Refinancing student loans: Variable or fixed interest rate?

By Amy Fontinelle
Amy Fontinelle is a personal finance writer focusing on budgeting, credit cards, mortgages, real estate, investing, and other topics.
Posted on Nov 14, 2018

When you refinance your student loans, you’ll often have a choice between a fixed interest rate and a variable interest rate.

  • Choose the fixed interest rate and you lock in your rate for the life of the loan. Your monthly loan payment will always be the same, and you’ll know up front exactly how much the loan will cost you in interest over the years if you make payments as scheduled.
  • Choose the variable interest rate and the only things that are certain are your starting interest rate, how often the lender can increase the rate, how the lender determines the amount of the increase, and the maximum rate the lender can charge. Your monthly loan payment can change numerous times throughout your repayment period, and there’s no way to calculate your total borrowing costs ahead of time.

With so much uncertainty, why would anyone choose the variable interest rate? Because it can be lower than the fixed rate at the beginning of the loan term, and it could get even lower if interest rates drop. Consider the rates currently available from three major student loan refinancing companies. Where a particular borrower’s actual rate falls in the ranges provided depends on credit score, amount borrowed, and other factors.

SoFi : As of mid-2018, fixed rate loans cost 3.899 percent to 7.804 percent APR (annual percentage rate); variable rate loans start at 2.480 percent to 7.524 percent APR when you enroll in autopay, which provides a 0.25 percent discount. Variable rate loans cap out at 8.95 percent or 9.95 percent APR, depending on your loan term.1 Your interest rate can change monthly based on changes in the one-month London Interbank Offered Rate (LIBOR) .

Earnest : Fixed-rate loans cost 3.89 percent to 6.32 percent APR, and variable rate loans start at 2.57 percent to 5.87 percent APR when you enroll in autopay, which gives you a discount of 0.25 percent. Variable rate loans have caps of 8.95 percent, 9.95 percent, or 11.95 percent depending on your loan term and state of residence. Variable rates can change monthly 2 based on the one-month LIBOR.

Citizen’s Bank : Fixed interest rates range from 3.50 percent to 8.69 percent APR and starting variable interest rates range from 2.72 percent to 8.17 percent APR. Variable rates can climb as high as the greater of 21.00 percent or the prime rate plus 9.00 percent. The lowest rates are available to borrowers who use autopay and who have a graduate degree, a cosigner, a five-year repayment term, and a preexisting Citizen’s Bank account.

Doing the math on fixed versus variable rate student loan payments

Suppose you refinance $25,000 in student loans and want to repay them over 10 years. The lender says that if you choose a fixed rate loan, your interest rate could be as low as 4.00 percent, while if you choose a variable rate loan, your interest rate could be as low as 2.50 percent. The fixed rate loan gives you a monthly payment of $253.11; the variable rate loan gives you a starting monthly payment of $235.67 — a savings of about $17.44 per month, according to calculations made with Bankrate’s student loan calculator .

After that, your payments could increase as often as monthly. If LIBOR doesn’t change, your monthly payment doesn’t change. If LIBOR increases by 0.25 percent, your interest rate increases by 0.25 percent. If the lender caps the variable rate on 10-year loans at 10.00 percent, your maximum monthly payment could be $330.38, which is about $95 higher than the starting monthly variable rate payment and about $77 higher than the fixed rate payment.

Which interest-rate option should you choose?

Earnest points out borrowers can think about the higher starting cost of a fixed-rate loan as “ interest-rate insurance .”3 You pay a higher rate now in exchange for the certainty that your rate will never increase. If you have a low risk tolerance, a fixed-rate loan may be your best option. And you might come out ahead in the long run, depending on what happens with interest rates.

To even consider choosing the variable rate option, you need a plan to afford the potentially higher monthly payments in the future, possibly for years. If you’re a recent graduate starting a first job, you can reasonably expect your income to increase over time, making it possible to handle a higher payment. But your other expenses might increase, too — you might move out of your apartment and buy a house, for example. ( Related: Buying Your First Home )

A variable rate loan could be a good choice if you think interest rates will stay flat or decrease. But interest rates have been inching up since the end of 2015, and the Federal Reserve expects increases to continue. 4 Its board members predict that the federal funds rate, the interest rate banks pay each other to borrow money short term, will go up by 0.7 percent from 2018 to 2019 and by another 0.3 percent from 2019 to 2020. The federal funds rate, which is just below 2 percent as of early August 2018, influences the rate banks charge borrowers for loans.

In today’s market, “Variable rate loans can still make a lot of sense for highly qualified buyers who plan to pay off their loans quickly,” said Robert Farrington, a student loan debt expert and founder of TheCollegeInvestor.com, a site about the best ways to pay for college and how to get out of debt after college. “The best advertised rates you see from lenders are typically three- to five-year variable rate loans. If you plan to pay off your loan within five years, these loans can make a lot of sense and save you money. If you need a longer repayment period, the risk of variable rate loans is likely too high to outweigh the fixed rate loans you can get today.”

The shorter your loan term, generally the less risk you take by choosing a variable rate. It’s easier to guess what will happen to interest rates in the short term than the long term, and you’ll have fewer months of higher payments to make if rates increase. The longer your student loan term, however, the more risk you generally take by choosing a variable rate.

You can try to guess what will happen with your variable interest rate by looking at what the benchmark rate has done in the past. How volatile is it? How high and low has it gotten? The St. Louis Federal Reserve website shows the history of LIBOR over the last 30 years 5 and the history of the prime rate since 1983 .6 You can also look at the Federal Reserve’s predictions 7 for where interest rates are headed.

The best of both worlds

Finally, with some lenders, your choice isn’t locked in long term. For example, as of mid-2018, Earnest lets you switch from a variable rate to a fixed rate or vice versa once every six months with no fees. But there’s still some risk here, since your new APR will depend on market interest rates and your financial profile at the time you request the change.

The better your financial profile, specifically your credit history and credit score, the more likely you are to receive a lower interest rate. Of course, making your monthly student loan payments on time helps build your credit history in the first place.

Some opt to consult with a financial advisor about their individual circumstances and the refinancing options available.

The major credit bureaus view student loans as installment loans for the most part. There’s an immediate benefit to your credit score and credit history by keeping your student loan payments current. And a good credit score will help for future loans and in negotiating terms for consolidation and refinancing. Since graduating students typically don’t have extensive credit histories, then, student loans can be a useful vehicle for establishing a credit score.

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1 SoFi, “Student Loan Refinancing Rates & Terms,” accessed August 10, 2018.

2 Earnest.com, “How Does an Interest Rate Change Affect My Student Loan?” December 16, 2015.

3 Earnest.com, “How do I decide between a fixed interest rate and a variable one?” accessed August 13, 2018.

4 Board of Governors of the Federal Reserve System, “Advance release of table 1 of the Summary of Economic Projections to be released with the FOMC minutes,” June 13, 2018.

5 Federal Reserve Bank of St. Louis, “Graph: 1-Month London Interbank Offered Rate (LIBOR), based on U.S. Dollar.”

6 JPMorgan Chase & Co., “Historical Prime Rate.”

7 Board of Governors of the Federal Reserve System, “Advance release of table 1 of the Summary of Economic Projections to be released with the FOMC minutes,” June 13, 2018.

The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own, and do not necessarily represent the views of Massachusetts Mutual Life Insurance Company.