When student loan borrowers are looking to refinance student loans, they typically come across two options: a fixed rate student loan and a variable rate student loan. Variable rate student loans are the most common when refinancing or consolidating your loans, but fixed rate loans are available.

However, variable rate loans can sound scary up front, even though their interest rates are typically lower than a fixed rate loan.

Let’s break down the differences between variable rate student loans and fixed rate student loans, and when each makes sense for a borrower.


Fixed Rate Student Loan Refinancing

A fixed rate student loan is one that maintains the same interest rate on the loan for the entire life of the loan. Every lender is different, but based on excellent credit, the typical fixed rate student loan with no cosigner will charge an interest rate at 7%.

For our example, we are going to assume a 10-year repayment plan at 7% interest on a $40,000 student loan.  We’re also going to assume that the loan has no fees beyond the interest rate. Some loans do charge origination fees, so make sure you do your due diligence.

Here’s what your loan repayment would look like:

Original Loan Balance$40,000
Monthly Payment$464.43
Total Interest Paid$15,732.28
Total Payments Made$55,732.28


As you can see, with a fixed rate loan, you would pay $15,732.28 in interest over the life of the loan. However, the benefit is that your payment would stay the same for the entire duration of the loan.

Variable Rate Student Loan Refinancing

A variable rate student is a loan where the interest rate can adjust each month based on the current interest rates available. Right now, interest rates are near all time historic lows, which is a benefit to borrowers.

However, since interest rates are low today, they may go up in the future. That is one of the key risks with variable rate loans – your payment may rise (even substantially) in the future.

Many loans use the 1 Month LIBOR average to calculate their interest rate. A typical interest rate will be LIBOR + APR. If you have an excellent credit score, that APR could be as low as 2.76% right now, or it could be as high as 8% or more.

For this scenario, we’re going to use the same 10-year repayment plan on a $40,000 student loan, also using excellent credit with an APR added to the LIBOR of 2.76%.

However, we’re going to look at three possible scenarios:

  • Interest rates remain steady near their current levels for the next 10 years
  • Interest rates rise back to their historical average over the life of the loan
  • Interest rates rise much higher than their historical average and reach previous highs (this would be a worse case scenario for variable rate student loan borrowers)

Scenario #1:

Loan Amount$40,000
Initial Interest Rate2.76%
Initial Payment$381.83
Ending Interest Rate2.76%
Ending Payment$381.83
Total Interest Paid$5,819.24
Total Payments Made$45,819.24


In this scenario, you can see that the monthly payments, interest paid, and total loan payments are all significantly lower than the fixed rate loan. You would save $82.60 per month initially. Even if interest rates rise slightly during the 10 year period of repayment, your savings would be significantly more with this scenario.

Scenario #2

Loan Amount$40,000
Initial Interest Rate2.76%
Initial Payment$381.83
Ending Interest Rate6.81%
Ending Payment$421.35
Total Interest Paid$8,776.57
Total Payments Made$48,776.52


In this scenario, the interest rates rose from 2.76% to 6.81% over the life of the loan. As such, your payments would have risen $39.52 per month during that time. However, because of your lower payments up front, even with the higher payments at the end of the loan, you would have still paid less than using a fixed rate loan.

Scenario #3

Loan Amount$40,000
Initial Interest Rate2.76%
Initial Payment$381.83
Ending Interest Rate12.84%
Ending Payment$485.65
Total Interest Paid$13,491.43
Total Payments Made$53,491.43


This scenario uses a peak LIBOR rate of 10.06%, which occurred during March of 1989. It has never been that high since, but it is always wise to look at worse case scenarios.

Even in this scenario, your ending monthly payment and total interest paid would be lower than the fixed rate plan above – even though your ending interest rate is much higher. You would pay $2,240.85 less over the life of this loan than the fixed rate loan.

What Makes Sense For You

However, it’s always important to remember to pick a loan that is right for you. All of our scenarios above were based on excellent credit. If you have less than excellent credit, your variable rate loan will initially be higher than our scenarios, which could make the fixed rate loan more attractive.

Also, remember that interest rates could rise higher than the past highs, and they could do so much faster than we estimated in our scenario. Once again, that would make the variable rate loan less attractive than the fixed rate loan.

If you’re comfortable assuming a little more risk in your payment amount, a variable rate loan does have the potential to offer savings.