Comparing Student Loan Options
Once you’ve exhausted scholarships, grants, and federal student aid, you may need more funding to cover your tuition bill. Private student loans exist to help families fill the gaps left after using other forms of aid. But how do you determine the best fit for your situation? Below we break down two of the most common questions for borrowers.
Should I choose a fixed or variable rate?
Fixed Interest Rate
A fixed rate loan is exactly as it sounds – the interest rate is fixed, or stays the same, for the entire life of your loan.
Pros: You’ll know what your interest rate is and won’t have to worry about fluctuations down the road.
Cons: The tradeoff for knowing what your rate will be for the long haul is that it is often a higher rate to start than a variable rate option.
Who should consider a fixed rate: In general, most borrowers will benefit from a fixed rate loan. But know that if interest rates decrease later, you’ll be stuck with the rate you locked in unless you refinance your loan(s).
Variable Interest Rate
When you select a variable rate loan, your interest rate will fluctuate over time based on the current index rate. Your lender adds a percentage to that base according to your credit score and history, and there is usually a limit or “ceiling rate” on how high your rate can go if the index increases.
Pros: Variable rate options are typically lower than fixed rate at the start of your loan. Additionally, if the index decreases in the future, so will your interest rate.
Cons: There is risk involved; while your rate could go down, it could also increase, meaning you will pay more in interest over time.
Who should choose a variable rate: If you feel confident in your ability to continue to make payments regardless of a potentially higher interest rate, or you plan to pay your loans off quickly, you might want to consider a variable rate.
Should I choose a longer repayment term so my monthly payments are lower?
In general, the longer your loan repayment term (10 years, 15 years, 25 years) the lower your monthly payment will be, which certainly sounds like a great option. However, the longer you are making those payments, the more interest you will pay in the long run. This is a personal choice, and there is no one right answer. Here are a few factors to consider: