Fixed Rate vs. Variable Rate Student Loan Refinancing

_{Please Note: New variable rate ELFI loans applied for after 7:00 PM EST on January 7, 2022, will use the Prime Rate of Interest appearing in the Money Market section of the Wall Street Journal (WSJ) as the benchmark rate index. Borrowers who have an existing variable rate ELFI loan(s) that use the London Interbank Offered Rate (LIBOR) as the benchmark rate index will continue to have LIBOR as the benchmark rate index on their loans. ELFI will notify borrowers with existing variable rate loans originated prior to 7:00 PM EST on January 7, 2022, of the expected change from LIBOR to an alternative benchmark rate index in the future.}

Updated November 12, 2020

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

Which option is best for refinancing student loans?

When borrowers begin to consider their options for refinancing student loans, one of the most commonly asked questions is whether to choose a fixed or variable rate loan. 

While the details of each loan type are fairly simple, the crux of the decision is centered around what will be right — and best — for you. If you are still undecided, take a look at the following details to help you better understand and choose between a fixed or a variable rate loan.

Fixed Rate Student Loans

A fixed rate student loan has an interest rate that does not change over the life of the loan. This means you will pay the same amount in interest each month for the duration of the loan.

Here are a few benefits of this type of loan:

• You’ll always know your exact monthly payment amount
• It’s easy to plan ahead for future payments
• If interest rates rise, your loan won’t be affected

On the other hand, with a fixed rate, you may also experience a few drawbacks. They include:

• Fixed rate student loans can have slightly higher starting rates than variable rate loans
• Even if student loan interest rates drop, your rate will remain the same

To determine which type of student loan you have, first, consider your lender. All federal student loans have fixed rates, while private student loans may have either fixed or variable rates. 

Based on your financial situation, you may easily be able to determine which type of student loan is right for you. If you’re unsure whether student loan interest rates may rise during your repayment period, a fixed interest rate could be a more reliable choice. Additionally, if you’re on a tight budget and can’t risk higher interest, a fixed rate student loan could be for you.

Variable Rate Student Loans

Variable rate loans, on the other hand, have interest rates that may fluctuate during the term of your loan. These fluctuations are directly linked to changes in common financial indexes, such as the LIBOR index, typically by adding the current index amount to a fixed margin defined by the lender to determine the current rate. 

Compared to fixed rate loans, variable rate loans tend to have lower starting interest rates for the same term, but this can change (and increase) after your loan closes. However, most lending institutions, including Education Loan Finance, put an interest rate cap on variable rate student loans. 

For example, Education Loan Finance caps its variable rates at 9.95 percent on 5, 7, 10, 15, or 20-year variable rate loans. This means that no matter how much the LIBOR rate increases, you will never pay more than 9.95 percent interest if you choose a variable rate refinanced student loan through Education Loan Finance.*

If you’re trying to decide between fixed and variable rate loans, then consider these benefits:

• If student loan interest rates drop, then your monthly payment will decrease
• Variable rate student loans can have slightly lower starting rates than fixed rate student loans

Variable rate loans, however, are less consistent than fixed rate loans, which can make planning ahead more difficult:

• If student loan interest rates rise, your monthly payment and overall interest total will also rise
• It may be more difficult to budget your monthly payments knowing that your interest rate may change

Variable interest rate student loans may be a good choice if you have a bit more flexibility in your budget. That way, you’ll be prepared if interest rates rise, but can also enjoy the lowered payments if rates fall. Additionally, if rates do fall, you may be able to reduce your loan amount more quickly by making more than the minimum monthly payment. Additionally, those with a shorter loan term may be better suited for a variable interest rate loan because of the limited amount of time that the interest rate may fluctuate.

What Is Your Best Option?

Both fixed and variable interest rate loans have pros and cons. By examining your repayment plan and long-term financial goals, you can determine which is right for you.

If you’d like to change your current loan from one type of interest rate to another, then student loan refinancing could be the answer. When you refinance your student loans, you’ll have the option to choose between a fixed or variable interest rate.

Student loan refinancing also offers you the opportunity to earn a lower interest rate if you have a strong credit score and debt-to-income ratio. Additionally, you can shorten or lengthen your student loan repayment term to better fit your financial plan.

If you’re able to lower your interest rate by refinancing, then both fixed and variable rate loans offer different benefits. With a fixed rate loan, you’ll enjoy the same lowered interest rate until the loan is paid off. A variable rate, on the other hand, may fluctuate slightly, and if it goes down, you’ll have your lowest interest rate yet.

If you’re interested in refinancing your student loans with ELFI, our expert Customer Care team would love to speak with you. Contact us or give us a call at 1-844-601-ELFI (3534).

How Does Student Loan Interest Work?