Variable vs. Fixed Interest Rates

What to do, what to do with your student loan repayment plan?

Rather than reinvent the wheel, read this as it does an excellent job of breaking down the numbers with refinancing a student loan with a variable versus fixed interest rate. I have always opted for a variable interest student loan both as an undergraduate and a graduate student. My credit score has always been excellent (>800). As an undergraduate in 2007, I opted for private school loan with a variable interest rate. That rate has remained below 3.75%. Thank goodness I am close to paying it off soon.

When I attended nurse anesthesia school, I received a mix of federal student loans with an interest rate ranging between 4.5%-7% along with private school loans through Discover at a variable interest rate of 4%. When I graduated from nurse anesthesia school, I opted with SoFi because they did not have origination fees for their loans and at the time, they offered the best rates along with a great customer service department.

I knew that I was going to pay my student loan debt down within 10 years or less. SoFi offers a 10-year repayment plan. Here were the terms I was offered:

10 year repayment term @ 4.7% fixed


10 year repayment term @ 3.43% variable

For me, it was a no-brainer. My primary objective was to obtain the lowest interest rate possible. Variable interest rates track the 1-year LIBOR, which is the interest rate at which banks lend to each other. However, given how interest rates have been at a historic low and that the Federal Reserve has been hinting at increasing the federal funds rate, it’s possible that the LIBOR may experience a slight increase as well (since it historically tracks the funds rate). Again, I know I am generalizing and oversimplifying this viewpoint, but the odds that your variable student loan interest rate will increase to the point where having a fixed interest rate would have been more beneficial is minimal given the current economic climate we’re in.

Additionally, worst case scenario, let’s just say you opt for a variable and one day it goes up to 5%. Well, you can always refinance your variable interest rate loan to a fixed interest rate loan so as long as you have a great credit history. Again, much more nuance to this discussion and I’m certainly open to having it, but for the purposes of this post: I opted for a lower interest rate because (1) I’m betting on the idea that the LIBOR will not rise to such an extent that my variable interest rate will exceed the fixed interest rate and (2) I’m betting on the idea that I can maintain a great credit score which will allow me the opportunity to refinance if needed.

Sign up through SoFi and receive a $300 bonus when you decide to consolidate and refinance your student loans.


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