There are many reasons to consider refinancing your student loans. Perhaps interest rates were high when you took out your loans, and you’re ready to take advantage of lower rates. Or maybe your credit score has improved since you took out your student loans, and you’re curious to see how low of an interest rate you could qualify for now.
Regardless of your reasons to refinance your student loans, there are some considerations to make before you begin the process. Through understanding the differences between fixed and variable interest rates, as well as their potential pros and cons, you can determine which option will be best for you when refinancing. From there, you can move forward with greater confidence and ultimately maximize your savings.
Understanding Fixed vs. Variable Interest Rates
Many types of loans come with the option of a fixed or variable interest rate. With a fixed rate, your interest rate will remain the same for the entire life of the loan; it will not be subject to fluctuations in the market, so you’ll never have to worry about it increasing. A variable interest rate, on the other hand, can increase or decrease based on current market conditions.
Which type of student loan(s) do you currently have? If you took out Federal loans to pay for school, your interest rate is likely to be fixed. Private student loans, on the other hand, are offered with both fixed and variable rates, so it’s important to know which type of rate you currently have. If you took out different loans to pay for your education (such as a new loan each semester), you may have a combination of both fixed and variable rates.
Advantages and Disadvantages
There are inherent advantages and disadvantages of both fixed and variable interest rates on a student loan. With a fixed interest rate, for example, you’ll enjoy the peace of mind knowing that your rate will never increase. As a result, you can know exactly how much you’ll need to pay monthly until your loan is paid off.
However, a fixed interest rate also means that if the market improves and student loan interest rates drop across-the-board, you won’t get to reap the benefits of lower payments unless you refinance.
With a variable rate student loan, there isn’t as much predictability. Your rates could increase with changes in the market, which could lead to higher monthly payments. On the flip side, a variable rate loan could also save you money if interest rates decrease. You also won’t have to go through the process of refinancing to enjoy those lower rates.
Which is Right For You?
When deciding which type of student loan interest rate is right for you while refinancing, there are some important considerations to keep in mind. Start by thinking about how much predictability and a stable monthly payment matter to you. If you’ll be on a fixed income or if you simply enjoy the peace of mind in knowing exactly how much your student loan payments will cost you each month, then you may want to opt for a student loan with a fixed interest rate. The same applies if you’re planning on repaying your student loans over a longer period of time (10-20 years). This will allow you to lock in your interest rate.
Generally, a variable rate loan will be the better option for those who plan to pay off their student loans in a shorter timeframe. This is because loans with shorter repayment terms tend to come with lower interest rates overall. Of course, you’ll still need to be prepared for the possibility that rates could rise. Your monthly payment could increase along with them.
If you’re leaning towards variable rate loans, it’s worth checking with lenders to see if they offer a rate cap. This limits how high your interest rate can rise regardless of market conditions and can provide some added peace of mind.
Resources for Refinancing Your Student Loans
As you can see, there’s a lot to consider when you’re deciding between a fixed or variable rate loan. Ultimately, you’ll want to choose a refinance option that provides you with a comfortable monthly payment and that allows you to pay off your loan in the desired timeframe.
A student loan repayment calculator can be a valuable resource for determining exactly what your monthly payment would be for a particular loan based on loan type, repayment period, and interest rate. If you use one of these tools and are taking out a variable rate loan, however, just be aware that your monthly payment can still fluctuate based on market changes. Still, this can be a great tool for comparing refinance options and figuring out which has the potential to save you the most money.
Refinancing your student loans can be an excellent way to save money and potentially even pay your loans off sooner. Just be sure to carefully consider the advantages and drawbacks of fixed vs. variable rate loans and compare your options from various lenders before you make a decision.