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Refinancing student loans: variable rate vs fixed rate

Home Personal Finance and Budgeting Refinancing student loans: variable rate vs fixed rate

  • Avatar medicine2wallstreet 
    Participant
    Status: Student
    Posts: 1
    Joined: 07/15/2019

    I will have around 253k in loans when I graduate this May running at about 6.11% APR.

    My question is in regards to variable rate interest versus fixed rate interest. With the U.S. economy being somewhere towards the end of its majestic bull run, would it be advantageous for me to secure a variable rate interest refinance deal instead of a fixed rate for when the economy finally experiences a downturn? By that I mean when we eventually have a recession in the likely near future will I significantly benefit from relaxed lending and interest rate policies from the Fed and have a much better variable rate interest for a decent period of time vs a fixed rate.

    Or does that not even matter that much really? I want to be aggressive and try to finish loan repayment 4 years after my 4 year residency if that helps with advice on which interest rate option is best.

    #230522 Reply
    Avatar Future Fire 
    Participant
    Status: Physician
    Posts: 16
    Joined: 08/20/2018

    Great blog post on this from 2015.

    Fixed Versus Variable Loans

    I’d do variable if you are able to pay off in 4 years or less as you plan.

    #230618 Reply
    Avatar Budgetmaestra 
    Participant
    Status: Attorney
    Posts: 41
    Joined: 04/30/2019

    I’d go variable. The spread between the fixed rates and variable ones is pretty wide so I think variable is worth it. It will also add a little extra motivation to get that thing paid off quickly.

    #230635 Reply
    Craigy Craigy 
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    Status: Spouse
    Posts: 2049
    Joined: 09/16/2016

    I will have around 253k in loans when I graduate this May running at about 6.11% APR.

    My question is in regards to variable rate interest versus fixed rate interest. With the U.S. economy being somewhere towards the end of its majestic bull run, would it be advantageous for me to secure a variable rate interest refinance deal instead of a fixed rate for when the economy finally experiences a downturn? By that I mean when we eventually have a recession in the likely near future will I significantly benefit from relaxed lending and interest rate policies from the Fed and have a much better variable rate interest for a decent period of time vs a fixed rate.

    Or does that not even matter that much really? I want to be aggressive and try to finish loan repayment 4 years after my 4 year residency if that helps with advice on which interest rate option is best.

    Click to expand…

    First of all, if rates fall, you can simply refinance your loan.  Even if it’s a fixed rate.

    Second, you’ll have to read your note, but you usually have to call/write/serve/obtain a congressional decree in order to get your lender to actually adjust your rate down on a variable rate.

    But without trying to predict the future of rates (right now it looks like they’ll remain low for the next year or so)…

    It’s all about risk.  By taking the variable rate, you are accepting the market risk in exchange for a lower initial rate.

    1. What is the spread.  I.e. is it even worth it to take the variable rate.  IMO it should be more than a quarter point, ideally substantially more to be worth the risk.
    2. How fast do you intend to pay it off, how much income will you have.  Shorter –> variable.  I would not touch a variable loan if you intend to pay it off over the course of a decade, e.g.
    3. How secure is your job. Less confident –> fixed.  If you lose your job, you’ll want to make sure your payment doesn’t go up.
    4. What is the maximum allowed rate under the note.  Lower –> Variable.  Some lenders will cap the loan around 10%, some is closer to 20%.  In theory there doesn’t have to be a cap.  Yes, we have had double digit rates in the not-so-distant past.
    5. Could you afford to pay the highest variable rate allowed under the note, or even just double the current rate.  If not  –> fixed.
    6. How often can they adjust the rate.  Usually this is monthly or quarterly.  If you intended to pay off the loan in 12-24mos, having your rate “fixed” for several months at a time would reduce your risk.

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    #230647 Reply
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