Fixed-Rate Student Loans

pros and cons of fixed student loansStudent loans tend to work in one of two ways. One form, which includes loans that originate with the U.S. Department of Education, has interest rates that can wax and wane. The other form provides an interest rate that stays constant, no matter what might happen. These fixed-rate student loans are appealing because they provide a level of security that is missing in a variable-rate loan, but there are still a few hidden problems consumers must be aware of.

A Rare Option

Fixed-rate loans were once common in the federal market, but as Bloomberg pointed out in July of 2013, the U.S. Senate held a vote, and 81 legislators voted to do away with the practice with only 18 voting against. As a result, loans that originate in the federal market now have interest rates that can bob and sway, depending on the yield on 10-year Treasury notes.

Variable rates like this can be a boon at times, because dips in the stock market can make a student’s loan suddenly much cheaper. There’s no need to fill out extra paperwork and/or choose the right time in which to buy a loan, because the variable rate handles all of that work with no intervention required at all. However, these loans can also give students less control. They’re not in charge of deciding how much they’ll pay, and there’s little they can do to stave off a price hike.

A fixed-rate student loan does give students that power, and when credit is cheap and plentiful, these loans allow students to lock in a rate that’s beneficial for them. The loans are also predictable, meaning that students know exactly how much they’ll need to pay and how much the loan will cost if it’s paid on time. This can make budgeting really easy, as all of the surprises have been eliminated.

 

Types of Student Loans