Refinancing student loans: Variable or fixed interest rate?

Amy Fontinelle

By Amy Fontinelle
Amy Fontinelle is a personal finance writer focusing on budgeting, credit cards, mortgages, real estate, investing, and other topics.
Posted on Feb 28, 2022

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. And owing to economic turmoil prompted by the pandemic, interest rates are likely to rise. (Related: What rising interest rates mean for consumers)

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. But they can get higher if interest rates rise. (Related: What's gained and lost when refinancing student loans)

Where a particular borrower’s actual rate falls in such a range depends on credit score, amount borrowed, and other factors. 

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 interest rates don’t change, your monthly payment doesn’t change. But if the general level of interest rates rise by 0.25 percent, your loan 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?

Borrowers can think about the higher starting cost of a fixed-rate loan as “interest-rate insurance .” 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.

Currently, interest rates are expected to rise. That will trigger increases in both fixed and variable college loan 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 are influenced by a variety of economic factors and can fluctuate in unforeseen ways. Already, interest rates are expected to rise over 2022 and 2023.

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.

The best of both worlds

Finally, with some lenders, your choice isn’t locked in long term. Some lenders allow for switching from a variable to a fixed rate loan or vice versa. 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 professional about their individual circumstances and the refinancing options available. (Find a MassMutual professional here).

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.

Learn more from MassMutual…

Applying for new credit cards and your score

Building your financial pyramid

Saving for retirement in your 20s: Doing the math

This article was originally published in February 2018. It has been updated.

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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.