Student loans will be a regular part of life for many Americans aspiring to attend college or university. The reality is that student loans are also a part of life beyond school.
If you are borrowing money to pay the cost of attendance, it is important to have a financial plan. One factor you have to address is the interest rate. Is a variable or fixed-rate student loan right for you?
Before you can answer that question, you need to understand how interest rates work in the lending process. Let's look at the variable-rate loans and fixed-rate loans more closely.
What is an interest rate?
First off, what is an interest rate? When you borrow money through any type of loan, including student loans, the lender will charge interest. This is a percentage of the principal — the initial loan amount you borrow — that is added in exchange for access to the funds. It's also commonly referred to as the annual percentage rate (APR).
The interest rate structure you choose for your student loan will directly impact your repayment plan.
How does a variable-rate student loan work?
The most important thing to know about variable-rate student loans is that the interest rate can increase or decrease. The rate is set against a benchmark but floats up and down with the broader market. These movements are generally influenced by the larger economy, as interest rates historically trend up and down over time.
The main advantage to a variable-rate student loan is potential interest savings. If your interest rate is adjusted down, you pay less in interest when paying off your student loan. However, the tradeoff is potentially paying more in interest over the life of the loan if your rate increases.
Many private student loan options come with a variable rate. It's important to research how each financial institution structures the loan. Some keep the rate fixed for an introductory period, like when you are in school. Always ask how frequently your rate will be adjusted, whether monthly or quarterly, for example.
How do fixed-rate student loans work?
Fixed-rate student loans feature a rate that is consistent from beginning to end. There is no increasing or decreasing for a fixed rate; it stays constant throughout the repayment period.
This offers benefits such as a stable amount of interest. You can more easily budget for repayment of a fixed-rate loan because you know exactly how much interest is charged on your monthly payment, every month. If you choose a fixed rate, however, you also close the door on potential savings should interest rates trend lower.
Most federal student loans have fixed rates. Those rates are controlled by Congress and published by the Department of Education. There are also fixed-rate options available from private lenders, too.
Is a variable or fixed rate student loan right for you?
There's no one answer to this question. Everyone's unique situation will dictate whether a variable or fixed-rate student loan is right for them.
Still, there are some ways to determine which could be best for your individual needs:
- If interest rates are low and projected to stay low, a variable rate could lead to possible savings.
- If you don't want the added risk of increased rates, a fixed-rate loan might be ideal.
- If you plan on paying off your student loans quickly, variable rates could help unlock savings.
- If your future income after school is uncertain, a fixed rate can provide budget security.
Find the right Comerica Bank student loan for you
Whether you are more interested in a variable or fixed-rate student loan, Comerica Bank can help. We offer both types of student loans, as well as different repayment options, rate reduction opportunities and no origination fees or prepayment penalties.
Contact us today to learn more about variable and fixed-rate student loans from Comerica Bank.
