It can be hard to figure out how much you should borrow for college without carrying a calculator around everywhere. With this in mind, the article explains the difference between fixed and variable rate student loans and discusses five differences in rates and repayment terms. If you’re looking for specific information on student loans, it’s helpful to know which kind of loan is right for you!
What are some of the differences between variable and fixed rate student loans?
With fixed-rate student loans, interest rates remain the same for the life of the loan. Variable-rate loans are reviewed periodically and may change depending on how long you have left to repay your loan. Fixed-rate loans can be easier to pay off because you know what your monthly payment will be for a certain amount of time. But variable rates aren’t just about convenience, they’re also cheaper in some cases. For example, if your loan terms are longer than 7 years, then a variable rate probably makes more sense than a fixed rate.
Some of the key differences between variable and fixed rate student loans are that variable rate loans charge higher interest rates, but may offer better terms for a borrower who can make on-time payments. They also usually have lower monthly payments. Fixed rates always charge the same amount of interest, but they may offer additional benefits to borrowers who are likely to be able to stay current with their payments.
What is a variable rate loan, and why wouldn’t I want one?
A variable rate loan is a loan that is based on your income, not a set interest rate. Depending on how well your income fluctuates, you’ll pay more or less in interest. Fixed rate loans are cheaper because they don’t change as often. On fixed rate loans, the borrowers pays the same amount of money per month for an agreed-upon term.
A variable rate student loan is a loan in which the interest rate will change over the life of the loan. This keeps your payments affordable but can increase your total cost of borrowing. Fixed-rate loans are typically lower interest rates and have an established fixed payment that stays the same from start to finish.
Differences in interest rates
The rates for variable rate student loans are based on what the financial markets are dictating, while fixed rate loans are based on a standard annual percentage rate of interest. Fixed rates do not fluctuate over time and provide consistency in payments. However, fixed rates may be higher than variable rates because they have a greater risk associated with them.
The difference in interest rates can be significant. For example, if a student borrows $10,000 at 5%, they will pay $200 per year while they’re in school. They also have to pay taxes on the money. If they borrow the same amount at 10%, they will only pay $175 each year after taxes and fees, resulting in a savings of $75 each year.
Differences in repayment terms
Fixed rate loans are not the only option for students. Some lenders offer variable interest rates, which change based on the interest rate in general. This can range from 2.6% to 3.9%, making fixed rate loans more expensive to students over a certain loan amount. It also means that if the market goes up, so do your repayments, but with variable rates, they go down as well.
Fixed rate loans are generally easier to get because there is a fixed amount of interest you will owe. However, variable rate loans have some advantages: they are usually cheaper in terms of interest, and they typically last longer than fixed rate loans. Some student loan lenders offer a mix of the two and allow students to choose which type they want.
Differences in co-signers
In order to apply for a variable rate student loan, the co-signers must be listed on the application. The co-signer is required to provide their signature to be considered on the loan application. Unlike fixed rate loans, your co-signer could go delinquent on their loan and you will still be able to pay off your loan with interest rates as low as 3%.
Some people might be concerned that they would have to co-sign on a fixed loan. This is not the case. In fact, the application process for fixed rates can actually be more beneficial than variable rates in some ways. One of those differences is that you don’t need a co-signer for a fixed rate loan which allows your family member or friend to save money by not having to help out with the student loans every month if they don’t want to.