Fixed or Variable Interest Rate: Which Is Better? (2024)

When faced with the need to find funds to close the gap between college costs and available financial aid, many students and their families turn to private student loans. One of the first choices you need to make about private student loans may be choosing between a variable and a fixed interest rate.

While federal student loans only offer fixed rates, you have the option to choose a private student loan with a variable interest rate or a fixed rate.

Know the difference

A fixed rate stays the same throughout the life of the loan. If you follow the repayment schedule, you will have the same monthly payment until the loan is completely repaid.

A variable interest rate, though, goes up and down based on current market conditions. Payments for variable-rate student loans might change frequently. The variable rates for ISL Education Lending's private student loans, for example, are evaluated quarterly and may change up to four times a year.

Which is better? The answer: It depends.

Variable rates are typically lower than fixed rates at the time of application. A fixed rate is generally higher to accommodate potential increases due to future market conditions. A variable rate can start off lower because it reflects market conditions.

Do you believe interest rates will increase significantly over time?

You may want to do some research to make a prediction on where you think interest rates will go over the next 15 years — a common repayment time if you include your time in school. Historical trends don't necessarily indicate what will happen in the future, though, so this is something that cannot be known for certain. If you imagine interest rates will increase beyond the offered fixed rate (and stay there), you may want a fixed rate.

Do you imagine being able to pay off the loan faster than the repayment schedule?

You may expect to make larger or more frequent payments on your loan than the repayment schedule takes into account. This could be the result of a high-paying job or an upcoming monetary gift or other windfall. If you think you will be able to repay a large share of your loan before rates have a chance to rise significantly, a variable rate may work for you.

Do you like consistency so you can more easily create a budget?

If you are not comfortable with financial risk, a fixed rate might be for you — you won't get a benefit when interest rates drop, but you also won't have to make higher payments when they increase. And you will know exactly what your payment will be every month of your repayment term.

Do you want to start repaying your loan immediately?

If you plan to begin making principal and interest payments immediately, then a variable rate may be a good option for you as the monthly payments will generally start off lower than a fixed-rate loan.

As your situation and market conditions change, you may opt for either a fixed rate or a variable rate on your next private student loan. ISL Education Lending offers lower-cost private student loans with both types of interest rates as well as multiple payment options.

ISL Education Lending is able to offer lower-rate student and family loans because it is self-funded and self-capitalized. As a nonprofit dedicated to helping students and families succeed in education after high school, ISL Education Lending can help you plan smart and pay less for college.

Learn more now about the loans ISL Education Lending offers.

As a seasoned financial expert with extensive knowledge in student loans and educational financing, I can confidently delve into the concepts discussed in the article. My expertise is grounded in a deep understanding of the financial landscape, including the intricacies of private student loans, interest rate structures, and the factors influencing borrowers' decisions.

The article primarily explores the choice between variable and fixed interest rates when considering private student loans. Here's an analysis of the key concepts presented:

Fixed Interest Rate vs. Variable Interest Rate:
- Fixed Rate: Stays constant throughout the loan's life, ensuring a predictable monthly payment. This stability is beneficial for budgeting, but the initial rate may be higher.
- Variable Rate: Fluctuates based on current market conditions, potentially resulting in changes to monthly payments. Initial rates are often lower than fixed rates, reflecting current market conditions.
Determining the Better Option:
- Variable Rates Initially Lower: Variable rates tend to be lower at the outset compared to fixed rates, providing potential cost savings early on.
- Risk and Market Conditions: Choosing between fixed and variable rates involves assessing one's risk tolerance and predicting future interest rate movements.
Factors to Consider When Choosing Between Fixed and Variable Rates:
- Interest Rate Trends: Predicting whether interest rates will rise significantly in the future informs the choice. Fixed rates are preferred if expecting substantial increases.
- Repayment Speed: If planning to repay the loan faster than the schedule, a variable rate might be suitable, considering the potential initial cost savings.
- Budgeting and Consistency: Individuals preferring budgetary consistency may opt for fixed rates, ensuring stable monthly payments.
- Immediate Repayment: Those intending to start repayments immediately might find variable rates appealing due to lower initial monthly payments.
ISL Education Lending's Approach:
- Variable Rate Calculation: ISL Education Lending evaluates variable rates quarterly, potentially changing up to four times a year based on market conditions.
- Offering Both Rate Types: Providing borrowers with the choice of both fixed and variable rates, catering to diverse financial preferences and risk tolerances.
Consideration of ISL Education Lending:
- Nonprofit Status: ISL Education Lending's nonprofit status is highlighted, emphasizing its dedication to assisting students and families in education beyond high school.
- Self-Funding and Self-Capitalization: The organization's ability to offer lower-cost loans is attributed to being self-funded and self-capitalized, potentially leading to more favorable terms for borrowers.

In conclusion, the decision between fixed and variable interest rates for private student loans involves a careful consideration of individual financial goals, risk tolerance, and market conditions. ISL Education Lending's provision of both rate types and its nonprofit status add an additional layer of choice and potential affordability for borrowers.