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Variable vs Fixed Rate Student Loan: Make the Right Choice!

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If you want a student loan for studying abroad, you will be presented with the option between a variable vs. fixed rate student loan. While the lowest rate of interest available is the most essential for all, it still matters whether the interest rate will adjust down the line. Discussing variable vs. fixed rate student loan, while variable interest rates fluctuate, fixed interest rates don’t change. The best decision depends on the kind of borrower you are, your potential earnings, and whether you can afford to repay fairly. For student loans, here’s the overview of variables and set interest rates.  

Variable V/S Fixed Rate Student Loan Overview
Variable vs Fixed RatesChoose between variable and fixed rates based on risk tolerance, potential earnings, and repayment ability. Variable rates fluctuate, while fixed rates offer stability.
Variable Interest RateFluctuates based on market conditions, with potential for both increased and decreased rates. Initial lower rates may rise, impacting monthly payments.
When to Pick Variable RatesSuitable for those with high credit scores, planning quick debt payoff, and comfortable with payment fluctuations. Offers potential savings if interest rates decrease.
Fixed Interest RateRemains constant throughout the loan term, providing stability and predictability. Monthly payments stay the same, unaffected by market fluctuations.
When to Choose Fixed RatesIdeal for borrowers with limited budget flexibility, low-income earners, or those seeking consistency in monthly payments. Protects against potential interest rate increases.

What is a Variable Interest Rate?

If you are confused between fixed rate or variable rate, let’s understand the variable rates first. A variable interest rate, unlike a fixed interest rate, has the potential to fluctuate throughout the repayment period, either increasing or decreasing. It consists of two components: a fixed margin and a variable interest rate index.

Example Of Variable Interest Rate

In contrast, a variable interest rate mortgage may start with an initial rate of 3%, but it is subject to change based on market conditions. If the benchmark interest rate increases, your interest rate may also increase, resulting in higher monthly payments. Conversely, if the benchmark rate decreases, your interest rate may decrease, leading to lower monthly payments.

When To Pick A Loan With Variable Rates?

Variable interest rates are rates that, like the prime rate that fluctuates depending on an index rate. The interest rate changes, implying that, depending on a modified interest rate, your monthly payments could increase or fall. While you may start paying a lower interest rate than you would with a fixed-interest loan, there is a risk that later on you may get a higher interest rate. Along with fixed-term options, private student loans appear to offer flexible interest rates.

Below are some of the advantages of a student loan with variable rates:

  • Variable interest rates are sometimes much lower, especially upon sign-up than fixed interest rates.
  • You can pay less for your debt if interest rates decline. This is particularly important if, until interest rates increase again, you can pay off your debt fast.

Factors To Consider For Variable Student Loan

Although fixed rate student loans have advantages, there are several factors that need to be weighed. For variable-rate loans, things to look out for include:

  • Since variable interest rates are linked to market conditions, you could have a higher interest rate on the same form of loan than for a fixed interest rate.
  • From month to month, the higher your interest rate, the higher your bill, and your monthly balance will adjust.

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Who is best suited for a variable-rate student loan?

For borrowers with the best credit who are eligible for the lowest possible interest rate, flexible interest rates are fine. For borrowers who plan to pay off their debt as quickly as possible, certain kinds of interest rates are fantastic. If you see an incredibly low rate, you might pay off the loan until rates have a chance to increase, or you might continue to make higher payments more frequently.

Variable-interest-rate loans will help consumers with high-paying occupations and others who don’t mind fluctuating payments. You might end up saving a ton of money over the term of the loan if you can handle the wiggle room inside your budget.

What Is A Fixed Interest Rate?

A fixed interest rate remains constant throughout the duration of the loan, as the name suggests. The interest rate assigned to your loan at the time of borrowing will remain unchanged for the entirety of the repayment period.

Example of Fixed Interest Rate

Let’s say you take out a fixed-rate mortgage with an interest rate of 4%. This means that regardless of any fluctuations in the market, your interest rate will remain at 4% for the entire loan term. Whether interest rates rise or fall, your monthly payments will stay the same, providing you with stability and predictability.

When Can A Fixed Rate Loan Be Chosen?

Fixed interest rates are rates that remain the same over the repayment period on your student loan. The only way your interest rate would change is if your student loans are combined or refinanced.

Each month, fixed interest rates offer you the same payout, which ensures your spending stays consistent. All federal student loans have set interest rates, and with private lenders, fixed rates are usually an option.

Here are some of the advantages of a student loan at fixed rates:

  • When it comes to fixed interest rates, there are no surprises. Your interest rate never increases, so even if interest rates on student loans escalate due to market dynamics, you can always profit from the rate you first take out.
  • Since student loans are usually repaid over 10 or 15 years, if you encounter income problems, you would be allowed to hold the monthly cost the same, which is particularly beneficial. 

Factors To Consider For Fixed Rate Student Loans

While choosing a fixed rate student loan, you should consider a few things that can have a great impact on your further repayments. We have listed below some factors to consider: 

  • The advertised cost for fixed rates is usually greater than that for variable rates, provided that fixed interest never varies.
  • People with flexible rates can gain a large sum on their monthly costs in settings where interest rates decline, but people with fixed interest rates will still be bound to their higher rates.

Who is best suited for a fixed-rate student loan?

For borrowers who don’t have a lot of wiggle room to account for an adjustable interest rate, fixed interest rates are perfect. It is perfect for low-income earners who can only give student loan repayments a certain sum of money every month and can not afford to spend more in the event that their interest rate and minimum cost go up.

What are LIBOR and SOFR?

LIBOR (London Interbank Offered Rate) and SOFR (Secured Overnight Financing Rate) are both interest rate benchmarks, but they serve different purposes and are associated with distinct markets. Here’s an overview of each:

LIBOR (London Interbank Offered Rate):

LIBOR is an interest rate benchmark that was historically used as a reference rate for a wide range of financial instruments, including loans, derivatives, and variable-rate debt securities.

It represents the average interest rate at which major banks in London are willing to lend to each other in the interbank market. LIBOR rates are calculated for various currencies and different time periods (e.g., overnight, one week, one month, three months, etc.).

LIBOR has been a widely used benchmark for decades, but its credibility came into question following a series of manipulation scandals. As a result, global financial regulators decided to phase out LIBOR and transition to more reliable benchmarks.

SOFR (Secured Overnight Financing Rate):

SOFR is a benchmark interest rate introduced as a replacement for LIBOR. It is specifically designed to reflect the cost of borrowing cash overnight, collateralised by U.S. Treasury securities.

SOFR is based on actual transactions in the U.S. Treasury repurchase (repo) market, which involves borrowing and lending cash overnight with U.S. Treasuries as collateral. This makes SOFR a more transparent and transaction-based benchmark compared to LIBOR.

SOFR is intended to be a more reliable and robust benchmark for various financial products, including derivatives, business loans, and mortgages. It is considered a risk-free rate because it is based on secured transactions.

Transition from LIBOR to SOFR:

Due to the shortcomings of LIBOR and the need for a more reliable benchmark, financial regulators, including the Federal Reserve in the United States, have been actively promoting the transition from LIBOR to alternative rates like SOFR.

Many financial contracts and instruments that previously referenced LIBOR are being transitioned to reference SOFR. This transition is a global effort involving coordination among financial institutions, regulators, and market participants.

The transition away from LIBOR is a significant shift in the financial markets, and it has implications for various industries and financial products. It aims to enhance the reliability and integrity of benchmark rates used in financial transactions.

How rate indexes affect student loans

Interest rate indexes can play a significant role in determining the interest rates on student loans, particularly for variable-rate loans. Here’s how rate indexes can affect student loans:

  • Variable Interest Rates: Many student loans, especially federal loans, offer both fixed and variable interest rate options. Variable interest rates are often tied to a specific financial index. Commonly used indexes include the London Interbank Offered Rate (LIBOR) or the U.S. Treasury Bill rate. These indexes are benchmarks that reflect general market interest rates.
  • Adjustments and Changes: When you have a variable-rate student loan, your interest rate may change periodically based on movements in the chosen index. This means that your monthly payments can go up or down, depending on how the index changes.
  • Economic Factors: Rate indexes are influenced by broader economic conditions. Economic factors such as inflation, central bank policies, and market demand for credit can impact these indexes. As economic conditions change, the rate index may fluctuate, leading to changes in the interest rates on variable-rate student loans.
  • Federal Student Loans: For federal student loans, interest rates are typically tied to specific indexes. The interest rates on federal student loans are set by Congress, and they can vary depending on the type of loan and when the loan is disbursed.
  • Private Student Loans: Private lenders may use various rate indexes to set interest rates on student loans. The choice of index can vary among lenders, and borrowers should carefully review the terms of their loan agreements to understand how the interest rate is determined.
  • Interest Rate Caps: Some student loans, both federal and private, may have interest rate caps. These caps limit how much the interest rate can increase during a specific period, providing some protection for borrowers against excessive rate hikes.
  • Borrower Considerations: When choosing between fixed and variable interest rates, borrowers need to consider their risk tolerance and the current economic environment. Fixed rates offer stability, while variable rates can initially be lower but come with the risk of future increases. Federal student loans may use the 10-year Treasury note as a benchmark, with an additional fixed percentage added to determine the interest rate.

Which Rate Is Better For Student Loan Refinancing?

If you are thinking that variable interest rate is better than fixed interest rate then let us tell you, student loan refinance has the potential to accelerate the repayment of student loans by reducing the interest rate. If the borrower intends to aggressively pay off the refinanced loan, selecting a variable rate may optimise potential savings in case interest rates decrease. However, it is important to perform the necessary calculations beforehand. Typically, the difference between the lowest fixed and variable rates offered by refinance lenders is not significant. This implies that opting for a fixed rate may not result in significantly higher costs, while providing protection in case of changes in repayment plans. If the borrower chooses a variable rate and interest rates start to rise, there is minimal risk associated with attempting to refinance again.


Federal student loans only have set interest rates, plus a number of conditions for repayment. Private student loans appear to give both set and flexible interest rates, allowing you the option of taking advantage of the one that fits your finances and repayment schedule better.  A fixed interest rate could be a good match if you like seeing the same set sum per month. A flexible interest rate could fit well if you believe you can pay off your student loans before prices have a chance to increase.

No matter variable or fixed rate student loan, make sure you get quotes from a few lenders for student loans, where UniCreds will help you do that and choose the best deal available. It would help you ensure that the least amount of interest necessary is charged from you.


Q1. What is the difference between a variable and fixed interest rate student loan?

A variable interest rate student loan has an interest rate that fluctuates over time, whereas a fixed interest rate student loan has an interest rate that remains constant during the loan’s term.

Q2. Which type of student loan is best for me?

It is determined by your own financial status and risk tolerance. A variable interest rate loan may be a smart option if you are fine with the risk of interest rates altering. A fixed rate loan, on the other hand, may be a better alternative if you prefer the stability and predictability of a constant interest rate.

Q3. Does the loan term affect the interest rate?

Yes, the loan period does have an effect on the interest rate. In general, the greater the interest rate, the longer the loan duration.

Q4. Are variable rate student loans more expensive in the long run?

Since the interest rate on a variable rate loan can vary, potentially increasing over time, it can be more expensive in the long term. A fixed rate loan, on the other hand, will have a stable interest rate throughout the loan’s term.

Q5. Can I switch from a variable rate student loan to a fixed rate student loan?

It is determined by the loan conditions as well as the lender’s policy. Some lenders will let you refinance your loan to go from a variable to a fixed rate, while others will refuse. Check with your lender to determine whether this is a possibility for you.

Q6. Why are fixed interest rates better than variable interest rate? 

Fixed rates provide predictability and stability in monthly payments, shielding borrowers from interest rate fluctuations.

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How to Convert India’s Grade to US 4.0 GPA Scale

Variable vs Fixed Rate Student Loan: Make the Right Choice!

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