Variable vs. Fixed Rate Student Loans

The interest rate on your new student loan will determine the cost of borrowing that money from your lender. You’ll repay the interest and the principal amount—how much you borrow—so it’s wise to lock in the lowest interest rate possible.

Your terms can vary by lender, but the two main types of interest on student loans are variable and fixed. We’ll explain how these differ and how each can affect the total cost of your loan below.

Fixed and variable interest rates defined

You might encounter two primary types of student loan interest rates. Depending on your lender and the type of loan, you might pay a fixed or variable interest rate.

• Fixed interest rates remain the same for the entirety of the loan period, giving you a consistent and predictable interest rate regardless of market changes.
• Variable interest rates may change over the course of the loan, rising or falling with factors such as market rates.

How fixed vs. variable-rate student loans affect interest

Your loan’s interest rate determines how much the loan will cost you, from disbursement to your final payment. A fixed or variable interest rate can influence the cost and your monthly payment obligation throughout the repayment period.

A fixed interest rate means your monthly payments will not change, and you can calculate how much you still owe at any time.

A variable interest rate is based on a percentage on top of a benchmark rate; when this rate goes up, so does your interest rate. When this rate goes down, your interest rate is lower. A variable rate is typically based on the prime rate. Some lenders may use a Secured Overnight Financing Rate (SOFR)-based index as a replacement.

How much more (or less) could a variable-rate loan cost you compared to a fixed-rate student loan? Let’s take two five-year student loans, each for $10,000. One loan has a fixed rate of 6.0% APR, while the other has a variable rate of 3.5% + prime (which, in this example, is 2% when the loan is disbursed).

	Fixed rate	Total annual payments
Disbursal	6.0%	$2,316
Year 1	6.0%	$2,316
Year 2	6.0%	$2,316
Year 3	6.0%	$2,316
Year 4	6.0%	$2,316
Year 5	6.0%	$2,316
Ave. rate	6.0%	—
Total cost	—	$11,580

	Variable rate at 3.5+ prime	Total annual payments
Disbursal	5.5%	Varies
Year 1	7.0% (+1.5%)	$2,273
Year 2	4.5% (-1.0%)	$2,238
Year 3	7.5% (+2.0%)	$2,308
Year 4	6.0% (+0.5%)	$2,273
Year 5	4.5% (-1.0%)	$2,238
Ave. rate	5.83%	–
Total cost	–	$11,330

As you can see, some years might see lower rates if your APR is variable. In other years, your interest rate might be higher. A variable rate may save you money over a fixed rate, but it’s never guaranteed. Sometimes, a variable rate could increase the amount you pay over time.

Is a fixed or variable rate better?

When comparing fixed and variable rates, one isn’t “better” than the other. Each type of interest rate offers its own benefits and upsides. However, the type of interest rate that is better for you comes down to several important factors.

Consider your repayment strategy when choosing a fixed or variable rate. You should also look at lenders’ quotes to see how much money you can save with each scenario.

Take your personal economic situation into account. If you’re on a tight budget and can’t manage an increasing loan payment, variable rates might not be the right choice.

Here are the pros and cons of each type of rate to help you make an informed decision.

Pros and cons of fixed rates

Pros

• Your rate will stay the same for the lifetime of the loan

  You’ll typically lock in this rate when you sign your loan agreement, and it won’t change.

• Your monthly payments will be predictable

  Your fixed rate and monthly payment obligation don’t change. You will pay the same amount in month one as month 120.

• You can calculate your loan cost at any time

  If you ever want to know how much your loan will cost you over its remaining term or how much you’ll have paid over the loan’s lifetime, you can calculate this. Just multiply your monthly loan payment by the term (how many months you have left, etc.).

• You can lock in rates

  No one can predict what interest rates will do in the coming years. However, if you lock in a low rate, you’ll be safe if interest rates increase.

Cons

• Rates may be higher

  Fixed rates might be higher than starting variable rates depending on the overall interest rate environment.

• You don’t benefit from rate cuts

  If you lock in a fixed-rate loan while rates are high, you’re stuck with that rate even if they drop across the board. To lower your rate, you’d need to refinance your student loan.

• You may pay more for the total loan

  Your total interest charges will be higher if you lock in a rate consistently higher than the variable rates for the loan term.

Pros and cons of variable rates

Pros

• Starting rates tend to be lower

  You might find the same loan has a lower variable interest rate than one with a  fixed rate. However, the overall interest-rate environment can influence whether this is the case.

• You can take advantage of rate cuts

  If interest rates drop over your loan term—sometimes a decade or more—you can reap the benefits with a variable-rate loan. Your variable rate will likely drop along with market rates, saving you interest and reducing your monthly payment obligation.

• Rates can only increase so much

  Most lenders will have a built-in rate cap, limiting how high your APR can increase in the future. Rates might rise, but you can predict the worst-case scenario when you sign your loan.

Cons

• Rate hikes can bite you

  Variable rates mean your interest rate can climb if the market dictates. As the prime rate and other benchmarks rise, so will your student loan rate. This could mean a higher monthly payment and an increased overall loan cost.

• Payments can be unpredictable

  Rates can shift monthly, quarterly, or annually and often mean an adjusted monthly payment. This changing payment can be frustrating if you’re on a strict budget or appreciate a predictable monthly obligation.

• It’s hard to tell how much you’ll pay over the lifetime of your loan

  With a fixed-rate loan, you can calculate on day one how much that loan will cost (assuming you pay it off as agreed). With a variable-rate loan, however, there’s no telling. Depending on how rates change and when, you could pay more or less than you think.

How are fixed and variable rates calculated?

If a student loan lender offers fixed and variable interest rates, you’ll likely find these rates aren’t the same. Fixed rates might be higher in exchange for predictability and consistency. With variable rates, you could snag a lower rate in exchange for the potential of future rate adjustments.

Each lender has a proprietary way of calculating its rates. The rate range depends on the lender’s risk appetite, products, and loan limits. Your student loan rate depends on personal factors such as your credit history and income, as well as the loan details.

How are fixed rates calculated?

A fixed interest rate is one that’s locked in at the time you sign your loan agreement. This rate stays the same for the loan’s lifetime; regardless of what happens with your finances, the economy, or other market benchmark rates, your loan’s APR will not change.

With federal student loans, fixed rates are determined by law, set each year by Congress according to 10-year Treasury Note rates. These fixed rates apply to any federal loans originated (or taken out) that year.

For private student loan lenders, fixed rates aren’t tied directly to economic indicators or benchmarks. The private lenders set the rates based on their own assessment of market conditions.

Your personal financial details can also affect your fixed loan rates. As a borrower or cosigner, your income, credit history, credit score, and loan term can affect your interest rate.

How are variable rates calculated?

Variable interest rates are set by the lenders themselves but are based on, and can fluctuate along with, certain federal policies and index rates.

Variable rates are not offered on federal student loans. Private lenders will calculate their variable rates as a premium on top of an index or benchmark rate. This is often the prime rate.

• The prime rate is an average base rate according to the top 25 individual banks in the U.S. The Federal Reserve doesn’t set this rate, but banks tend to follow the federal funds rate set by the Fed when determining prime rates.
• LIBOR is a benchmark based on average rates from international banks. It was a financial standard for many years but was “retired” permanently on June 30, 2023, with its final publication.
• Many lenders are turning to SOFR as a viable alternative to LIBOR. SOFR is based on U.S. Treasury securities, and the Federal Reserve Bank of New York publishes it daily.

Banks originate loans with an interest rate a certain percentage above either benchmark; as the benchmark rises or falls, so does the borrower’s rate.

Each private lender has its own processes and criteria for determining overall and individual rates. That’s why the rate range differs from one lender to another. The rates lenders offer to student loan applicants and their cosigners will vary according to their individual factors.

Who offers fixed-rate loans?

Lenders offer student loans with fixed rates because of market demand and the predictability they offer. These terms guarantee the lender will get a set amount from a borrower each month, and the lender can predict how much it will make over the loan’s lifetime.

Federal student loans always come with standardized fixed rates. All students who take out federal loans in a specific time frame will have the same interest rate, regardless of their credit history. Federal rates tend to be lower than private lenders’.

This rate can differ depending on what type of federal loan you take out and whether you’re an undergraduate or graduate student.

Here’s a look at current fixed APRs on student loans:

Company/loan	Fixed rates (APR)
Federal Direct Subsidized Loan	5.50%
Federal Direct Unsubsidized Loan	4.99%
Federal Direct PLUS Loan	N/A
Ascent	3.22% – 14.75%
College Ave	3.39% – 13.95%
Sallie Mae	3.75% – 13.72%

Students looking to consolidate or refinance their existing loans can also lock in a low fixed APR with many different lenders.

Company/loan	Fixed rates (APR)
Direct Consolidation Loan	Average of the loans you’re refinancing
Earnest	2.99% – 7.99%
ELFI	3.39% – 6.99%

Who offers variable-rate loans?

You can also finance your education with a student loan at a variable rate. These might be lower than a lender’s fixed interest rates and have the potential to rise or fall.

Lenders cap the highest interest they can charge on a variable-rate loan. If rates drop, borrowers may find themselves saving money on their interest payments.

Most private student loan lenders offer variable interest rates, but federal loans are only fixed-rate products.

Here’s what you can expect from four popular lenders’ variable-APR loans:

Company	Variable rates (APR)
Ascent	0.98% – 11.90%
College Ave	0.94% – 12.99%
Sallie Mae	2.00% – 12.35%
Earnest	1.34% – 11.44%

If you have student loans to refinance, a variable-rate refinance loan could also be the right choice. Here are three current refinance loan variable APRs:

Company	Variable rates (APR)
Earnest	1.74% – 7.99%
ELFI	1.86% – 7.98%

Which rate type do most borrowers choose?

Both fixed and variable interest rates have benefits and drawbacks. Depending on your financial situation, one type of interest rate might make more sense.

Most borrowers take out student loans with fixed rates. Most student loans (about 92%) are federal, and as we already mentioned, these are always at fixed rates. Many private loan borrowers also opt for a fixed rate when taking out money for school.

This is likely because the loans are more predictable, with an interest rate that isn’t subject to change over time. Even if rates are higher at origination than variable rates from the same lender, borrowers know how much they owe on their loan, what to budget for their monthly payment, and how much they’ll pay in interest over the loan’s lifetime.

How do I compare variable- vs. fixed-rate student loans?

It’s impossible to predict what will happen with interest rates. If index rates rise, so can your variable-rate loans; comparing the future cost of a fixed-rate student loan versus a variable-rate loan is difficult.

When weighing this decision, students should consider the following:

• If interest rates might drop, a variable-rate loan could be the best money-saving option. When rates are rising, locking in a fixed-rate student loan could be the smarter choice.
• Variable rates allow you to benefit from future rate cuts. Plus, you’ll start your loan off at a lower rate when your balance is at its highest.
• Fixed rates are still the choice for the majority of student and parent borrowers, offering the security of predictable interest payments over the life of the loan.

What if you decide on one type of loan now and later want to change it? You can’t change your loan type once you’ve taken it out, but you aren’t stuck with that rate type or loan structure for the duration of the debt repayment.

With a refinance, you can make whatever changes you want. Refinancing your student loans allows you to consolidate multiple balances into one account. You can also snag a variable or fixed rate for the entire refinanced balance, saving money if you can lower your current rates.

Refinancing can benefit borrowers who do it carefully and after significant consideration. Waiting until you qualify for lower interest rates and better loan terms can ensure your new student loan refinance doesn’t cost more long-term.

Choosing between variable and fixed student loan interest rates is a personal decision. The right answer depends on whether you’re applying for private or federal student loans, your credit history, and your preferences. There’s no right or wrong answer, so it’s best to consider and calculate which is best for you.