Got variable rate student loans? If you do, you might have noticed that your interest rate has been slowly ticking up over the last couple of years. The interest rates on your loans are affected by the Federal Reserve and they have been increasing their rates since 2015 – which has meant that the amount you owe on your student loans each month is also increasing.
Who has that extra cash just sitting around? If you’re like most millennials or recent grads, balancing your budget is about as hard as doing a perfect headstand the first time you walk into a yoga class. It sometimes happens, but everyone is extremely surprised when it does.
Variable rate loans look like a good idea when you’re shopping for student loans or student loan refinancing. After all, they often offer lower initial rates! But they’re like all the products you’ve ever bought from late night infomercials – they quickly lose their luster when you get them in the mail and realize they’re made of flimsy materials. Similarly, the savings that variable rate student loans provide is only temporary if you get them in a low interest rate environment and soon your rates go up and leave you wishing you would have chosen the fixed rate alternative.
Interest Rates Are Only Going Up
Have you ever thought that it would be nice to have a crystal ball so that you could know the future?
But you don’t need a magic ball to know that interest rates are going up. That’s because the Federal Reserve has said that they plan to continue to raise rates in the coming years after nearly a decade of low rates. That means that you’re almost certain to come out better if you refinance your student loans over the next 10 or 20 years with fixed rate loans.
After all, the last thing you want is to go through the process of refinancing student loan debt only to find out a few years down the line that because you chose variable rate loans you’re paying exactly the same interest rate you were before your first refinanced.
Fixed Rate Loans Provide More Security
When it comes to refinancing your student loans, you want security and savings. But you don’t just want to save more money this month or year - you want to also have some security around what you’ll pay in the future. After all, if you’re thinking about taking out a car loan or buying a house, it’s easier to make that big financial leap if you know exactly what your student loan repayment will cost you each month for the next 5 or 10 or 20 years. If you don’t know, you’ll likely need to build in a bigger cushion into your budget to make room for the possibility that your payments could go up.
You’ll also be able to lock in lower rates over the long term if you refinance now at a fixed interest rate. Since rates are going to go up, fixed rate student loans will also increase in cost. According to data from LendEDU, if your variable rate loan goes substantially higher, it could still be cheaper than the fixed rate loans that will be on offer at the time. Why gamble with your payments and financial security? Getting a fixed rate loan at a low rate now will ensure that you’re guaranteed an interest rate until you pay back your loans.
Lenders Who Care About You Offer Fixed Rates
Here’s the thing – lenders who want to help their borrowers make the best student loan refinance choices offer fixed rate loans. Splash Financial only offers fixed interest rates for that reason. Especially the near certainty that interest rates will increase, variable rate loans just don’t make financial sense for most of their customers.
While it might seem like another lender is offering a lower rate – if it’s a variable rate loan it will likely cost you more over the life of your loan and you’ll be gambling with your future – hoping that interest rates won’t go up too much.
But you have the crystal ball – you know that the Federal Reserve intends to raise rates. You know what to do.
Dave Rathmanner is a Millennial who enjoys reading and writing about personal finance. Dave works to use data to educate consumers about their student loans.