Conquer your student debt. Refinance now.
When you’re considering a student loan refinance, one important decision you’ll need to make is which kind of rate to choose—fixed or variable. Basically, there’s one major difference between the two: With a fixed-rate loan, your interest rate doesn’t change. With a variable-rate loan, the interest rate fluctuates based on market conditions.
There’s no one-size-fits-all answer. Both fixed- and variable-rate student loans have their pros and cons. When choosing between them, you should consider the possibility of interest rate changes and related risks, along with the potential impact on your monthly payment1. Here’s what you need to know about fixed- vs. variable rate loans, and some factors to consider when deciding which one may be right for you.
What is a fixed-rate student loan?
A fixed interest rate is one that never changes. When you borrow a fixed-rate loan, it means your minimum payment will rarely rise or fall over the life of the loan2—you lock in your terms when you sign the agreement.
One reason borrowers, especially those with long-term loans, like fixed-rate loans is that they provide a kind of “interest rate insurance”—they cost a little more, but that premium protects you against price changes down the road.
Pros of a fixed-rate student loan
- Your payment is the same every month: Choosing a fixed-rate loan means your monthly payment doesn’t change, making it a predictable expense to budget for.
- Your interest rate stays the same: With a fixed-rate loan, the interest rate doesn’t change over the repayment term. That means you won’t need to worry about rate hikes or economic uncertainty.
- You know the exact amount you need to pay back: Since the interest rate and amount due are the same every month, you can easily figure out how much you owe by multiplying your monthly payment by the number of months you have left in the repayment period.
Cons of a fixed-rate student loan
- You may end up paying a higher interest rate: Fixed-rate loans typically have higher interest rates than the initial interest rates offered on variable-rate loans, so your payments might be higher at first.
- You could miss out on interest rate savings: Since fixed rates don’t change, you aren’t able to take advantage of lower rates—and the opportunity to lower your monthly payment—if market rates go down. You’d have to refinance your loans to try to get a lower rate.
- You may pay more over the life of your loan: You could end up paying more in interest charges over time, since fixed-rate loans generally have higher rates.
What is a variable-rate student loan?
A variable interest rate may start out lower than a fixed interest rate, but it will fluctuate over the life of the loan as its underlying reference rate changes, or with shifts in Federal Reserve policy. This means your minimum payment will change as rates change. For instance, you could start out with a variable APR of 3.25%³, and then it could spike to 5% or 6% if market rates increase.
If you’re an Earnest customer, when your loan originated will determine the benchmark rate Earnest uses. For loans originated prior to 12/15/22, the 1-month LIBOR⁴ as published by the Wall Street Journal will be used each month. For loans originated after 12/15/22, the 30-day Average SOFR as published by the Federal Reserve Bank of New York will be used each month.
Some borrowers prefer variable rates when they do a student loan refinance because they don’t want to pay a premium for the “interest rate insurance” — they are making a kind of bet that rates won’t rise significantly during their loan term, which is why these tend to be better for shorter terms.
A final thing about variable rates to keep in mind: There is no limit to how much the reference rate can rise or fall in any one year, but each loan does have a maximum APR.
When you’re refinancing with Earnest, any variable student loan that has a term of 10 years or less has a lifetime cap of 8.95%. For a term of more than 10 years and up to 15 years, it’s 9.95%. Any term longer than 15 years is capped at 11.95% subject to state availability.5 For any new student loans taken out through Earnest, the lifetime variable rate cap is 36%.
Pros of a variable-rate student loan
- Your interest rate may be lower: Variable-rate loans generally have lower interest rates than fixed-rate loans, at least to start.
- You may save money: Lower rates mean you’ll potentially pay less in interest charges over the life of your loan, which could save you money in the long run.
- You could pay more toward your principal balance: Here’s another benefit of a lower rate: One of your repayment options includes making more than your minimum monthly payment, which could actually help you pay off your loan faster since the extra money will go toward paying down the principal instead of just the interest charges.
Cons of a variable-rate student loan
- Your interest rate may go up: Although variable student loan rates have the potential to offer some of the lowest rates up front, there’s no guarantee they’ll stay that way. You may find yourself paying a higher rate as market conditions change and rates rise.
- Your monthly payment might increase: Interest rates fluctuate with variable-rate loans. That means your monthly payment could go up if rates rise. Some private lenders have an interest rate cap based on the highest variable APR they’ll allow. Still, the new payment may be more than you can afford, wreaking havoc on your personal finances.
- You can’t calculate how much you owe: Since your rate has the potential to change at any time, it’s impossible to know the total cost of your student loan repayment amount. If rates go up significantly, you could end up paying hundreds or thousands more in interest charges.
Can I switch from variable to a fixed-rate loan?
You can always switch at Earnest with no fees, though a hard credit check will be conducted every time you do. You may switch once every four months, from variable to fixed-rate or fixed-rate to variable. However, the APR on your new loan will be based on prevailing student loan interest rates and your financial profile at the time of your request, which means the new rate could be higher than what you were offered originally.
If you decide to pursue a student loan refinancing with other student loan lenders, you’ll usually be able to choose between a fixed- and variable-rate loan. In other words, it is possible to switch from one kind of rate to another, but you’ll need to refinance your loans to do so.
If you have Federal student loans6, the rates are fixed for the life of the loan, but you can refinance with another loan servicer if you have private student loans. Keep in mind, the better your credit score, the better the private loan rates you’ll likely qualify for. If your credit is less than perfect, or if you have several open credit cards with balances, applying with a cosigner may make it easier to get approved for a lower rate.
It’s also worth mentioning that student loans benefit from consumer protection laws. Among other things, that means lenders can’t discriminate against you for any reason. And if you’re still in school, you can choose how you want to receive any financial aid, including student loans, beyond tuition and fees paid directly to your college or university.
Variable loan or fixed-rate loan: Which should I choose?
When it comes to choosing between variable or fixed-rate student loans, it depends on your priorities, including how quickly you plan to pay off the loan, how well you can stomach the risks of a potential rate increase, and how the monthly payment amount fits your budget.
A variable-rate loan may be ideal for you if:
- You want lower monthly payments in the short term, especially if you anticipate your income will go up over time.
- Your repayment plan includes paying off the loan quickly, which could save you money on interest charges if rates don’t rise too much.
- You’re able to refinance when interest rates are lower and have the potential to remain that way for a while.
A fixed-rate loan may be ideal for you if:
- You prefer a predictable monthly student loan payment.
- You want to lock in the interest rate and loan amount.
- You plan to take several years to pay off your student loan debt.
If you’re gung ho about a fixed-rate loan, a Direct PLUS Loan is another option to consider. These federal student loans come from the Dept. of Education, and are often made to graduate or professional students, or parents of dependent undergrad students to assist with costs not covered by other financial aid. The perks of a Direct PLUS loan are the government pays the interest charges while you’re in school. Like most federal student loans, the interest rates are fixed, which means there’s less likelihood of surprise rate increases than there might be with a variable APR loan.
See how much you could save with Earnest
The final decision—fixed- or variable-rate student loan—is up to you. A fixed-rate loan may be a good fit if you prefer predictable monthly payments and you think it may take you a while to pay off the loan.
On the other hand, a variable-rate loan may be appealing if you want to take advantage of low starting student loan interest rates and you intend to pay off the loan ahead of schedule, before rates rise too much. It all depends on your comfort level and what works best for your situation.
Earnest offers fixed-rate loans starting at 2.44% APR, and variable-rate loans starting at 1.74% APR3 (including a 0.25% auto pay discount7). If you’re thinking about refinancing your student loans, see what your monthly payment and total interest costs would be by using our student loan calculator.
1Choosing to refinance to a longer term may lower your monthly payment, but increase the amount of interest you may pay. Choosing to refinance to a shorter term may increase your monthly payment, but lower the amount of interest you may pay. Review your loan documentation for total cost of your refinanced loan.
2 Your monthly minimum payment may change with the use of benefits Earnest provides, including but not limited to Skip-A-Payment, forbearance, amortization, deferment, etc.
3 Actual rate and available repayment terms will range from 5-20 years in one month increments, subject to eligibility based on your assets and income. Fixed rates range from 2.69% APR to 8.45% APR (excludes 0.25% Auto Pay discount). Variable rates range from 1.99% APR to 8.45% APR (excludes 0.25% Auto Pay discount). These rates are guaranteed through 5/22/2022. If you choose the variable rate loan type. This means that your actual rate varies with the market and could be lower or higher than the rate on this form. The variable rate is based on the rate published on the 25th day, or the next business day, of the preceding calendar month, rounded to the nearest hundredth of a percent, plus a margin and will change on the 1st of each month. As of 3/2022, the 30-day Average SOFR rate is 0.05%. The initial variable interest rates range between 1.99% to 8.45% (1.74% – 8.20% with Auto Pay discount), will fluctuate over the term of your loan with changes in the SOFR rate, as applicable, and will vary based on your credit history and other factors. For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Our lowest rates are only available for our most credit qualified borrowers and contain our .25% auto pay discount from a checking or savings account. *Please note, we are not able to offer variable rate loans in AK, IL, MN, NH, OH, TN, and TX.
4 If you choose the variable rate loan type, this means that your actual rate varies with the market and could be lower or higher than the rate on this form. Variable rate shall be based on the one-month London Interbank Offered rate (“LIBOR”) published in The Wall Street Journal’s website on the twenty-fifth day, or the next business day, of the calendar month immediately prior to the Interest Rate Change Date (the twenty-fifth date of each month) plus a margin. As of Month DD, YYYY, the one-month LIBOR rate is X.XXX%. The initial variable interest rates range between X.XX%-X.XX% (X.XX%-X.XX% with auto pay discount), will fluctuate over the term of your loan with changes in the LIBOR rate, and will vary based on your credit history and other factors. *Please note, we are not able to offer variable rate loans in AK, IL, MN, NH, OH, TN, and TX.
5 Earnest’s Loan Cost Examples: These examples provide estimates based on payments beginning immediately upon loan disbursement. Variable APR: A $10,000 loan with a 20-year term (240 monthly payments of $XX) and a X.XX% APR would result in a total estimated payment amount of $XX,XXX.XX. For a variable loan, after your starting rate is set, your rate will then vary with the market. Fixed APR: A $10,000 loan with a 20-year term (240 monthly payments of $XX) and a X.XX% APR would result in a total estimated payment amount of $XX,XXX.XX. Your actual repayment terms may vary.
6 You may lose benefits associated with your underlying federal and/or private loans if you refinance such as federal Income-drive Repayment Plans, Economic Hardship Deferment, Public Service Loan Forgiveness, or other determent and forbearance options. If you file for bankruptcy, you may still be required to pay back this loan.
7 You can take advantage of the Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment from a checking or savings account. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. For multi-party loans, only one party may enroll in Auto Pay.
Loan Eligibility criteria: Your debt is from paying for education at a Title IV accredited school. The debt is from your education or your child’s. The debt you’re refinancing is for a completed degree or one that will be completed at the end of this semester. You are currently the primary borrower on the student loans you would like to refinance, and you will remain the primary borrower after refinancing. You must reside in the District of Columbia or one of the 47 states Earnest Operations LLC is authorized to lend in (all but Delaware, Kentucky, and Nevada). This is strictly a student loan refinance product. There is no opportunity to borrow more than your outstanding qualifying student loan amount. You must be the age of majority in your state or older at the time you apply, as well as be a United States citizen or Permanent Resident Alien without conditions. Please note, we are not able to offer variable rate loans in AK, IL, MN, NH, OH, TN, and TX.
Earnest Loans are made by Earnest Operations LLC. Earnest Operations LLC, NMLS #1204917. 535 Mission St., Suite 1663, San Francisco, CA 94105. California Financing Law License 6054788. Visit www.earnest.com/licenses for a full list of licensed states. For California residents: Loans will be arranged or made pursuant to a California Financing Law License.
Earnest loans are serviced by Earnest Operations LLC with support from Navient Solutions LLC (NMLS #212430). Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by agencies of the United States of America.
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