Fixed vs. Variable Rate Student Loans: Which One Is Better During the Recession?

Make the best student loan decision for your unique situation.

A college student looks over her interest-rate options.
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Marc Romanelli / Getty Images 

As a result of the coronavirus recession, interest rates are historically low. If you’re a student loan borrower, this may make you wonder whether you should opt for variable rates or fixed rates. After all, the lower your interest rates are, the more money you might be able to save over the life of your loans. Below, we’ll dive deeper into this decision to help you make an informed choice.

What Is a Fixed-Rate Student Loan?

If you take out a fixed-rate student loan, your interest rate will remain the same over the life of your loan. You won’t be able to change it unless you decide to refinance. With a fixed-rate student loan, you’ll have predictable monthly payments and know exactly how much you’ll owe upfront. Federal student loans come with fixed rates that are typically lower than the rates of private loans. 

What Is a Variable-Rate Student Loan?

A variable-rate student loan features an interest rate that is likely to change during repayment because the lender bases the rate on an index like Libor or the prime Rate. As the index rises and falls, your interest rate will rise and fall accordingly and your monthly payments will change. Private student loans usually give borrowers the option of a fixed or variable rate. 

Fixed or Variable Rate: Which Is Better?

Which interest type is best depends on how quickly you can pay back your loans, how big of a monthly payment you can afford, and what you think will happen with interest rates in the future:

  Fixed-Rate Student Loan Variable-Rate Student Loan
Loan Length You have a longer-term loan and don’t want to deal with fluctuating rates. You have a shorter-term loan and there are fewer opportunities for the rate to change.
Monthly Payment You don’t want your minimum payments to increase. You feel comfortable with a higher minimum payment.
Future Rate Changes You believe interest rates will go up in the near future and wish to secure a lower rate now. You believe interest rates will go down or remain the same in the near future.

What’s Happening With Loan Rates During the Recession?

The coronavirus recession has had a significant effect on student loan rates. Fixed rates on direct subsidized and unsubsidized federal student loans are down to 2.75%, the lowest rate in the past 14 years. As long as you’re an eligible borrower, you’ll likely be able to lock in this rate.

If you opt for private student loans for an undergraduate degree, you can potentially qualify for a variable rate near 1%. However, your credit and a number of other factors will determine if you get the loan.

The following chart shows the historical fluctuations in the prime rate, a popular index that lenders use to set their fixed and variable rates. Seeing the ups and downs before, during, and after a recession can give you a general sense of the type of fluctuations you might see by choosing a variable rate:

Past performance of interest rates does not guarantee similar future results.

Which Type of Rate Is Best in the Recession?

When variable rates drop as low as they do know, it can be hard to pass them up. However, said Stanley Tate, founder of St. Louis-based Tate Law, variable rates have their drawbacks.

“Low variable rates may seem like an attractive option right now but the risks involved are still high,” Tate said in an email to The Balance. 

If you can pay off your loan within a few years, then you will avoid any variable rate increases that may come once the pandemic is over and the economy recovers.

Conversely, if you’re unable to quickly pay off your loan, your variable rate will likely increase. At that point, your payments may be higher than you anticipated; this is the risk you take.

It’s difficult to gauge when rates go up, but as historical data shows, at some point, they usually do.

Carefully consider how well your budget could handle changes to your minimum monthly payments.

Rising interest rates are a risk you may not be willing to take with a variable-rate loan. If that’s you, then it may be best to choose a fixed-rate loan. While student loan fixed rates may not be as low as variable rates, they’re still lower than they’ve been in the past for federal and private loans. The fixed rate means you’re getting fixed monthly payments, which may be an advantage if you’re trying to build a budget based on guaranteed numbers. 

Should I Refinance to a Different Rate Right Now?

If you don’t need a new student loan but are contemplating whether you should refinance, there are a number of things to consider.

First, if you’re considering a variable-rate refinance, understand that most of the variable interest rates near 1% are typically available for those with excellent credit and income. If you don’t meet the criteria, you’re unlikely to qualify for rock-bottom rates.

“Since many borrowers pay student loans for decades, refinancing to a slightly higher fixed interest rate now, as opposed to a lower variable interest rate...could still average out to save you money on interest over the years,” said Lauren Bringle, an Accredited Financial Counselor at SelfFinancial, in an email to The Balance.

There is no hard answer to whether you should refinance to a different rate right now. If you're prioritizing paying off your student loans in the short term, it could make more sense to refinance to a variable loan. With the lower interest rate, you could eliminate your debt faster. 

“If you plan to pay the minimum balance, choosing a fixed-rate loan is the better route,” Certified Financial Planner R.J. Weiss told The Balance in an email. “This eliminates the risk of seeing an increase in your monthly payment, allowing you to save for other goals, whether that's an emergency fund or a down payment on a house. 

Key Takeaways

  • Variable interest rates are at an all-time low due to the coronavirus recession.
  • Only borrowers with excellent credit have a chance to secure the lowest variable rates. 
  • Refinancing to a variable-rate loan may be a good choice if you plan to pay off your student loans quickly. If not, a fixed-rate loan is likely the wiser option. 

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