When faced with the need to find funds to close the gap between college costs and available financial aid, many students and their families turn to private student loans. One of the first choices you need to make about private student loans may be choosing between a variable and a fixed interest rate.
While federal student loans only offer fixed rates, you have the option to choose a private student loan with a variable interest rate or a fixed rate.
Know the difference
A fixed rate stays the same throughout the life of the loan. If you follow the repayment schedule, you will have the same monthly payment until the loan is completely repaid.
A variable interest rate, though, goes up and down based on current market conditions. Payments for variable-rate student loans might change frequently. The variable rates for ISL Education Lending's private student loans, for example, are evaluated quarterly and may change up to four times a year.
Which is better? The answer: It depends.
Variable rates are typically lower than fixed rates at the time of application. A fixed rate is generally higher to accommodate potential increases due to future market conditions. A variable rate can start off lower because it reflects market conditions.
Variable rates are set by a calculation using a base rate (such as the Secured Overnight Financing Rate or Prime) plus a margin of an added percentage. As the base rate rises and falls, your student loan payments will also vary. If the base rate increases significantly, payments could increase to an unaffordable level. If the base rate stays low over the life of the loan, payments may not increase much.
In the end, the choice between a fixed and variable interest rate is a personal choice based mainly on your financial goals and your comfort level for risk.
What should you consider when choosing between variable- and fixed-rate loans? The answers to the questions below can help you make the decision that's best for you.
Do you believe interest rates will increase significantly over time?
You may want to do some research to make a prediction on where you think interest rates will go over the next 15 years — a common repayment time if you include your time in school. Historical trends don't necessarily indicate what will happen in the future, though, so this is something that cannot be known for certain. If you imagine interest rates will increase beyond the offered fixed rate (and stay there), you may want a fixed rate.
Do you imagine being able to pay off the loan faster than the repayment schedule?
You may expect to make larger or more frequent payments on your loan than the repayment schedule takes into account. This could be the result of a high-paying job or an upcoming monetary gift or other windfall. If you think you will be able to repay a large share of your loan before rates have a chance to rise significantly, a variable rate may work for you.
Do you like consistency so you can more easily create a budget?
If you are not comfortable with financial risk, a fixed rate might be for you — you won't get a benefit when interest rates drop, but you also won't have to make higher payments when they increase. And you will know exactly what your payment will be every month of your repayment term.
Do you want to start repaying your loan immediately?
If you plan to begin making principal and interest payments immediately, then a variable rate may be a good option for you as the monthly payments will generally start off lower than a fixed-rate loan.
As your situation and market conditions change, you may opt for either a fixed rate or a variable rate on your next private student loan. ISL Education Lending offers lower-cost private student loans with both types of interest rates as well as multiple payment options.
ISL Education Lending is able to offer lower-rate student and family loans because it is self-funded and self-capitalized. As a nonprofit dedicated to helping students and families succeed in education after high school, ISL Education Lending can help you plan smart and pay less for college.
Learn more now about the loans ISL Education Lending offers.