Variable vs. Fixed Interest Rates on Student Loans: Which is Better?
If you’re thinking about borrowing money to pay for college, you might be wondering, are student loans fixed or variable? The answer is both. Federal student loans are fixed, but private loans can be fixed or variable.
Understanding the difference between a student loan with a variable interest rate vs. a fixed interest student loan is important. To put it simply, variable interest rates change, while fixed interest rates stay the same.
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Variable-interest rate vs. fixed student loans
Variable and fixed student loan interest rates are calculated differently and offered with different types of loans.
| Fixed interest rate | Variable interest rate | |
|---|---|---|
| Interest rate | Stays the same for the life of the loan | Fluctuates based on market conditions |
| Monthly payment amount | Stays the same for the life of the loan | Can go up or down |
| Available on | Federal and private student loans | Private student loans only |
Interest rates on federal student loans are always fixed, set by Congress and static for the life of the loan.
Private student loans can be fixed or variable, and private lenders set their own interest rates. Variable interest rates go up and down based on the Federal Reserve interest rate and other benchmarks like the London Interbank Offered Rate (LIBOR) or the Secured Financing Overnight Rate (SFOR).
Fixed-rate student loans
| What to like | What to consider |
|---|---|
Payments may be more manageable since they’re the same each month Don’t need to worry about interest rates rising in an inflationary period Will know up front how much interest you’ll pay over the life of the loan | At onset, fixed interest rates are usually higher than variable (under typical market conditions) Borrowers who take out loans in high-interest times won’t enjoy a lower interest rate when inflation goes down |
Fixed-rate federal student loans
To calculate federal student loan interest rates, Congress first looks at the high yield of the 10-year Treasury note auctioned on June 1 (the last auction of the year). Congress then takes that figure and tacks on an additional percentage.
10-year Treasury note high yield + add-on percentage = fixed interest rate for federal student loans
The add-on percentage varies depending on the type of loan you have. For instance, for direct subsidized and unsubsidized undergraduate loans disbursed on or after July 1, 2023 and before July 1, 2024, the add-on rate was set at 2.05%. However, the add-on was 3.60% for graduate and professional students with direct unsubsidized loans.
Fixed-rate private student loans
Some private student loan lenders also offer fixed rates. Even so, private lenders make up their own rules when it comes to calculating their fixed interest rates. There isn’t a set formula, so you’ll want to shop around for the best interest rate possible.
With the exception of PLUS loans, you aren’t required to complete any form of credit check when applying for a federal student loan. And with all federal loans, your credit score or history won’t affect the interest rate you get — interest rates are the same across the board, as set by Congress each year.
In contrast, private lenders will take you through a more traditional loan underwriting process, where they’ll review factors like your credit score, your major and the school you attend. After the private lender calculates your interest rate, it’ll stay the same for the life of the loan.
Variable-rate student loans
| What to like | What to consider |
|---|---|
At the start of the loan, interest rate is usually lower than fixed (unless in an inflationary period) If interest rates go down, you might pay less interest over time than if you had a fixed-rate loan | Risky in a volatile market or over a long period of time Hard to budget since monthly payments fluctuate Can’t know how much interest you’ll pay over the life of the loan since the rate changes over time May have points where your interest rate is higher than it would be if you were on a fixed interest rate loan |
If you have a variable-rate student loan, it must be from a private lender — federal student loans are always fixed.
When calculating your variable interest rate, private lenders traditionally used LIBOR along with the interest rate set by the Federal Reserve. At the end of June 2023, however, the industry largely changed to using the similar Secured Overnight Financing Rate (SOFR).
Your lender would then apply an add-on-percentage to SOFR (or a different benchmark) to come up with your rate, usually in one- or three-month increments.
Knowing this, it’s easy to see why taking out a variable-rate loan can be risky in a tumultuous market, or if you plan on paying off the loan over the course of several decades. If inflation goes up, so does your interest rate.
Variable vs fixed: Which is better?
Your decision on what type of interest rate to seek on a private student loan will come down to whether you feel comfortable with some risk.
A variable rate will likely fall when interest rates are going down, but will generally become more expensive loan as rates rise. Lenders pay close attention to the interest rate environment, so you can bet that their variable rates are adjusted to keep the loans profitable for them.
With a fixed rate, on the other hand, you know what you’re getting. The main concern here might be if rates fall drastically and you end up paying above-market interest on your loan. Even then, however, you could refinance with another lender if you have good credit — see more details below.
Frequently asked questions
That depends on the type of loan you’re taking out. Private student loans can be variable or fixed, but federal student loans are always fixed.
In a low-interest or low-inflation market, variable-rate student loans usually offer lower starting interest rates than those of fixed-rate student loans. In a high-interest or inflationary environment, you’ll often find that a variable-rate loan has a similar (or even higher) interest rate than a fixed-interest loan.
However, if inflation decreases over time, those with a variable-rate loan will enjoy a lower interest rate than someone with a fixed rate. Variable-rate loans can be a bit of a gamble, since you never know what the market conditions will be in the future.
It depends. You can refinance a private student loan with a variable interest rate to a private student loan to a fixed interest rate. You can also refinance a federal student loan to a private one, but this could prove to be a refinancing mistake to avoid, since you’d lose the hardship benefits that come with federal student loans.
What you can’t do is refinance a private student loan with a variable rate to a federal student loan. In fact, you can never refinance a private student loan to a federal, no matter what type of interest plan you have.