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Fixed vs. Variable Interest Rates

Video Transcript

Hi, I'm Ray Jones, vice President of Loan Programs with South Carolina Student Loan, and I want to talk to you just a few minutes about rates of student loans and how they can impact your borrowing.

Fixed and variable rates are, are very simply determined by, first of all, what you're selecting when you borrow. Once you're offered that rate, a fixed loan will stay the same rate for the life of the loan. So from the time that we approve the loan until the time that you make the last payment on that loan, the interest rate never changes. Different things that change our market can affect a variable interest rate.

So you'll be offered an interest rate when you apply. However, as the economy adjusts, as the market adjusts, that rate may go up and down for the life of the law. First of all, if you're going to be taking out a student loan through the federal government, the Federal Direct student loan has a fixed interest rate that is determined by the federal government every year. It's not something that you can change, however you want to pay attention to what that rate is, as well as the fees that the federal government charges you for those rates. 

For private educational loan options, interest rates become very important. Understand that things like FICO scores mean something. 

So as you're preparing for you or your child or your family to experience that college career, be sure that you're being mindful of what your credit report looks like. Remaining in good standing in other things because that's gonna affect your interest rate. And then lastly, one of the things that can impact rate is what can you pay while you're enrolled.

These things mean something in the term and the interest rate that you're gonna receive. For example, if you can pay the interest while you're in school, we offer a lower rate. However, we do offer fixed payment options of $25 per month, as well as the completely deferred payment option.

When you're looking at that, please select the term that's gonna make you as successful as possible once you graduate and actually have to go into full repayment of the loan.

Fixed vs. Variable Interest Rates

When it comes to funding your education, understanding the nuances of student loans can feel like learning a new language. One of the most critical decisions you'll face is choosing between a fixed and a variable interest rate on your loan. Both options have their advantages and potential drawbacks, and the right choice depends on your financial situation, risk tolerance, and the economic environment.

Fixed Interest Rates

Stability in Every Season
A fixed interest rate means that the rate stays the same for the duration of your loan. It's the financial equivalent of steady sailing; you'll know exactly what your monthly payment will be from start to finish, making budgeting a breeze. This predictability is comforting for those who prefer stability over the life of their loan, as it shields borrowers from the ups and downs of market fluctuations.

Pros:

  • Predictable payments make budgeting easier.
  • Immunity to interest rate increases over time.

Cons:

  • Typically starts higher than variable rates.
  • Won't benefit from potential rate decreases.

Variable Interest Rates

Riding the Economic Waves
Variable interest rates, on the other hand, fluctuate over time based on changes in an underlying interest rate index. This option can be likened to surfing: it requires a bit more balance and preparedness to ride the waves of economic change. If interest rates fall, so do your payments; however, if rates climb, your payments will rise accordingly.

Pros:

  • Often starts lower than fixed rates, potentially saving money initially.
  • Can decrease over time if the underlying rate index goes down.

Cons:

  • Uncertainty in monthly payment amounts, making budgeting harder.
  • Risk of increasing rates, which can raise the cost of borrowing over time.

Which is Right for You?

Choosing between fixed and variable interest rates for your student loan boils down to a few key considerations:

  1. Risk Tolerance: Are you comfortable with uncertainty in your monthly payments, or do you prefer knowing exactly what you will pay each month?
     
  2. Loan Term: Shorter-term loans might be less risky with variable rates since you'll have less time for interest rates to increase significantly.
     
  3. Economic Outlook: Consider the current and projected economic environment. If rates are historically low, locking in a fixed rate might be wise. Conversely, if rates are expected to fall, a variable rate could save you money.
     
  4. Financial Flexibility: If you have room in your budget to handle potential increases in your monthly payments, a variable rate could offer initial savings. However, if your budget is tight, the predictability of a fixed rate might be a safer bet.
     
  5. Future Income Expectations: If you anticipate a significant increase in income, the potential for higher payments with a variable rate might be more manageable.

Before making a decision, it's crucial to simulate different scenarios using loan calculators. Consider speaking with a financial advisor to understand how your choice fits into your broader financial picture. Remember, the goal is not just to choose a loan but to strategize a repayment plan that aligns with your financial goals and lifestyle.

In the world of student loans, knowledge is not just power—it's also savings and peace of mind. By understanding the differences between fixed and variable interest rates, you can navigate the path to financing your education with confidence, ensuring that you select the loan that best suits your needs and future plans.

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