Fixed or Variable-Rate Student Loan the Best Option: Which Should You Select?

You’re considering refinancing your student loan — great idea! However, before you can complete the loan, you’ll have to choose whether you choose a fixed-rate or variable-rate loan?

There’s no definitive answer to this question. It is dependent on your budget, the length of your term, and your risk tolerance if rates change.

The most straightforward approach to think about this is variable loans may be more affordable, but your minimum payment may alter over time. Fixed loans usually cost a little more, and your minimum payments won’t be affected.

What is a fixed-rate loan?

A fixed-rate loan is one in which your minimum monthly payment will not alter throughout the loan. You will be able to agree to the loan terms when you sign the contract regardless of whether interest rates rise, but your APR won’t.

One reason that borrowers, particularly those with long-term loans such as fixed-rate loans, offer a type known as “interest rate insurance” is that they cost a bit more; however, the premium safeguards you from price increases later on.

What is a variable-rate mortgage?

A variable-rate could begin less than fixed rates. However, it can fluctuate throughout the loan when its reference rate for the base rate changes. That means that your minimum monthly payment is subject to change when rates change.

Specific borrowers opt for variable rates because they do not wish to pay to cover the “interest rate insurance”–they are making a wager that rates will not increase significantly over the term of their loan. This is the reason why variable rates are generally better for loans with shorter durations.

Another thing regarding variable rates to bear in mind in the forefront: There’s no limit on how much the rate used to determine the reference rate may increase or decrease in one year.

However, every loan has an APR maximum. With IPASS, the variable loan with an initial duration of less than ten years has a lifetime limit of 8.95 for any loan that is longer than ten years, and for up to fifteen years, the limit is 9.95 percent. Any loan term over 15 years is a cap at 11.95 percent, subject to availability in the state.

When the rates change, what happens to my loan payment?

If you’re in the market for a variable-rate private loan, you’re likely to notice an alteration in the APR you pay and the minimum amount due as rates change. 

In this case, for example, if the APR at the time of purchase was 2.60% and the 1-month LIBOR rises by 25 basis points or .25 percent, your next APR would be 2.85 percent.

Do I have the option of switching from a variable-rate to fixed-rate?

It is possible to change your loan to IPASS at no cost. (That’s another way that we’re not like any other lender and will help you meet your requirements.) 

You can switch at least every six months or in any direction. But, the APR of the following loan may be determined by the interest rates in effect and your financial situation at the time you request. This means that the rate you receive could be higher than the one you received initially.