Wednesday, April 8, 2015

Blog Anniversary Celebration: Variable vs. Fixed vs. Mixed Interest Rates: What you should know before refinancing your student loans

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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 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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