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Fixed or Variable: Which Student Loan Rates Do You Want?

August 23, 2017

College graduates have essentially proven themselves to be a smart bunch. You made a good decision for your future, did the hard work and now you have a degree to show for it. Sure, you had to take on some student loan debt in the process, but as the saying goes, you have to spend money to make money, and investing in yourself is always smart.

Now you’ve nabbed a good job and you’re on your way to becoming the best version of yourself, complete with the career of your dreams. You’re grabbing life by the horns and adulting like a pro, building your resume, networking and paying down your student loans as you go. You didn’t get to this position in life by making poor decisions, so it’s only natural that you’re interested in refinancing your student loans as a way to save money, get ahead and knock out that five-year plan in just three.

Before you pull the trigger, however, you might want to stay your hand and take a moment to consider whether fixed- or variable-rate loans are more likely to deliver the best advantages. It’s tempting to follow the knee-jerk reaction that fixed-rate loans are safer (because quantities are known), but this might not actually serve your best interest, so to speak. Here’s what you need to know about fixed versus variable rates before you refinance your student loans.

Fixed Rate Pros and Cons

The difference between fixed- and variable-rate loans is pretty rudimentary. The former is characterized by a locked-in interest rate that remains the same throughout the life of the loan, regardless of market fluctuations. The latter starts out at an agreed-upon rate, which may change as the market changes, fluctuating in response to market interest rates and altering your payments in the process.

Is one better than another? That depends. Let’s look at the pros and cons of fixed rates first. The major benefit is that you always know what your payment is going to be – it’s predictable. A fixed rate is static, so your interest today will be the same as the day you pay off your loan. This can help you to plan your monthly and annual budget and bring you peace of mind.

Of course, peace of mind can cost you. The biggest downside to fixed-rate loans is that they are almost sure to have higher interest rates than their variable counterparts, at least initially, and this has to do with risks. Banks are betting that rate variances will work out in their favor in the long run, showing greater returns (and ultimately costing you more). Avoiding such risk will mean paying more up front to lock in a fixed rate. However, if your current plan involves a long term for repayment, say 20 years, this is probably your best option.

Variable Rate Pros and Cons

As you’ve probably guessed, the major downside to choosing a variable-rate loan is the potential for interest rates to increase and bump up your monthly payments. The upside is that rates could also remain low or even go down, saving you what you might have been stuck paying with a fixed-rate loan.

In other words, it’s a bit of a gamble. It can be a calculated risk, though. At the moment, the market is on the rise, with the prime increasing to 4.25% in June. Will it go down again? Eventually, but probably not before further increases, since the economy is currently on an upswing. If you’re on track to pay off debt early and the market is trending down, variable rates make sense. In the current economic climate, it’s probably better to proceed with caution.

Which is Right for You?

Choosing the right loan for you depends not only on current economic conditions, but also on your particular circumstances. Some personal considerations could include:

  • Current loans
  • Income
  • Debt-to-income ratio
  • Your personality

If you have yet to refinance or consolidate, you’re probably juggling at least a few student loan payments, some of which may be fixed while others are variable. Since July of 2006, all federal student loans feature fixed interest rates, although the set rates have fluctuated from year to year and from one loan type to another, so that different loans have different rates. You might also have some private student loans with either fixed or variable rates.

There’s a lot to be said for consolidating all of your loans to lock in a single, fixed rate, and when you do so with a favorable lender like Education Loan Finance, you can consolidate all your loans (whereas only federal loans can be consolidated into a Direct Consolidation Loan through the government, and there may be restrictions based on loan type and eligibility). On the other hand, you might prefer a variable rate that is lower than fixed options, especially if your income allows you to make larger payments, pay down debt before rates go up, and take advantage of less accruing interest in the meantime. A low debt-to-income ratio could net you even better rates and improve your odds of speedy repayment.

Naturally, your personality also plays a role. Are you a risk-taker or do you hyperventilate at the thought that loan rates, while low now, could increase next month or next year? If you play it safe, will you be kicking yourself over the money you could have saved with variable rates? In Hamlet, Polonius famously uttered the oft-quoted line, “To thine own self be true.” You have to know yourself if you want to make a decision about refinancing that you can reasonably live with.

Whether you end up choosing fixed rates or variable when you refinance, you need to understand both options so you can make an informed decision that confers the greatest benefits. To a degree, it might depend on the offers you receive, but assuming both options are on the table, you’ll want to consider the terms, research the forecast for interest rates, and perform a realistic appraisal of yourself and what you can manage. Then you can weigh all the pros and cons to select the terms that will have you refinancing your student loans like a boss.

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Young woman reading student loan news
2020-05-22
This Week in Student Loans: May 22

Please note: Education Loan Finance does not endorse or take positions on any political matters that are mentioned. Our weekly summary is for informational purposes only and is solely intended to bring relevant news to our readers.

  This week in student loans:
what you need to know about student loan debt relief

What you need to know about debt relief on student loans

As there have obviously been some major changes in the world of student loans recent, the Washington Post covers many frequently asked questions in this article, from the details of the Heroes Act to how the new changes affect a variety of borrowers.  

Source: Washington Post

 

college's loan default rate

Why a college's student loan default rate matters

With the extended deadline for "decision day" approaching, this US News & World Report brings to light how a college's default rate, or the average portion of students who default on their student loans, should matter to students who are choosing where to attend college.  

Source: US News & World Report

 

Donors provide students with debt relief

Anonymous donors paid off $8 million in student loans for first-generation grads

According to CBS News, a group of anonymous donors contributed a total of $8 million to pay off college loans for up to 400 first-generation college students who have overcome financial hardships, from homelessness to poverty. The donors are longtime supporters of Students Rising Above (SRA), a Bay Area nonprofit.  

Source: CBS News

 

Student Loan Debt Relief

More relief could be coming for student loan borrowers

While the CARES Act has already suspended federal student loan payments through September 30, 2020, a new bill known as the HEROES Act, passed by the House last Friday, would include additional relief for borrowers with both federal and private student loans, including potentially suspending federal student loans another year through September 30, 2021.  

Source: CNBC

    That wraps things up for this week! Follow us on FacebookInstagramTwitter, or LinkedIn for more news about student loans, refinancing, and achieving financial freedom.  
 

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.

Clock representing the time it takes to pay off student loans.
2020-05-21
How Long Does it Take to Pay Off Student Loans?

If you have student loan debt, do you know what your loan term is and how long your payments are expected to last? On average, college graduates think they will have their loans paid off in six years. Is this a realistic expectation to pay off loans that quickly? Here we will show you how long it actually takes people to pay off student loans. And if you are looking for ways to pay them off faster, we have some tips for that as well.     

Loan Terms

The loan term is how long it will take you to repay the loan if you only pay the amount owed each month and do not make any additional payments. For federal student loans, the average loan term on the standard repayment plan is 10 years. However, there are options to increase the loan term up to 30 years, depending on the amount of money owed and what payment plan you choose. Increasing the loan term will cause you to pay more interest over the lifetime of the loan, but may require a smaller payment compared to the standard repayment plan.    

Average Time to Repay Undergraduate Loans

Although the standard loan term is ten years, many people take much longer than that to repay student loans. The average time it takes to repay student loans depends on what degree you obtained, mainly because of the amount of loans taken out. However, it also depends on the income you are earning. If you work in a job that is in your degree field, you may be earning the average income in the sector and be able to pay off your loans in the average amount of time. However, if you are not working in your degree field and your salary is lower than the average salary for that degree, it may take more time to pay off.
  • The average amount of student loan debt for a person who finished some college, but did not obtain a degree is $10,000. The average amount of time it takes to repay the loans is just over 17 years.  
  • For a person who obtained an Associate degree, the average amount of debt is $19,600 and on average it will take just over 18 years to pay off the loans. 
  • For college graduates that earned a Bachelor’s degree they will repay an average of $29,900 in student loan debt and will take approximately 19 years and 7 months to repay the loans. 
 

Average Time to Repay Graduate Loans

Earning a graduate degree takes more time and, of course, more money. The average amount of student loan debt for graduate degrees is $66,000. However, certain degrees require much more than the average amount of loans and, therefore, more time to pay. 
  • Medical school - The average student loan debt for medical graduates in 2019 was $223,700. Because of the high salaries doctors are able to earn after residency it can take an average of 13 years to repay the student loans. 
  • MBA - If you earn an MBA the average student loan debt is $52,600 and can take 22 years and 10 months to repay.
  • Law degree - Obtaining a J.D. may cause you to rack up the average of $134,600 in student loans and it will take an average of 18 years to repay.  
  • Dentist - To become a dentist it will cost an average of $285,184 in student loans and may take 20-25 years to pay off the debt.  
  • Veterinarians - Attending veterinary school can cost an average of $183,014 in student loans. It may take veterinarians longer to repay their student loans than traditional medical colleagues because their average income is much lower at $93,830. It can take 20-25 years to repay the loans. 
 

How to Pay Student Loans Off Early

If seeing these averages makes you panic, don’t worry! Use them as motivation to pay your loans off faster. Here are some ways to accomplish that:   

Student Loan Refinancing 

Refinancing student loans is extremely advantageous for many borrowers because it can save you money on monthly payments and in interest over the life of the loan. Refinancing can also be beneficial to shorten the length of time it takes to pay off your loans and save even more in interest costs. This can be done by obtaining a new loan with a shorter term than your current remaining loan length. Although refinancing to a shorter term length will increase your monthly payment, if you are able to afford the new payment it can be a great financial move for your future. You will be paying your loans off sooner and saving more in interest.     For example:  If you have $30,000 in student loans with a standard 10 year repayment plan and 7% interest rate, your payment would be $348 per month. If you refinance to a 7 year loan and qualify for a 6.48% interest rate, your payment would only increase by $62.00 per month and your loans would be paid off 3 years earlier. You would also save $4,403 in interest!   If you did not want to increase your monthly payment you could still utilize the benefits of refinancing by keeping the same loan term and qualifying for a lower interest rate than your current rate. With the same example as above, if you refinance to a 10 year term loan with a lower interest rate it would still save you $573.00 in interest. Qualifying for an even lower interest rate could save you up to $5,590 in interest.     To see your potential savings, use our student loan refinancing calculator.*   

Make Extra Payments 

No matter what payment plan you have for your student loans, making extra payments can be a beneficial way to shorten the amount of time it takes to pay off your loans, including saving you in interest costs.    

Conclusion

Tackling student loan debt may seem daunting at times, but payments don’t last forever. If it’s your goal to pay your loans off as quickly as possible, hopefully using some of these tips will help you reach that goal. Knowing the average time it takes to pay off loans will allow you to set realistic expectations for your financial goals.   
  *Subject to credit approval. Terms and conditions apply.   Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.
Chart of rates over time
2020-05-18
Current LIBOR Rate Update: May 2020

This blog provides the most current LIBOR rate data as of May 7, 2020, along with a brief overview of the meaning of LIBOR and how it applies to variable-rate student loans. For more information on how LIBOR affects variable rate loans, read our blog, LIBOR: What It Means for Student Loans.

 

What is LIBOR?

The London Interbank Offered Rate (LIBOR) is a money market interest rate that is considered to be the standard in the interbank Eurodollar market. In short, it is the rate at which international banks are willing to offer Eurodollar deposits to one another. Many variable rate loans and lines of credit, such as mortgages, credit cards, and student loans, base their interest rates on the LIBOR rate.

 

How LIBOR Affects Variable Rate Student Loans

If you have variable-rate student loans, changes to the LIBOR impact the interest rate you’ll pay on the loan throughout your repayment. Private student loans, including refinanced student loans, have interest rates that are tied to an index, such as LIBOR. But that’s not the rate you’ll pay. The lender also adds a margin that is based on your credit – the better your credit, the lower the margin. By adding the LIBOR rate to the margin along with any other fees or charges that may be included, you can determine your annual percentage rate (APR), which is the full cost a lender charges you per year for funds expressed as a percentage. Your APR is the actual amount you pay.

 

LIBOR Maturities

There are seven different maturities for LIBOR, including overnight, one week, one month, two months, three months, six months, and twelve months. The most commonly quoted rate is the three-month U.S. dollar rate. Some student loan companies, including ELFI, adjust their interest rates every quarter based on the three-month LIBOR rate.

 

Current 1 Month LIBOR Rate - May 2020

As of May 7, 2020, the 1 month LIBOR rate is 0.20%. If the lender sets their margin at 3%, your new rate would be 3.20% (0.20% + 3.00%=3.20%). The chart below displays fluctuations in the 1 month LIBOR rate over time.

 

(Source: macrotrends.net)

   

Current 3 Month LIBOR Rate - May 2020

As of May 7, 2020, the 3 month LIBOR rate is 0.43%. If the lender sets their margin at 3%, your new rate would be 3.43% (0.43% + 3.00%=3.43%). The chart below displays fluctuations in the 3 month LIBOR rate over time.

  Chart of 3 Month LIBOR for May 2020 (Source: macrotrends.net)  

Current 6 Month LIBOR Rate - May 2020

As of May 7, 2020, the 6 month LIBOR rate is 0.69%. If the lender sets their margin at 3%, your new rate would be 3.69% (0.69% + 3.00%=3.69%). The chart below displays fluctuations in the 6 month LIBOR rate over time.

  Chart of 6 Month LIBOR May 2020 (Source: macrotrends.net)  

Current 1 Year LIBOR Rate - May 2020

As of May 7, 2020, the 1 year LIBOR rate is 0.78%. If the lender sets their margin at 3%, your new rate would be 3.78% (0.78% + 3.00%=3.78%). The chart below displays fluctuations in the 1 year LIBOR rate over time.

  Chart of 1 Year LIBOR May 2020 (Source: macrotrends.net)  

Understanding LIBOR

If you are planning to refinance your student loans or take out a personal loan or line of credit, understanding how the LIBOR rate works can help you choose between a fixed or variable-rate loan. Keep in mind that ELFI has some of the lowest student loan refinancing rates available, and you can prequalify in minutes without affecting your credit score.* Keep up with the ELFI blog for monthly updates on the current 1 month, 3 month, 6 month, and 1 year LIBOR rate data.

 
 

*Subject to credit approval. Terms and conditions apply.

 

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.