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Fixed or Variable: Which Interest Rate Should You Choose?

By U.S. News & World Report

One of the first lessons in financial planning 101 is to embrace the mantra: “it depends.” Answers are rarely black and white when it comes to finances, which is one reason people stumble when debating whether or not to use a variable or fixed interest rate on student loan refinancing. Instead of offering a definitive answer (because there isn’t one), let’s look at some of the pros and cons of using each type.

Why Refinance Student Loans

Refinancing student loans can help you:

1. Consolidate all student loans into one place for an easier payment.

2. Get a lower interest rate.

Refinancing federal loans to a private loan means giving up protections and programs such as forbearance, deferment and forgiveness. However, if you can shave 2 percent or more off your interest rate, it very well may be worth giving up the protections of the federal government.

Keep in mind, those looking to refinance student loans need excellent credit and all loans in good standing to receiving the crème de la crème in interest rates.

Fixed Interest Rate

Personal finance experts advise young college graduates to refinance student loans to a fixed interest rate. Why? Because it offers one steady rate over the life of the loan. Borrowers don’t have to worry about a jump in interest or aggressively paying down the debt before the rate increases.

Similar to choosing a 30-year fixed mortgage over an adjustable-rate mortgage, refinancing with a fixed interest rate gives the borrower stability. The fixed interest rate might be ideal for anyone struggling with large amounts of student loans that might take several years or a decade to pay off. Fixed interest rates are as low as 3.5 percent with lenders such as SoFi and Earnest.

Pros

— Your interest rate isn’t going to change.

— You can account for the payment in an emergency fund in case of a job loss or reduction in income.

Cons

— The interest rate will be higher than a variable rate.

— It can take longer to pay off the loan because the APR starts higher than with a variable rate.

Variable Interest Rate

The variable interest rate is subject to change. In fact, it’s almost guaranteed it will change unless the loan is paid off quickly. Most lenders base their variable rates off a LIBOR rate, which stands for London Interbank Offered Rate and works as a benchmark rate for banks internationally.

As the LIBOR changes, so does the variable rate. At the moment the LIBOR rate is low, which yields low variable interest rates. (SoFi and Earnest both currently offer rates as low as 1.9 percent APR. Earnest will even will allow you to switch between fixed and variable interest rates once every six months.) Once the LIBOR begins to increase, borrowers with a variable rate will experience an increased interest rate. It’s important to ask a lender if the variable rate may increase month-to-month or if it’s locked in for a set period of time before it increases.

Variable rates will have a cap, but the cap may still be painfully high for those trying to dig out of debt. Ask the lender what the cap is before signing any documents.

The variable rate is ideal for anyone who is confident about his or her ability to repay a loan quickly. In this situation, the loan would be relatively low, and it would be unlikely that a job loss or other major expenses would occur during the borrower’s repayment period.

Pros

— Initial rates are currently low.

— It allows for aggressive repayment before rates hike.

Cons

— Rates could increase month-to-month.

— The cap on an interest rate is typically higher than a fixed rate offer.

— It’s difficult to estimate how much to have saved in an emergency fund to cover the cost of the loan in the case of job loss.

Other Qualities to Look for When Refinancing a Loan

It doesn’t matter if you choose variable or fixed — there are ideal qualities in any loan. Borrowers should focus on lenders that offer no origination fee and no prepayment penalty. If a borrower needs a co-signer, then he or she should consider looking for a lender that offers a co-signer release.

There is a variety of options when it comes to refinancing a loan, and unfortunately there are also scams. Be vigilant about doing research to ensure a company is reputable and offers the best possible deal for your situation.

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Fixed or Variable: Which Interest Rate Should You Choose? originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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