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To kick off the 2nd anniversary celebration of The Barrister on
a Budget Blog, I’m happy to introduce this week’s special guest contributor
Matt Zehr from Lendedu. Take it away Matt!
There are three different options that borrowers have to
consider when determining which student loan package suits their needs and
current financial situation.
Variable Interest Rate Loans: The first, and most common, is a
variable interest rate student loan. These packages offer a student loan with a
rate that adjusts on a monthly basis to reflect the most current LIBOR rates.
These student loan packages add a premium on the LIBOR rate that is usually
adjusted based on the borrower’s credit history. When researching variable
interest rate options, it is important to consider:
- The amount of risk the borrow can handle
- Term length
- Monthly payment options
Those
that choose to borrow with a variable interest rate will benefit from a lower
interest rate at the time of borrowing. The interest rate is lower because
there is less risk to the bank. If interest rates move higher, the bank could
move the interest rate higher too to avoid losing out. When choosing
between variable and fixed rate student loans the borrower should take into
account the possibility of interest rate changes. Students should assess the
term length and monthly payment that they can handle, as shorter term lengths
yield higher monthly payments but lower total interest paid.
Fixed Interest Rate Loans: Fixed interest rate student loan
packages are a popular choice for more conservative buyers who can afford the
tradeoff of a higher interest rate for enhanced security. In a fixed interest
rate package, the interest rate is determined at the start to the loan and
stays the same throughout the entire term length of the loan. These rates are
assessed at higher levels than variable rates to account for uncertainty in the
future of LIBOR rates. Since fixed interest rates remain the same throughout the
entire term, the bank must assess a higher rate to account for risk on their
end incase LIBOR rates increase, which reflect the rate that banks can get
money at.
Mixed Interest Rate Loans: Mixed interest rates are an
interesting combination of variable and fixed interest rates. In these plans,
borrowers are assigned a fixed interest rate for the first half of the loan,
and the transition to a variable interest rate for the remainder of the
balance. These unique options have distinct advantages. The fixed rate for the
first part of the loan is lower than that of a traditional fixed rate loan.
Also the variable rate at the end of the loan opens the door to capitalize on
lower interest rates in the future. With mixed rate loans, there is often a cap
placed on the maximum variable rate to protect buyers against significant rate
increase.
The Bottom Line: Each of these student loan packages offer unique advantages
depending on the situation the borrower is in.
- For the more conservative borrower: A fixed interest rate student loan is likely the best option for you. The added security against increasing rates may well compensate for the increased monthly payment resulting from higher interest rates.
- For the less conservative borrower: Variable interest rates provide a unique opportunity to capitalize on lower rates. If one is planning to pay of a student loan quickly, this may be the best option to minimize total interest paid.
- For the rest: Mixed rate student loan packages over a unique hybrid between the two traditional options. These offer enhanced security at the start of the loan – when the total amount owed is the highest, and still leave the door open to capitalize on low rates in the future.
About Our Guest: Matt Zehr is the Chief Marketing Officer at lendedu.com! LendEDU is a marketplace for student
loans and student loan refinance. LendEDU helps borrowers find the best terms
and rates available by connecting them with multiple lenders from one
application.
Favorite Barrister Blog Post:
One of my favorite blog posts is “Student
Loan Series: The Law School Scholarship Scam.” Applying for scholarships
and student loans can seem overwhelming at many points along the process. It is
pivotal to understand how to avoid false scholarships and the necessity of
reading the fine print. No student should ever be caught in a position where
they attend their dream school only to find that their scholarship offer was
too good to be true, or carries unrealistic expectations for their LSAT or GPA.
Keep up the great work Jenny!
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Until Next Time,
Jenny L. Maxey
Author of Barrister on a Budget: Investing in Law School…without Breaking the
Bank
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