Fixed- or Variable-Interest Rate Student Loan: Which One Should You Choose?

by Su Hsiang Yu | In Financial Empowerment, Guides and Tools, MPOWER VIP | 8 October 2019 | Updated on: January 30th, 2023

We know international student loans can be confusing, with terms and jargon you might not have heard of before. One important subject has to do with student loan interest rates. Student loans may come with a fixed interest rate, which stays the same over the life of the loan, or a variable interest rate, which can change over time. 

Both rate types have pros and cons, which are important to consider before you choose a loan. Read on for a closer look at these types of student loan interest rates so you can decide which one is a better fit for you. 

If you choose an international student loan with fixed interest rates: 

A fixed interest rate means you pay the same rate of interest over the life of your loan, so it’s easier to budget for. With a fixed interest rate, your monthly payments won’t change until you either finish paying off the loan or refinance it. 

Moreover, the interest rate won’t change regardless of economic conditions around the world. Thanks to this, you’ll always know exactly how much you’ll be paying toward your international student loan each month or quarter.

Pros of a fixed interest rate loan

– There’s no interest rate increase even if market rates increase.

– Your monthly payments don’t increase, so it’s easier to budget for your bills.

Cons of a fixed interest rate loan

– Fixed rates typically start out higher than variable rates.

If you choose an international student loan loan with variable interest rates: 

Variable interest rates can go up, down, or remain unchanged depending on economic conditions. In the U.S., for instance, rates have been rising lately due to interest rate hikes from the Federal Reserve. 

Variable rates usually start lower than fixed rates, so you might reduce the interest you are paying in the beginning. Over time, however, rates could increase, causing your cost of borrowing to go up. 

If rates increase, your monthly student loan payments will go up as well. Instead of having a fixed monthly payment to work into your budget, you’ll have to deal with unpredictable bills. 

Pros of a variable interest rate loan:

– The rate usually starts lower, so it’s more affordable during the first year.

– You have a chance to reduce the amount of interest you pay if the interest rate doesn’t rise. 

Cons of a variable interest rate loan:

– The monthly payments are unpredictable, making them more difficult to budget.

– The total amount of monthly payments could change as market rates change.

Our recommendations for international students:

There is no 100% right answer about whether you should go with a fixed-rate or variable-rate loan. It’s best for you to understand the pros and cons of each type and how they affect your situation.

Your decision should depend on several concrete factors, such as the terms and conditions of your loan and your monthly budget, as well as the volatility of the market. 

However, the loan experts at MPOWER Financing generally suggest that international students should avoid taking on the risk of variable interest rates when possible and stick with fixed rates. 

If you go with a variable rate, it will be a gamble because no one knows how the economy will shift or what the market rate will become. While a variable rate comes with the potential to lower your interest initially, your rate could increase your payment to a level that you have difficulty affording. According to the interest-rate forecast by Kiplinger, “…expectations of the future path of interest rates…showed a gradually rising trend over the next two to three years.”  

Ultimately, we hope that every student can pursue their higher education without financial concerns and have an awesome experience in the U.S.


What is a variable APR student loan?

A variable APR (annual percentage rate) student loan, also known as a floating rate loan, is a type of student loan with an interest rate that will change over the loan period in response to market conditions.


Is a variable rate student loan a good idea?

Variable interest rates can start out lower than fixed interest rates, but depending on the circumstances of the market, the variable interest rate may increase over time and increase your monthly repayment as well. If you plan to pay off your student loan in a short period of time, a variable rate could make sense. If you’ll be paying the loan off over several years, however, there is more risk in signing up for a variable rate. 


Is it better to go fixed or variable?

Fixed interest rates make it easier to budget for your student loan payments, which will stay the same from month to month. Variable rates, on the other hand, can be more unpredictable and can lead to a higher student loan bill than you initially planned for. That said, variable rates can start out lower than fixed rates, reducing the amount of interest paid at the beginning of your loan and making them a potentially appealing option to borrowers who plan to pay off their loans quickly. 

Author: View all post by Su Hsiang Yu

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