Fixed Rate Vs Variable Rate Student Loans
Q: What is the difference between a fixed rate student loan and a variable rate student loan, and which type of student loan is better?
A: A student loan with a fixed interest rate has a set rate that will not fluctuate over time. A student loan with a variable interest rate has a rate that moves (up or down) based on the changes of an underlying index (note: some variable rate student loans come with an interest cap, which cannot be exceeded).
There are both advantages and disadvantages to each type of student loan (fixed rate and variable rate). The advantages to a fixed interest rate student loan are that the borrowers monthly student loan payments will never fluctuate, which makes it easy to calculate the exact length of time it will take to pay back the loans principal and interest. The possible disadvantages to a fixed rate student loan are that the borrower may end up having a higher monthly payment (compared to if variable rates on loans are low).
The advantages to a variable interest rate student loan are that the borrowers interest rate may go down, if the underlying interest rate index goes down. The possible disadvantages to a variable rate student loan are that the borrowers interest rates could go up (increasing monthly student loan payments) and the borrowers monthly loan payments will fluctuate since variable interest rates are adjusted on a monthly, semi-annually, or annually schedule. Students in need of student loans for college should start by applying for FAFSA. Most financial aid experts recommend exhausting all federal financial aid (including federal student loans) before considering private student loans.