Fixed Rate vs Variable Rate Education Loans

Happy July! Hope you all had a festive July 4th holiday!

By now, most colleges and universities have mailed their tuition bills which in most cases  are due in early August! So many friends have contacted me recently asking for guidance with regard to private education loans, a necessary financing tool for many. Many friends are clearly overwhelmed by the task of comparing private education loans, thus I thought it would be helpful to post again about this topic and share some helpful links and tips from Financial Aid Sense.

Interest rates play a huge factor in the overall cost of private education loans (as well as any loan, really!) and one such factor to consider is whether your private education loan has a fixed or variable interest rate. A fixed rate is a rate that does not change over time; the interest rate paid for the loan will remain constant through the entire repayment period. A variable rate is very different as the rate will typically change each month, or in some cases each quarter. A variable rate will either be tied to the LIBOR index or to the Prime index and can change often and go as high as the interest rate cap for the loan. In most cases, interest rates are capped at a very high percent, often greater than 20%! Now that is not to say that the interest rate will ever go as high as the cap, however, the possibility does exist.

Many loan providers offer both fixed rate loan options and variable rate loan options and are based on credit. The better your credit, the better interest rate options you will have. The article on the American Saves website gives a nice overview of credit and the relationship to private education loans. In addition, our article on Private Loans and Credit also shares some good info on the relationship between credit and loans.

When shopping for private education loans, please be sure to compare loans very carefully. Fixed rate loans typically will have a higher interest rate since you are locking in your rate for the entire loan term. Many borrowers like this feature as it gives peace of mind against rising interest rates and allows the borrower to plan their repayment down to the penny. However, for that peace of mind comes a higher priced loan. Those that want the least expensive loan should consider a variable rate education loan, however, need to understand the risk involved with borrowing. If market changes force rates to creep us, the borrower needs to be prepared to repay a higher priced loan.

A Primer on Fixed Rate vs Variable Rate is available on the US News Site – I thought this article might be helpful. Carefully shop around for private loan before borrowing and be sure to ask many questions – See our article about paying for college with private loans and specifically the list of things to consider when borrowing a private loan as a guide – it could save you money!

Thanks for joining us on Financial Aid Sense. If you know of anyone who will be entering either their junior year or senior year in high school, Financial Aid Sense is a vital read!

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