In today's economy, any incoming college student must prepare to dedicate a large chunk of money toward education costs.
While scholarships can go a long way and federal student loans typically have the best terms and flexible repayment plans, some students may also benefit from a competitive. But the type of carries can make a big difference. Like any loan type, fixed or variable interest rates can influence your student loan repayment period and the total amount you owe.
In fact, before any borrower agrees to a private student loan, how the interest rate is determined is one of the most important questions to ask, according to Joseph Schmidt, CFP, founder of Sunrise Personal Finance. "Is the interest rate fixed or variable?" he says. "Is there a potential for the interest rate of the loan to increase in the future?"
Luckily, there are plenty of factors that can help you determine whether a fixed- or variable-rate loan is the best choice in today's rate environment.
When to choose a fixed student loan rate
In general, fixed student loan rates can be a safe choice no matter where interest rates go in the future. Today, federal student loans carry fixed interest rates, too.
The benefit of locking in a fixed rate — even when rates are relatively high — is the ability to anticipate how much you'll owe and how much interest you'll accrue over time. You can work the fixed monthly payments into your budget without worrying about that amount increasing over time.
Plus, if rates do fall in the future, you'll always have the option to, which can help you score a lower monthly payment and better rate.
It's never too early to start financially preparing for education costs. Compare student loan options available to you today!
When to choose a variable student loan rate
Variable student loan rates could result in paying more or less over the lifetime of your loan — but it all depends on how interest rates move. Whilearen't directly tied to the Federal Reserve's rate decisions, they do tend to move alongside them, like other types of loans.
If your variable interest rate goes up, it could increase not only the amount you pay in the long run, but also your monthly payment to your loan servicer. Because of the long-term impact a private student loan can have on your finances, make sure you're prepared to work any potential payment fluctuations into your monthly budget so you're not at risk of defaulting.
Nevertheless, if you have great credit and can qualify for the best loan rates, choosing a variable-rate student loan may help you score the most competitive interest available today. Plus, you'll benefit if your monthly payment decreases when rates eventually go down.
Knowing all the details of your variable rate loan may also help you make a clearer decision. For example, different loan servicers may adjust your variable rate more frequently than others, and each one may have a different cap for how high your rate can go.
What else to consider about private student loans
may be a solid financing option for students who aren't eligible for federal student lending or who need more money than they qualify for with federal lenders.
, make sure you take the time to compare and find the right option for your financial situation. Deciding between a fixed or variable interest rate is one way to secure the loan best for you, but there are other details to look for, too. Figure out the repayment term you prefer, the amount you'll need to borrow and any extra benefits or discounts you may qualify for.
Like any loan, the best way to guarantee ais by having the before you apply. And don't forget to shop around and compare different lenders. Even with the same application details, you may qualify for better rates with one lender over another.
Start your search today by learning more about student loan options available to you now.
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