone. Like many students and families in your situation, you’re likely exploring supplemental financing options to help you cover the rising costs of college. This is where options like scholarships and private student loans can come in handy.  

Understanding the different options for student loans can be a stressful, but important step as you prepare for your educational journey. One consideration you need to make when selecting a student loan is the interest rate. You can choose from two major types of interest rates: fixed or variable. 

Whether a student loan with a fixed or variable interest rate is a better choice depends on many factors, including your financial circumstances, educational goals, and loan terms. Read on to understand how student loans work and the differences between fixed and variable interest rate student loans. 

What Is a Fixed Rate Student Loan? 

A fixed rate student loan is a type of student loan with an interest rate that remains the same for the duration of the loan. The payment due on a fixed rate student loan will not change over the life of the loan. Fixed rate loans can help protect borrowers from increases in market interest rates that could otherwise cause payments to fluctuate.  

Fixed rate student loans can cover some education-related expenses, including tuition, fees, housing, textbooks, and other educational necessities. Fixed rate loans can apply to undergraduate, graduate, and professional degrees.  

Typically, repayment on a fixed rate student loan begins once the student completes their degree program, and repayment is done through installments over a fixed number of years. Many lenders offer flexible repayment options, so be sure to compare lenders while you are doing your research.   

Pros and Cons of Fixed Rate Student Loans 

There are many advantages of fixed rate student loans, including: 

• Stability and predictability of monthly payments. 

• The ability to accurately and confidently budget your future payments. 

• Protection for borrowers from fluctuations and increases in market interest rates.  

• Knowledge of the total cost of the loan from when it is signed. 

• A potentially lower overall cost if interest rates rise significantly over time.  

• High desirability for risk-averse borrowers. 

On the other hand, there are also some disadvantages of fixed rate loans, those include: 

• Likely higher initial interest rates. 

• Likely higher initial loan payments. 

• No benefits or cost savings if interest rates go down. 

• Lower flexibility than variable rate loans. 

• Potentially higher overall loan costs when market interest rates remain low over time. 

• The loan may not reflect future economic conditions or market interest rates. 

What Is a Variable Student Loan?

Also known as an adjustable-rate student loan, a variable student loan has an interest rate that can periodically change. In most circumstances, changes in variable rate student loans are caused by updates to a specified financial index. The terms of your loan will determine how often the interest rate may change, whether annually, semi-annually, or monthly.  

Due to changing interest rates, the payments on a variable rate student loan may fluctuate significantly over the life of the loan. Variable rate loans expose borrowers to fluctuations in market interest rates. 

Like fixed rate student loans, variable rate loans can be used to pay expenses for undergraduate, graduate, and professional degree programs and for education-related expenses, such as tuition, fees, room and board, textbooks, and other necessities.  

Repayment for variable rate student loans typically begins after the borrower is no longer enrolled in their degree program unless deferred for some reason, such as entering a new degree program. Repayment takes place over a set time through installments. 

Like fixed rate loans, multiple student loans can be consolidated into a single variable rate student loan. 

Pros and Cons of Variable-Rate Student Loans 

There are many advantages of variable rate student loans, including 

• Likely lower initial interest rates. 

• Likely lower initial loan payments. 

• May decrease interest rates and loan payments over time. 

• High cost-effectiveness in low interest rate environments. 

• Potentially lower overall loan costs in low interest rate environments. 

• Greater flexibility than fixed rate student loans. 

• May better reflect future economic conditions or market interest rates. 

On the other hand, some disadvantages of variable rate student loans include: 

• Expose borrowers to interest rate volatility. 

• Eliminate the ability to accurately budget for more than a short period in the future. 

• Potentially higher interest rates. 

• Potentially higher monthly payments. 

• Potentially higher overall loan costs if interest rates rise over time. 

• Less desirable for risk-averse borrowers. 

• May expose borrowers to greater refinancing risks. 

• Dependency on market conditions. 

• Uncertainty of the total cost of the loan until it is paid in full. 

• Do not protect borrowers from fluctuations and increases in market interest rates. 

Factors to Consider When Choosing Between Fixed vs. Variable Rate Student Loans 

Many factors must be considered when choosing between a fixed rate vs variable rate student loan. Here are some of the primary factors you should evaluate: 

• The Interest Rate Outlook: If interest rates are expected to remain low or increase gradually over the life of the loan, variable rate loans are often more desirable, and vice versa. 

• Risk Tolerance: If you prefer stability, accurate planning, and low risk fixed rate loans are a better choice. If you are willing to accept some risk of paying more under certain market conditions in order to potentially pay less initially, variable rate loans might be a better choice. 

• Loan Repayment Timeline: The shorter the loan repayment time, the less likely you are to experience significant interest rate changes. 

• Loan Terms and Conditions: Be sure to carefully review the terms and conditions of each loan you are considering, including any and all rate caps or limits on variable rate adjustments. 

• Overall Financial Goals and Stability: You should consider your financial priorities, such as a consistent monthly payments, minimizing risk, paying the least possible amount, projected salary, and much more. 

Should I Get a Fixed or Variable Rate Student Loan? 

Deciding on what type of loan to apply for can be challenging. Unfortunately, unless you can predict the future, it is impossible to know whether a fixed or variable student loan will be the right choice for you. However, making an informed decision about the best decision for your situation is possible. 

The first thing to consider are your loan options based on income, credit score, and other eligibility criteria. You may only get approved for certain loans depending on your credit score and other factors. You will need to compare all the terms and conditions of the specific loans to decide on the right one for you.  

When comparing fixed vs. variable rate student loans, you must balance many factors and consider your circumstances and preferences.  

For example, if you are uncomfortable with risk, a variable rate loan will probably not appeal to you. On the other hand, if the potential to save money over the long term is worth some risk to you, a variable rate loan might be ideal. ​​​​If you anticipate your salary will remain relatively stable over time, a fixed rate loan might be more advantageous. 

For a better understanding of your potential rates and repayment options, it can be helpful to review some hypothetical APR and repayment examples. If you are ready to view your personalized rate, you can check your rate in minutes without impacting your credit score.   

Learn More with Ascent

Choosing the right student loan is a major decision that will impact your finances during and after college. Knowledge is power, so research which loan type is best for your unique circumstances. 

Whether you are looking for more information on how to get a student loan or comparing undergraduate student loans, Ascent is here to provide various financial wellness resources for students and families. If you need an additional financial boost to help cover your tuition expenses, we offer several loan types to meet your needs including cosigned student loans and no cosigner student loans.  

We look forward to helping you take the next step toward pursuing your goal in college, and beyond. 

Fixed Rate vs Variable Rate Student Loan FAQs

Can I Change my Student Loan from Variable to Fixed? 

In many cases (but not all), you can change your student loan from variable to fixed if you meet certain criteria. You can do so by consolidating multiple student loans into a single fixed rate student loan or by refinancing the loan. Whether or not these options are available to you, as well as the specific terms that are available to you, will depend on several factors, including the type of student loans you have, the policies of the lender or loan servicer, the terms of your loan, and your creditworthiness and repayment history. 

Can you Refinance on a Fixed Loan? 

It may be possible to refinance a fixed rate student loan. You will typically have to obtain a new loan with different terms, including a new interest rate. Whether you can refinance a fixed rate student loan depends on several factors, including the loan type, the lender’s policies, and your financial situation. It may also be possible for you to consolidate your fixed rate student loans with other student loans to form a new, single student loan.