Fixed Interest Rate vs Variable Interest Rate

[ayyntee]

Hi,

I am in the process of doing my loan applications for school, and was wondering which option is best. Taking out a variable interest rate loan at 3.25% with deferred payment or taking out a fixed interest rate at 6.75% also deferred payment. I know the variable rate is a lot lower but do you guys think it will be higher in the long run? I also have options to do fixed payments while in school. Any suggestions would be great. Thanks.

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[RangerBob]

I assume these are private loans, correct? I had to take out a private loan for my post-bac, back in 2006. That loan, with a cosigner with excellent credit was at about 9.5%. We just paid it off, but it was down to around 3% a year or two ago. I think when we took out the loan it was at a peak in interest rates over the last 10-20 years or so, but it gives you an idea of the volatility of interest rates.

As a general rule, if you think you can pay off the loan quickly (within a few years) then variable-rate loans will usually save you money. If it's going to take you more than 6-10 years to pay off the loans I would personally opt for the fixed-rate loan. My personal opinion is the economy will pick up (slowly) and interest rates will start rising again.

All-in-all, it's a bit of a gamble. Rates could stay flat for 10+ years, and they could also skyrocket in two.

 

[Giovanotto]

Bump: I have the same questions/am in the same situation. Help!

 

[asdf123g]

I assume these are private loans, correct? I had to take out a private loan for my post-bac, back in 2006. That loan, with a cosigner with excellent credit was at about 9.5%. We just paid it off, but it was down to around 3% a year or two ago. I think when we took out the loan it was at a peak in interest rates over the last 10-20 years or so, but it gives you an idea of the volatility of interest rates.

As a general rule, if you think you can pay off the loan quickly (within a few years) then variable-rate loans will usually save you money. If it's going to take you more than 6-10 years to pay off the loans I would personally opt for the fixed-rate loan. My personal opinion is the economy will pick up (slowly) and interest rates will start rising again.

All-in-all, it's a bit of a gamble. Rates could stay flat for 10+ years, and they could also skyrocket in two.

im pretty financially illiterate, but is this fixed vs variable in relation to private loans or federal loans (fafsa stuff)?

 

[RangerBob]

im pretty financially illiterate, but is this fixed vs variable in relation to private loans or federal loans (fafsa stuff)?

I was referring to private loans. Federal loans only come as fixed-rate loans now.

 

[asdf123g]

I was referring to private loans. Federal loans only come as fixed-rate loans now.

thanks for clarifying. Do you know if theres a reason it seems federal loans are more popular than private?

 

[DrMidlife]

Federal loans come with all kinds of standardized infrastructure for deferment and survivable repayment and in some cases forgiveness. Federal loans don't require a cosigner and you're going to get funded unless you have fresh active problems on your credit report. Changes in the terms of federal loans require congressional approval. Repayment, in particular, is a huge big deal for doctors/dentists/etc since debt levels run well over $250k into the $500k range now. If you pay attention to the news, there's a whole lot of noise about lowering federal student loan interest rates, but who knows if/when that will come to fruition.

Private loans may or may not have any of that infrastructure. In theory, private student loans are dischargeable in bankruptcy, which federal loans are not, but good luck getting that bankruptcy finalized and good luck getting that private loan off your back. You should not be thinking about private loans for med school unless you're going to be the grownup who reads the pages and pages of fine print and becomes the expert on what exactly you're getting yourself into and what exactly you gain/lose compared to federal loans. You should not be taking anybody else's private loan experience as relevant to your own, except as items to research for your own circumstances.

Note that when somebody talks about "Sallie Mae" or "Navient" that this is just a loan servicer, not a type of loan. Navient services federal loans as well as private.

 

[asdf123g]

Federal loans come with all kinds of standardized infrastructure for deferment and survivable repayment and in some cases forgiveness. Federal loans don't require a cosigner and you're going to get funded unless you have fresh active problems on your credit report. Changes in the terms of federal loans require congressional approval. Repayment, in particular, is a huge big deal for doctors/dentists/etc since debt levels run well over $250k into the $500k range now. If you pay attention to the news, there's a whole lot of noise about lowering federal student loan interest rates, but who knows if/when that will come to fruition.

Private loans may or may not have any of that infrastructure. In theory, private student loans are dischargeable in bankruptcy, which federal loans are not, but good luck getting that bankruptcy finalized and good luck getting that private loan off your back. You should not be thinking about private loans for med school unless you're going to be the grownup who reads the pages and pages of fine print and becomes the expert on what exactly you're getting yourself into and what exactly you gain/lose compared to federal loans. You should not be taking anybody else's private loan experience as relevant to your own, except as items to research for your own circumstances.

Note that when somebody talks about "Sallie Mae" or "Navient" that this is just a loan servicer, not a type of loan. Navient services federal loans as well as private.

Thank you very much for taking the time to write all of that. I, and others, appreciate it a lot! Makes a whole lot more sense now.