Interest rates can wreak havoc on your financial situation as you try to pay back your student loans. Most private student loans have variable interest rates, while all current federal loans have fixed interest rates. Variable interest rates change throughout the life of your loan. When you signed the loan paperwork, it indicated how often the variable interest rate would change. Some lenders will only change the rate once a year, but some will change the rate quarterly or even monthly, so it can be hard to determine how much you actually owe over the lifetime of the loan.
Benefits of Fixed Interest Rates
When you go through the student loan consolidation process, you have the chance to get one fixed interest rate that applies to your outstanding loan balance. Federally-backed loans already have fixed interest rates, but you may have the option to change the rate percentage. Private lenders may give you the option to pick between a fixed and variable rate, so why should you consider the fixed interest rate? Here are just a few of the reasons:
- Less Risky – With a fixed interest rate, you can be certain that your rate will stay constant over the life of the loan. If inflation takes hold of the economy, you do not need to worry; your rate will not change. A variable rate may soar when inflation is on the rise, significantly increasing your monthly payments. A fixed rate ensures that you will be insulated from any of the economic conditions that may rock the interest market.
- Long-Range Planning – Most people don’t wake up one morning and decide to go out and purchase a house. They think through this big decision and begin putting money aside for a down-payment. When your student loans have fixed interest rates, you can better plan for this type of purchase. You know that each month you will pay $350 to your student loan lender. Variable interest rates can put a wrench in long-range financial plans. You know your interest will change quarterly, but you aren’t sure by how much. How can you plan for the long term when you don’t even know what you owe in the short term?
- Convenience – It is not uncommon for people to use a number of different student loans to pay for their education. Each loan will have a different interest rate, with some variable and some fixed. It can be extremely time-consuming to keep track of each of these rates. One fixed rate will streamline your monthly payment process.
Federal Loans and Fixed Interest Rates
Since federal loans already have fixed interest rates, you may be wondering what kind of interest rate benefit you will receive by consolidating. You probably have different federal loans with different rates. By consolidating, you will most likely receive a blended rate averaging the interest rates from each of your loans. The federal government caps the rate at 8.25%. However, be careful, and make sure that you don’t end up paying more. You may have a few large loans with low rates and eight small loans with high rates. When you average those rates together, you may end up paying a lot more interest on those larger loans.
Should You Pick Variable or Fixed?
While shopping around for private student loan consolidations, you will find that lenders may offer you an option between fixed and variable interest. However, you should not always jump at the chance to get a fixed interest rate. You will need to analyze your student loan portfolio along with current market conditions.
Take a look at your loan portfolio, and list the current interest rates you are paying and the terms of the loan. Calculate (to the best of your ability) how much interest you may end up paying. Then, do the same calculation with the fixed rate. Pay careful attention to your loans with larger balances. The fixed rate may end up costing you much more. If your loans are nearly paid off, changing rates may not make much sense either.
Now, take a look at the market conditions, and read some of the top economist’s predictions. The market does influence interest rates. With variable interest, your rates will not rise substantially if the economy begins sinking. They will rise when the economy is booming. You will have to decide if you are willing to risk it and hope the variable rates will stay low. Keep in mind that you have just one chance to consolidate your private loans.