Receive up to a $200 bonus* when you open your first Discover Online Savings Account.  Learn more.

 Discover Bank, Member FDIC.

Variable or Fixed Rate Student Loans: Which Should You Choose?


Whether you are applying for new student loans or refinancing your existing student loans, you must decide between variable interest rate and fixed interest rate loan options.

As is the case with many financial decisions, you should consider your personal risk tolerance and time horizon before making the decision.

Fixed Interest Rate Student Loans

With a fixed rate loan, the interest rate will never change. As a result, your total monthly payment will never change and any future interest rate changes will not impact your monthly payment.

Fixed rate loans typically have a higher initial interest rate than variable rate loans, but the rate never changes over the life of the loan. You are paying a higher initial interest rate to eliminate any risk of future interest rate increases.

When interest rates are low by historical standards (as they have been since 2009), fixed rate loans are more attractive than variable rate loans because interest rates are likely to rise in the future. When interest rates are higher than average, the opposite is true.

Variable Interest Rate Student Loans

Variable interest rate loans typically offer a lower initial rate than fixed rate loans, but the rate will fluctuate over time.

Most variable rate loans are tied to an underlying interest rate benchmark, such as the Prime Rate or the London Interbank Offered Rate (LIBOR). These benchmarks are set by central banks, such as the Federal Reserve. When the economy does poorly, the Federal Reserve and other central banks reduce short-term interest rates to encourage borrowing. When the economy heats up, the Fed often increases interest rates to slow economic growth and combat rising inflation.

When you apply for a variable interest rate loan, lenders use one of these benchmarks as the baseline rate. The lender then adds a fixed profit margin to the baseline rate to achieve a profit. Usually, the fixed margin is dependent on your credit profile. Excellent credit will reduce the fixed margin while poor credit will increase the margin.

The interest rate on a variable loan may adjust monthly, quarterly, or annually, depending on the underlying benchmark. The fixed profit margin (based on your credit) never changes. Some lenders limit how much your interest rate can increase during each adjustment period, and most limit the maximum interest rate change over the life of the loan.

For example, I previously obtained a private student loan through Discover Bank. The variable interest rate was tied to the 3-month LIBOR rate, which meant that it was adjusted four times each year (once per quarter). The fixed profit margin never changed. When the 3-month LIBOR rate increased slightly, so did my monthly payment.

Other Important Considerations

There are a few key considerations that apply to both fixed and variable rate loans.

The Loan Term – Most companies offer a variety of loan terms that you can choose from when obtaining a loan (such as 5, 10, 15, or 20 years). Shorter length loans will offer a lower interest rate than longer loans, all else equal. If you can afford the higher monthly payments, you can obtain a lower rate by choosing a shorter length loan.

Your Credit – Federal student loans offer a fixed interest rate that does not depend on your credit. Private student loan rates are largely determined by your creditworthiness as a borrower. If you have excellent credit, you will qualify for the lowest possible interest rate. If your credit needs work, you will need to obtain a co-signer with excellent credit, or you should expect to pay a higher interest rate.

Choosing Between Fixed and Variable Rate Loans

If I were choosing a new loan, here is how I would approach the decision.

Fixed Interest Rate Loans

If you’re uncomfortable with fluctuating monthly payments, then consider a fixed rate student loan. The interest rate and required monthly payment never change over the life of the loan.

In our current economy, locking in a fixed interest rate can be beneficial. Rates are expected to rise over the next couple of years, which will negatively impact variable rate loans. If you plan to pay off your student loan over a long period of time, choosing a fixed interest rate will guarantee your monthly payment, regardless of any future interest rate changes.

Student loans originated by the government always carry a fixed interest rate, but it’s often higher than the best rates offered by private lenders. If you have an outstanding federal loan, you might be able to obtain a lower fixed interest rate by refinancing.

Also, keep in mind, you can refinance multiple times if interest rates take an unexpected turn. For example, if you obtain a fixed-rate loan and interest rates fall, it’s possible to refinance into a variable-rate loan at the lower rate.

Variable Interest Rate Loans

If you plan to pay off your loan relatively quickly, or if you expect interest rates to remain stable or decrease, a variable rate student loan can save you money because the initial interest rate will be lower than a comparable fixed rate loan.

Because interest rates have been historically low since the 2009 financial crisis, it is reasonable to expect rates to rise in the future. However, history has shown that it’s nearly impossible to predict how quickly interest rates will rise or fall.

If interest rates increase, you should be prepared to make higher monthly loan payments. The longer it takes you to pay off the loan, the higher your probability of experiencing an interest rate increase. Although you can mitigate some of this risk by choosing a lender that caps its variable rates.

Have you decided between a fixed and variable interest rate student loan? Share with a comment below.

Editorial Disclaimer: The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author’s alone.

User Generated Content Disclosure: Responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.

Leave a Reply

3 Comment threads
3 Thread replies
Most reacted comment
Hottest comment thread
4 Comment authors
JoanneWallet SquirrelJacobSyed Recent comment authors

This site uses Akismet to reduce spam. Learn how your comment data is processed.


Very good and clear article on Fixed and Variable rates. My son is going into his last year of college and we most likely will refinance all these loans in a year or two. I usually opt for fixed because I am not a risk taker and rates have been low for so long, but I am really considering a variable on this last year loan because he will be refinancing. The rate difference is about 2% between the fixed and variable rates he was given is aprx. 2%. Any suggestions would be appreciated???

Wallet Squirrel
Wallet Squirrel

Great Post guys! I have been debating about refinancing my wife’s and my student loans. I have not pulled the trigger yet because it honestly terrifies me. This article helps me understand between the fixed and variable loans. One day here in the near future I will have to sit down, do my research, and pull the trigger.

– Adam


This is a great discussion. In today’s environment, I would think twice about using a variable loan since like you said interest rates are as low as they have ever been. And the Fed has come out and said they will raise rates this year barring any huge world events. I would stick to fixed rates for now since paying off loans quickly yourself will be the main factor on how fast they’re gone. If you’re doubling up on your monthly payment, the interest rate won’t matter as much.

Advertising Disclaimer

We believe you should have access to outstanding information so that you can build your best financial life. That’s why our researched content and expert recommendations are free.

If all of the content is free, how do we make money? We sometimes receive compensation from select advertising partners who offer a product or service that can benefit our audience. 

While compensation may influence the products we discuss, it doesn’t impact the qualitative and quantitative analysis demonstrated in each article and review. We try to objectively evaluate financial products and recommend those that are most beneficial to readers. Our site does not feature every company or financial product available on the market, and nothing written should be interpreted as financial advice. We are not responsible for your financial decisions.

For more information, see our full disclaimer.

Share on facebook
Share on twitter
Share on print

This website uses cookies to ensure you get the best experience on our website.