The Difference Between Fixed and Variable Interest Rates

In Paying for College on Jul 13, 2016

Student loans are confusing - repayment plans, forgiveness and deferral can spark anxiety in even the most financially-savvy grads. But one of the most important things to know about is interest rates - fixed vs. variable.

First of all, what are interest rates? Interest rates are percentages of a loan that are charged to the borrower. The borrower pays these fees to his or her lender in exchange for borrowing. This means that unless your interest rates are zero, you'll always pay back more than you borrowed. However, the only way you could possibly get a zero percent interest rate is if family members loaned you money for school with an agreement no interest would be paid; both private student loans and federal Stafford Loans will have higher interest rates than zero.

If your loan has a fixed interest rate, you'll pay that same rate over the life of your loan. Grads with a 3.76 percent interest rate, for example, will pay that 3.76 percent for the entire time they're repaying the loan. Federal student loans will have fixed interest rates.

Variable interest rates are sometimes offered by private lenders. What makes them different from fixed interest rates is that they can change over time. With a variable interest rate, you may start off with a 2.76 percent interest rate and have that rate climb to 6.81 percent a few months or years later.

Which One is Best?
That depends. This won't be a concern if you're only taking out Federal Stafford Loans, as these all have fixed interest rates.    

Fixed interest rates may be more appealing if you like stability and knowing exactly what your monthly payment will be throughout the life of your loan. Variable rates are often lower and can save you money, but they can change at any time so your monthly payments are less predictable.

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