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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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2020-03-25
Current LIBOR Rate Update: March 2020

This blog provides the most current LIBOR rate data as of March 17, 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 - January 2020

As of Monday, March 17, 2020, the 1 month LIBOR rate is 0.75%. If the lender sets their margin at 3%, your new rate would be 3.75% (0.75% + 3.00%=3.75%). The chart below displays fluctuations in the 1 month LIBOR rate over the past year.

 

(Source: macrotrends.net)

   

Current 3 Month LIBOR Rate - January 2020

As of Monday, March 17, 2020, the 3 month LIBOR rate is 1.05%%. If the lender sets their margin at 3%, your new rate would be 4.05% (1.05% + 3.00%=4.05%). The chart below displays fluctuations in the 3 month LIBOR rate over the past year.

  (Source: macrotrends.net)  

Current 6 Month LIBOR Rate - January 2020

As of Monday, March 17, 2020, the 6 month LIBOR rate is 0.91%%. If the lender sets their margin at 3%, your new rate would be 3.91% (0.91% + 3.00%=3.91%). The chart below displays fluctuations in the 6 month LIBOR rate over the past year.

  (Source: macrotrends.net)  

Current 1 Year LIBOR Rate - January 2020

As of Monday, March 17, 2020, the 1 year LIBOR rate is 0.86%. If the lender sets their margin at 3%, your new rate would be 3.86% (0.86% + 3.00%=3.86%). The chart below displays fluctuations in the 1 year LIBOR rate over the past year.

  (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.

2020-03-18
How to Plan a Wedding While Paying Student Loans

By Caroline Farhat   Congratulations, you’re engaged! Planning a wedding is an exciting time! From choosing your attire to picking out a venue and decor, there are a lot of decisions to make and many that can be costly. If you’re starting to plan your big day, you might be wondering how you’ll pay all of these extra expenses while still paying your student loan debt and regular bills. Don’t worry, we’ve got your back! Read on for some tips on how to plan a wedding with student loans on your radar.    

1. Set Realistic Expectations

A majority of the costs for a wedding are based on the number of guests, so you can save money by keeping your guest list relatively small. For example, if you plan a wedding for 350 people you will most likely need a bigger venue than you would for 100 guests. Venue costs typically account for one-third of ceremony and reception costs so this can be a major budget buster. Food and beverage and wedding favors are also typically charged per person. Because weddings can be expensive and extravagant or budget-friendly and low-key, it’s critical to discuss your desires and budget with your partner before you start planning.  

Here are some good points to discuss:

  • Parameters for the guest list: Do you want to invite your college roommate you haven’t seen in three years and every cousin on your partner’s side? Or are you looking for a more intimate affair with just your closest family and friends? 
  • Your near-term financial goals (besides the wedding): Are you saving for a down payment for a home? Considering starting a family? Understanding your joint financial goals is a great way to guide your expectations. 
  • Location of the wedding: Agreement on location is key because it will drive all of your other planning. If you’re eyeing a destination wedding and your partner wants a backyard wedding, you will want to understand each other’s individual desires so that you can create a joint wedding that makes both of you happy!
 

2. Set a Budget and Stick to It

Before you plan a budget, it helps to know who will be contributing to the wedding costs. Will you be paying for wedding expenses equally with your partner? Do any family members want to help with costs? This information can help shape your budget.     The average cost of a wedding in 2019 was $28,000 according to
The Knot 2019 Real Weddings Survey. This figure only accounts for the ceremony and reception and can vary widely depending on your location. When you add in the average costs of an engagement ring ($5,900), a honeymoon ($5,000), and other wedding events such as the rehearsal dinner, bachelor/bachelorette parties, and engagement parties, the actual wedding costs can be much higher. If these numbers are making you want to elope in Vegas, don’t panic. There are some ways you can try to lower the cost of a wedding: 
  • Going DIY - DIYing at least some elements of the wedding can save you a good chunk of money. If you’re a Pinterest aficionado, try creating your own wedding invitations or centerpieces. Better yet, homemade wedding favors would be extra special for your guests and can save you hundreds of dollars.
  • Barter - Do you have friends that are photographers, florists, musicians, or bartenders? Bartering can help keep your expenses down while still getting the services you need. 
  • Timing - Are you dead set on having a June wedding or are you more flexible? In some areas, the month you pick can have a big impact on cost! Typically, June is a higher cost since it’s considered peak season, while winter weddings tend to be less expensive. Additionally, having your wedding on a Friday or Sunday can save you some money compared to a Saturday wedding. 
  Tip: It’s important to keep in mind that most wedding vendors do not require full payment upfront. Many vendors require a downpayment to secure their services and final payment closer to the wedding date. Open a separate bank account or flag any money you set aside for final wedding payments so that it doesn’t get used for other expenses that might pop up.   

3. Cut Expenses

In the midst of all the wedding costs, it may seem like any money you had leftover at the end of the month is now going towards the wedding. If money gets tight, think of ways to cut expenses: 
  • Refinance your student loans: Refinancing can be a great way to get extra cash now and set you and your partner up for a better financial future. Refinancing can save you on your monthly payment, as well as save you on interest costs over the life of the loan. For example, if you have a $35,000 loan with an 8% interest rate and get approved for an interest rate as low as 3.99% you could be saving up to $70 per month and over $8,000 in interest costs. Check out our student loan refinance calculator to see how much you could be saving.*   
  • Cut cable or cell phone bill: If you still have cable, it’s easier now than ever to cut the cord and still watch the shows and sports you want to see. Still paying a high cell phone bill? Compare carriers and call your existing provider to see if you can lower your bill.  
  • Reduce eating out or other entertainment expenses: It may not seem easy or fun to stop eating out or to cut back on entertainment, but reducing these expenses now could be just what you need to afford the band or DJ you really want at your wedding. 
 

4. Start a Side Hustle

A side hustle is a way you can earn money outside of your day job. The possibilities for a side hustle are endless: You could babysit, walk dogs, pick up a part-time job, etc. The extra money can help pay for your wedding expenses or you could put it towards your future financial goals. Earning extra money is not only helpful during wedding planning when you will experience extra expenses, but it can also help you after the wedding to make additional payments on your student loans, save for a new car or fund a dream trip.   

Bottom Line

Planning a wedding with student loans can be a stressful time. Don’t let your student loans be a part of the stress. With realistic expectations and a budget, you can manage to have the wedding of your dreams while still paying down your student loan debt!   
  *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.
2020-03-17
#TorchStudentDebt Series: CMO Josh Phillips

Welcome to the first episode of our #TorchStudentDebt blog series! At ELFI, our goal is to empower a brighter future for those with student loan debt. We do this by offering competitive rates and flexible terms for student loan refinancing* as well as sharing helpful tips for helping you achieve financial freedom. In this exclusive blog series, we’re sharing the stories of individuals who have torched their student loan debt, covering everything from the challenges they faced to the tactics they used to eliminate their debt. Hopefully these experiences can provide you with some insight on how you can eliminate yours.   To kick this series off, we’re sharing the story of Josh Phillips, SouthEast Bank’s Chief Marketing Officer. Note: SouthEast Bank is the parent holding company of Education Loan Finance.   

Background

Josh is a Brimley, Michigan native that decided to go to college for the same reason that many of us do – to learn and make more money. His first job was picking up shingles around construction sites for his father, who was a licensed builder. He worked at McDonald’s through high school, handing out food in the drive-thru and eventually moving up into the role of “maintenance man,” being in charge of facilities around the building.  
“The variety of jobs I had growing up taught me a lot… although I did enjoy some parts of them, I also knew that they weren’t what I wanted to do for the entire adult experience.”
  Like a good portion of millennials, Josh was a first-generation college student. This left him in somewhat of uncharted territory when it came to choosing a college and acquiring financial aid.  
“Being the first person in my family to go to college, I didn’t really have any idea what I was doing in terms of the best way to approach it. This was in the early 2000s, so there were some resources online to help guide you through the process, but not nearly the amount of resources as there are now on the internet.”
  Josh used the U.S. News and World Report college tool to do his research, made a shortlist of schools, and began applying and going on college visits. He ultimately decided to attend Maryville College (TN), a private liberal arts college in East Tennessee.   

Taking Out Loans

Going into college, Josh took the same view of his loans that many of us do – putting off the worry until after school.  
“I definitely didn’t actively think about the amount of debt I was accruing throughout my college education. Four years seemed like a ways away, so I kind of took the approach of, ‘do what you have to do to get the education and experience you want,’ and worry about those minor details afterward.”
 

Facing Reality

Josh graduated with a double major in International Business and Political Science, but he also graduated with around $55,000 in student loan debt that consisted of both federal and private student loans.   
“At that point in time, I had loans in a variety of places – so it was kind of like this slow, painful trickle of letters coming in telling me how much I owed different lenders. I wouldn’t say it was completely demoralizing, but it definitely made me understand that this was going to be one of the major payments that I’d be making on a monthly basis for a good length of time.”
  This was in 2008, right before the bottom fell out of the market. Josh was lucky to find a job with a small startup prior to graduating and transitioned into that after school. He believed that working for a startup would give him the opportunity to potentially grow with the company and accelerate his career faster, but it was definitely a roll of the dice.  
“I heard the rule that you shouldn’t go into more student debt than what your first year’s salary will be upon graduation… well, I broke that rule.” 
  The startup Josh worked for was a marketing and advertising agency that was going through a transition from traditional marketing to digital marketing. Josh was an Account Manager and had the opportunity to work with a number of their larger, newer customers and also assist with general business operations.   

Strategy for Paying Down Debt

When Josh transitioned into his new role, he didn’t have much of a strategy for paying down his debt. He simply wanted a job that allowed him to meet the minimum monthly payments and afford his living expenses. As his role within the company grew, he began focusing more heavily on ways to eliminate debt.  
  Using these strategies, Josh was able to pay down his $55,000 in student loan debt in just seven years.  

Regrets Along the Way

Despite the impressive timeframe in which Josh paid off his student loans, he did mention that he had some regrets about how he went about it.   
“Looking back, I took out extra money to cover living expenses while I was in college… If I had to do it again, I would have probably tightened those purse strings more when I was in school, because living on borrowed money just costs you more and more over time.”
  He also mentioned that he wished he would have known about his ability to refinance student loans and lock in a better interest rate. He said that doing so would have allowed him to save on interest and possibly even extend his repayment period so that he could prioritize other financial goals, like saving for retirement.    In hindsight, he also wished he would have looked into scholarships and financial aid earlier in the process, as many others with student loan debt do.  

Being Debt-Free

As one would assume, Josh is happy to now be free from his student debt.   
“I mean, it’s great – I think any time you can eliminate debt, it just opens up new options. Whether you want to go into more debt for a new car or a bigger house, or maybe you just want to get to the point where you don’t owe anyone anything, paying down debt almost gives you a bit of a high. It’s great to see the number going down, and once it’s gone, you kind of want to turn around and figure out what you want to pay down next. Currently, my last debt is my mortgage.”
 

Advice for Others with Student Loan Debt

When asked what advice he would give others with student loan debt, Josh emphasized the trade-off of having great experiences vs. being debt-free.  
“Everyone loves doing new things and getting new experiences, but I would always counter that with the freedom you can feel from getting out of debt. There are plenty of things you can experience for free if you’re creative or thoughtful about how you do it… If you’ve got debt that keeps you worried or at a job you don’t like, it’s a good trade-off to delay your experiences and instead put that money toward your own financial freedom.”
 

#TorchStudentDebt

That wraps up our first #TorchStudentDebt blog! Stay tuned for more stories of how others put strategies in place to torch their student loan debt, challenges they faced along the way, and advice they have for others still on their student loan repayment journey. Thanks for reading!  
 

About Education Loan Finance

Education Loan Finance, a division of SouthEast Bank, is a leading online lender designed to assist borrowers by consolidating and refinancing private and federal student loans into one simple, low-cost loan. Education Loan Finance believes that providing consumers comprehensive refinancing and consolidation options empowers the consumers on their financial journey.    *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.