The standard advice goes like this: when you’re refinancing your student loans, go for the fixed rate so you can rely on having predictable monthly payments. With a variable rate, your interest goes up and down depending on market conditions, meaning that your payment could fluctuate.
But there are some situations where a variable rate loan may actually be a better deal. Here are some scenarios.
When you’re planning to pay off the loan fast
Many variable-rate loans start off with lower rates than their fixed-rate counterparts. The typical difference is about 1.25% to 1.75%, depending on the servicer and the loan.
You’re paying less with a variable-rate loan, but taking on more risk. If you plan to pay the loan off quickly, it gives the rate less time to change — and there’s a higher likelihood your risk will pay off.
You believe interest rates will stay low
Banks adjust the interest rates on variable interest rate loans based on the London Interbank Offered Rate (LIBOR) or the prime rate.
If you’re weighing a variable-rate loan, it’s good to have at least a general idea of whether those rates are projected to go up or down.
Of course, you can’t tell for sure what will happen in the future. But if you’re offered a significantly lower variable interest rate, rates are expected to stay low, and you plan on paying off your loan fast, a variable interest rate loan may be worth considering.
While these rates have been low in recent times, financial analysts are predicting an increase in 2018.
See also: Refinance Student Loans
The loan is temporary
Technically, you can refinance your student loan as many times as you want.
Why would you want to refinance your loan more than once? One reason might be to land a lower interest rate — and change the term of your loan to reduce monthly payments.
For instance, let’s say you worked for a while, and now you want to go back to school full-time. If you have federal loans, you can defer the payments or enroll in an income-based repayment program to make your budget more manageable.
But you don’t have that option for private loans. So what can you do?
One way to reduce your private loan payment is to refinance. If the lowest rate on offer is variable, it might make sense to take that rate while you’re in school.
Then, when you graduate, you can refinance again with a fixed rate that makes your loan more predictable over the long term.
Making an educated guess
The problem with variable-rate loans is that you can’t predict what the interest rate will do. You can, however, look at analyst predictions and make an educated guess. In many cases, the fixed-rate loan is a better choice overall — but in some situations, the variable rate may be worth a second look.
Figuring out your student loan repayment strategy? Our Student Loan Repayment Calculator can help.