Brought to You By Our Partners at College Ave Student Loans
When searching for a student loan, you will likely discover two different types of interest rates: variable and fixed. The interest rates you find will be dependent on the types of student loans you pursue. The government does not offer a variable rate loan, so all federal student loans will only contain fixed rate options. On the other hand, many private lenders offer both variable and fixed rates on private student loans.
Not quite sure what a variable interest rate is? Our partners at College Ave Student Loans break down the information you need to know.
What makes a variable interest rate “variable”?
To understand a variable rate, we need to break down the structure of a variable rate and look at the individual components. A variable rate is composed of two parts: a fixed margin and a variable interest rate index.
Part I – Fixed Margin
The fixed margin is a set rate determined during loan origination. Once set, it does not change over the life of the loan. When applying for a private student loan, the lender assesses the creditworthiness of the applicant – and their cosigner if present. Based on this assessment, a fixed margin is applied. Lenders utilize varying criteria to assess the creditworthiness of an applicant, but a general rule of thumb is that a higher credit score leads to a lower fixed margin.
Part II – Variable Interest Rate Index
The second part of a variable rate is based on an interest rate index. This is the component of a variable rate that makes it “variable.” As the index goes up or down, so does the interest rate. Multiple interest rate indexes exist, and the type of index utilized to determine the variable rate often varies based on the type of loan (i.e. mortgages, credit cards, cars, etc.). For student loans, lenders typically refer to the London Interbank Offered Rate (LIBOR) index.
Is a variable rate better than a fixed rate? Learn this on the College Ave Student Loans blog – plus, more about student loans and interest rates!