Variable Rate Student Loan Guide
When you go to take out a student loan, you’ll have several options to choose from, including private, federal, fixed-rate, and variable-rate student loans.
Variable-rate student debt refers to student debt that has a fluctuating interest rate. Typically, these types of loans start out with low introductory interest rates that slowly increase during your loan term. By the end of the term, your interest rate may be considerably higher than it was at the start of the term.
While interest rates typically rise, it’s also possible for rates to decrease over time, meaning you can potentially pay less in interest than you would with a fixed-rate loan.
Lenders set variable rates based on index rates. As the index rate changes, your variable interest rate may fluctuate.
Generally speaking, variable-rate student debt is best if you expect to be able to pay off your loan early so that you can take advantage of the low introductory rates.
Types of Variable-Rate Student Debt
If you want to apply for variable-rate student debt, you only have one option: private student loans.
Federal student loans have fixed interest rates that are set by Congress on an annual basis. If you take out a federal student loan, your interest rate will be the rate set by Congress in the year that you borrowed the loan.
Private lenders, on the other hand, offer variable- and fixed-rate student loans, leaving it up to you to decide which you prefer.
Private loans, while often less flexible than federal student loans, can still offer very competitive interest rates and repayment terms.
If you’re interested in borrowing variable-rate student debt, private lenders are a solid option.
How Much Does Variable-Rate Student Debt Cost?
Since variable-rate student debt is so unpredictable, it’s more or less impossible to determine how much the total cost of your loan will be.
In general, variable rates start lower than fixed rates but can rise to be much higher by the end of your loan term. Currently, you can find variable rates starting as low as 2.49%, but it’s difficult to predict how much your rate could rise or fall in the future.
Aside from the interest rate, you also need to consider your loan balance, term, and fees.
Loan limits are typically dependent on your college or university’s total cost of attendance. This includes housing, food, tuition, books, and other expenses.
Terms vary depending on the repayment plan you negotiate with your lender. That being said, terms for private student loans tend to be between five and 15 years. Longer loan terms mean you’ll pay more in interest, and there will be more potential for your rates to increase.
Lastly, don’t forget to ask your lender about any potential fees. Prepayment, late payment, processing, origination, and other fees can add up if you’re not careful.
Benefits of Variable-Rate Student Debt
Benefits of variable-rate student debt include:
- Potential to save money on interest
- Low introductory interest rates
- Flexible repayment terms
- Can be used to finance all education-related expenses
- Available from a wide range of lenders
While fixed-rate student debt may be better for those that prefer more predictability in their loan payments, variable-rate student debt can help students save money on interest if rates fall or they are able to pay off their loan early.
Tips for Applying for Variable-Rate Student Debt
Applying for variable-rate student debt is a fairly straightforward process, but it’s important to be prepared before diving in.
Follow these tips to make applying for a loan as easy as possible.
- Compare Lenders
When applying for any type of loan, one of the most important steps is to compare rates, terms, and fees from multiple lenders.
- Prepare Your Documents
Most lenders will require the following documents to complete your application:
- Social Security Number
- Personal Identification
- Proof of Income
- Proof of Employment
- Cost of attendance
- Proof of Enrollment
- Co-signer Information
- And more
Be sure to check your lender’s requirements to ensure you have all the necessary documents to submit your application.
Lastly, you need to submit your application.
If you are approved, you should receive an offer letter from your lender dictating the terms of your loan, including your interest rate, term, fees, disbursement method, and more.
If you agree to these terms, you can accept the offer and receive your financial aid.
Monthly payments at 7.81% interest rate on a 10 year loan with a $22,000 balance