Fixed- or variable-rate student loan: Which is best for you?

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By Dori Zinn, Bankrate

When you choose your student loans, you might face the choice between fixed and variable interest rates. While the lowest interest rate available is important, how the interest rates work also matters.

Fixed interest rates don't change, while variable interest rates fluctuate. The right choice depends on the type of borrower you are, your future income and what you can reasonably afford to repay. Here's the breakdown of variable versus fixed interest rates for student loans.

How fixed interest rates work

Fixed interest rates are rates that stay the same throughout the course of your student loan repayment term. The only time your interest rate will change is if you consolidate or refinance your student loans.

Fixed interest rates give you the same payment each month, which means that your budget remains consistent. All federal student loans have fixed interest rates, and these rates are the same for all borrowers regardless of credit score or history. Some private student loan lenders offer fixed interest rates, but borrowers with the highest credit score qualify for the lowest interest rates available.

Pros

• Payments never change. There are no surprises when it comes to fixed interest rates. Your interest rate never changes, which means your monthly payment never changes.

• Consistent repayment plan. Since student loans are typically repaid over the course of 10 or more years, you'll be able to keep your monthly payment the same - which is especially helpful if you face income challenges.

Cons

• Typically higher starting rates. Since fixed interest never changes, the advertised rate for fixed rates is typically higher than that of variable rates.

• Can’t take advantage of rate drops. In environments where interest rates fall, people with variable rates will save a significant amount on their monthly payments, but people with fixed interest rates will still be tied to their higher rate.

Who are fixed interest rates good for?

Fixed interest rates are good for borrowers who don't have a lot of wiggle room to account for an adjusting interest rate. It's ideal for low-income earners who can only devote a certain amount of money per month to student loan repayments and can't afford to pay extra in case rates rise.

How variable interest rates work

Variable interest rates are rates that fluctuate based on an index rate, like the prime rate or the Libor. The interest rate changes, meaning your monthly payments could rise or fall based on an adjusted interest rate. While you might start off paying a lower interest rate than you would with a fixed-interest loan, there's a chance that you could have a higher interest rate later on. Private student loans tend to offer variable interest rates along with fixed-interest options.

Pros

• Rates are typically lower. Variable interest rates are often much lower than fixed interest rates, especially upon sign-up.

• Save in interest payments. If you plan to pay off your loan sooner than the original terms, you could save more money in interest payments over the course of your repayment by taking advantage of a low interest rate.

Cons

• Possible volatile fluctuation. Since variable interest rates are tied to market conditions, you could see a higher interest rate than with a fixed interest rate for the same type of loan.

• Fluctuating payments. The higher your interest rate, the higher your payment, and your monthly balance may change from month to month.

Who are variable interest rates good for?

Variable interest rates are good for borrowers with the best credit who qualify for the lowest interest rate available. These types of interest rates are good for borrowers who plan to pay off their loans as soon as possible - if you see an extremely low rate, you could pay off your loan before rates have a chance to rise, or you could afford to make higher payments more often.

Borrowers with high-paying jobs and those who don't mind fluctuating payments would benefit from variable interest rate loans. If you can afford the wiggle room in your budget, you could end up saving a lot of money over the life of your loan.

The bottom line

If you're borrowing student loans, the type of interest rate can be a determining factor in where you borrow from. Federal student loans have only fixed interest rates, plus a variety of repayment terms.

Private student loans tend to offer both fixed and variable interest rates, giving you the option to take advantage of the one that best fits your finances and repayment plan. If you like having the same set amount every month, a fixed interest rate may be a good match. If you think you can pay off your student loans before rates have a chance to rise, a variable interest rate might work best.

While it’s usually best to exhaust your federal student loan options first, they may not cover the full cost of your education. If that's the case, you may need to take out private student loans to bridge that gap.

See more at: Bankrate