Fixed- vs. Variable-Rate Student Loans: How To Choose the Best Option

Student borrowers collectively owe more than $1.7 trillion on loans they took out to pay for school, according to data compiled by the Federal Reserve. While that may already seem like an enormous sum, the total amount they ultimately need to pay back could be significantly more due to interest.

Student loan interest, in simple terms, is the additional money you repay on top of what you borrow. The interest rate is expressed as a percentage of the total amount you borrowed. Student loans may offer fixed or variable interest rates, which affect the amount you pay for your loan over time.

Understanding the difference between fixed- and variable-rate loans can help you find the right loan for your financial needs.

What are fixed-rate and variable-rate student loans?

A fixed-rate student loan has an interest rate that stays the same throughout the entire life of the loan. This means that you'll always make the same monthly payment.

Variable-rate student loans have interest rates that can fluctuate depending on economic conditions. These loans usually offer lower initial interest rates, but the rates change based on circumstances outside of your control. That means the monthly payment can go up unexpectedly (or, in rare cases, go down).

It's more difficult for borrowers to predict the lifetime cost of a variable-rate loan than a fixed-rate loan since the interest rate may change over time.

Many student loan borrowers don't really understand the differences between these two types of loans until they enter repayment. Joseph Reinke, a chartered financial analyst (CFA) and founder of financial planning firm FitBUX, sees this mistake all the time.

“A lot of borrowers just look at the interest rate and pick the variable rate because it's lower to start,” Reinke says. “They don't understand what can make the rate go up, how often it can go up, or how high it can go up.”

Current private student loan rates

Pros and cons of fixed-rate student loans

Although Reinke finds that fixed-rate student loans are usually better for most student borrowers, they do have some drawbacks, too.

On the plus side, fixed-rate loans have predictable monthly payments, which means your monthly payment will stay the same throughout the life of the loan.

In addition, fixed-rate loans have a predictable repayment cost. You'll know how much the loan will cost you over its entire life since the rate will never change.

Finally, fixed-rate loans are often best for borrowers who need a long repayment period. The longer your repayment period, the more likely it is that a variable rate will fluctuate up during that time, making fixed interest rates less expensive.

But fixed-rate loans do have some important disadvantages that could affect your bottom line. One major drawback is that not all borrowers may qualify for a fixed-rate loan. Federal loans don't rely on your credit score and are all fixed, but private student loans may be fixed or variable — and it's generally easier to qualify for a variable-rate loan.

Fixed-rate loans will also never see a rate drop, unlike a variable loan. This is a particular concern for current students, as fixed federal student loan interest rates for the 2024-25 academic year are at a six-year high of 6.53% for undergraduate students, 8.08% for graduate students, and 9.08% for graduate and parent PLUS loan borrowers.

Read More: What Is the Average Student Loan Interest Rate?

Finally, fixed-rate loans could cost more over a short repayment period. Anyone who plans to pay off their student loans quickly could end up paying more on a fixed-rate loan than on a variable-rate loan. Since a variable-rate loan will typically have a lower initial interest rate, borrowers who can pay off the loan prior to a rate increase would pay less with the variable loan.

Pros and cons of variable-rate student loans

Variable-rate student loans may be the best choice for some borrowers, but not all. Understanding the advantages and disadvantages of this kind of loan can help you decide if a variable interest rate is right for you.

One of the benefits of variable-rate loans is that they tend to be easier to qualify for than fixed-rate loans. If you have exhausted your federal student aid options and still don't have enough to cover your school costs, you may need to apply for a private student loan. Depending on your financial situation, credit history, and other factors, you might only qualify for a variable-rate loan.

Since variable-rate loans typically have lower initial interest rates, the starting payments for these loans also tend to be lower than those of fixed-rate loans. This might be appealing if you expect your income to rise over time.

Finally, although your variable interest rate will probably not drop below the initial rate you pay, it could go down in the future depending on market conditions, which would also lower your monthly payment.

Variable-rate loans do have some drawbacks, however. The interest rate can rise or fall with market conditions, making it difficult to estimate your overall repayment costs. That said, depending on your lender, a variable-rate student loan could come with an interest rate cap, which is the highest variable rate allowed by the lender. Your rate will never increase past this amount.

Just remember that even with a rate cap, you may still end up paying more in interest with a variable-rate loan than you would with a fixed-rate loan — especially if you can't pay off your loan before the rate increases.

With the potential for rate fluctuations comes unpredictable payments. Any changes in your rate will also mean shifts in your monthly payments, which can make budgeting difficult.

Finally, variable-rate loans are potentially more expensive overall. Depending on how quickly you pay off your student loan, you might find yourself paying much more over time with a variable rate compared to a fixed rate.

Check Out: 12 Strategies To Pay Off Student Loans Faster

How to choose between fixed-rate and variable-rate loans

If you need to decide whether a fixed- or variable-rate loan is right for you, make sure you consider the following factors:

• Loan term length: The longer it takes you to repay your loan, the more likely it is that a fixed-rate loan will cost you less.
• Risk tolerance: Borrowers likely to feel overwhelmed by uncertainty may prefer to stick with fixed-rate loans.
• Economic trends: During times of higher interest rates, taking out a new fixed-rate loan may be more expensive than a variable-rate loan. This is because the high rate will be set for the life of the loan with a fixed interest rate, while a variable rate may go down when the economy stabilizes. On the other hand, when interest rates are low, fixed-rate loans will typically cost less over time, since variable rates may increase during the life of the loan.
• Loan balance: The size of your loan affects how much you pay in interest. “Let's say you borrow $10,000 in a variable-rate loan and your interest rate goes up by 3%,” says Reinke. “It's no more than a $15 to $20 per month difference in your monthly payment. But if you borrowed $100,000 and your rate goes up by 3%, your monthly payment will increase by $150 to $200.”
• Future income: Borrowers who anticipate earning a high income after graduation may be in a better position to take on a variable-rate loan since they can plan on paying off their loan quickly or can afford to ride out rate fluctuations. Reinke does caution undergraduates to remember that not every college graduate can expect a six-figure income.

Refinancing fixed and variable student loans

If you refinance your student loans, you'll pay off your old loans with a new, private student loan, leaving you with just one loan and payment to manage. Refinancing may also be an opportunity to switch from a variable- to a fixed-rate loan, or vice versa.

Borrowers with a variable-rate loan may choose to refinance to a fixed-rate loan for a number of reasons. To start, you might make the switch to lock in a fixed rate if you can now qualify for a better rate than you're currently paying. It might also make sense to refinance a variable loan into a fixed-rate loan if you expect to have a longer repayment period than you originally thought.

It's less common to refinance a fixed-rate loan into a variable-rate loan, but there are still some scenarios where that may make sense. For example, if you have a fixed loan with a high interest rate, you might choose to refinance it into a variable loan with a lower initial interest rate. Generally, this strategy will work best if you plan to repay the loan quickly, before the rate increases.

See Also: Pros and Cons of Consolidating Student Loans