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Home Student Loans Fixed vs. Variable Interest Rates: Student Loans

Fixed vs. Variable Interest Rates: Student Loans

How Student Loan Interest Works

Different student loans will have different interest rates. Interest is the cost you pay to the lender for borrowing the loan. Until your loans are paid in full, you will be charged interest (except while you’re enrolled in-school at least half time, your grace period, and during periods of authorized deferment on subsidized federal student loans), so the faster you pay off your student loans, the less they will cost you overall.

In today’s marketplace, private student loan interest rates range from around 1.04% (variable) to more than 13.72% APR. Many private student loan lenders offer both fixed and variable interest rates, enabling eligible borrowers to choose the option they prefer. Interest rates are determined based on the credit rating of the borrower and cosigner. To find lenders that may offer the rates and terms you’re looking for, check out our student loan lender comparison page.

student loan interest rates for July 2020

What Is a Fixed Rate?

A fixed interest rate is a rate that stays the same for the life of the loan. If you borrow a loan at 5% interest, your interest rate will not fluctuate over the life of your loan. It will remain at 5%.

Pros and Cons of Fixed Interest Rate

Pros Cons
 Lower risk — monthly payments are stable  Rates are typically higher than variable rates
 While a variable rate can increase, a fixed rate cannot  While a variable rate can decrease, a fix rate cannot

What Is a Variable Interest Rate?

A variable interest rate may be lower than a fixed interest rate initially, however, variable interest rates fluctuate with market changes. This means your monthly payments could go up or down depending on the current rate.

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Pros and Cons of Variable Interest Rate

Pros Cons 
 Rates are typically lower than fixed rates Higher risk — monthly payments can fluctuate
 If the interest rate decreases you pay less If the interest rate increases, you have to pay more

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How Does Variable Interest Work?

Variable rates are calculated based on the sum of two interest rates: a variable index rate and a fixed margin, which is added to the variable index rate to determine your variable rate.

The index rate increases or decreases based on changes in a standard interest rate, such as the London Interbank Offered Rate (LIBOR) or Wall Street Journal Prime Lending Rate (WSJ Prime). Once the index rate has been determined, the margin will be added. This is an additional percentage added to the index rate that will determine your variable interest rate.

The margin is based on the credit scores and credit histories of the borrower and cosigner (if applicable). Better credit will result in a lower margin, yielding a lower interest rate.

Variable Index Rate + Fixed Margin=Variable Interest Rate

Your variable interest rate can change whenever the index rate changes:

  • The one-month LIBOR resets every month; the three-month LIBOR resets quarterly, the six-month LIBOR resets twice a year and the one-year LIBOR resets annually.
  • The WSJ Prime Rate, the rate banks charge their most favored customers, changes when the two-thirds of the 30 largest banks surveyed by the Wall Street Journal change their rates.
  • The fine print of your loan agreement will tell you which index your lender uses to determine rates.


If your interest rate is 1M LIBOR + 2.5%, the rate is calculated by taking the current one-month average LIBOR rate plus an additional 2.5 percentage points.

Federal Student Loans always have a fixed interest rate. Federal student loan interest rates are updated yearly on July 1. Regardless of credit, all borrowers of federal student loans will receive the same rate for that loan type. The following table illustrates the current federal rates.

Federal Student Loan Interest Rates 2020-2021

The following table lists current federal student loan rates for comparison. These rates are fixed for all borrowers and are valid from July 1, 2020 to June 30, 2021.

Undergraduate Subsidized or Unsubsidized Graduate Unsubsidized PLUS Loans
 2.75 4.30 5.30

Private student loans offer fixed or variable rates. Available rates will change with market trends, meaning the rates listed this month, may not be the rates available next month. It’s important to note that private student loan interest rates may be lower than federal student loan interest rates for some borrowers.

How to Get a Lower Interest Rate on Private Student Loans

  1. Apply with a cosigner who has very good credit scores and a strong credit history.
  2. Take advantage of any interest rate discounts (such as a 0.25% reduction for signing up for automatic debit) offered by your lender.
  3. Consider private student loan refinancing after you start repaying your loans. If your credit or your cosigner's credit has improved, you may qualify for a lower interest rate.
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