Pros and Cons of Fixed Rate Private Student Loans

Private student loan lenders have started to offer fixed rate loans as an alternative to variable rate loans. This introduces a new dilemma for students and their families as they now have the choice to fix or not to fix. It is impossible to say definitively which option is the better choice, as interest rates can be fickle creatures, with long term rates hard to predict.

Students should exhaust all other means of financing college before even considering private student loans. Applicants that qualify for federal government loans know where they stand as only fixed rate loans are available. They know that upon graduation or some point further down the line, they have the option to consolidate their federal student loans if a lower fixed rate is available, to thus reduce the overall repayments.

Previously private lenders only offered variable rate loans. The interest rate levied varies as the base rate moves either up or down. It is possible that a variable rate today could go lower thus reducing the monthly payments. However private student loans tend to have repayment periods of between 10 -15 years and if interest rates rise then a rate rise can increase the monthly payment. Whilst one can follow current interest rate trends it is impossible to predict how interest rates will have moved after more than a decade.

The fixed rates currently on offer are higher than the variable rates, plus they add origination fees, further increasing the cost of the loan. However it is perfectly viable that a fixed rate of 8% today could well prove to bargain in the future. Opting for a fixed rate has the advantage of giving security as the student will know what the monthly repayment will be and can fix their budget accordingly. The insecurity of variable rates can play havoc with ones budget if payments rise.

The fixed rates on offer can be tiered, as in the case of the fixed rate loan from Wells Fargo. Their rate varies between 7.75% -14.25%, dependant on the credit of the co-signer. Those who can use a co-signer with excellent credit should be able to secure a fixed rate at the low end of the scale. The U.S. Bank offers one fixed rate of 7.99% but adds an origination fee of between 2% – 9%, depending on the co-signers credit.  

The advantage of fixed rate loans is the long term security they offer in allowing the student to know exactly what their future payments will be. The disadvantage is they could well end up costing more in the long term than a variable rate loan. They could of course cost less in the long term. The decision must come down to an individual choice based upon the need for the certainty fixed rate loans give or the willingness to take a fiscal gamble on future rates.