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How variable rate student loans work

These changing rates could help you save, but consider the risks before signing up.

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Many private student loan providers give you a choice between fixed rates and variable rates on student loans. Fixed rates are relatively straightforward, as you pay the same interest rate each month. But variable rates change based on the lending market and economy.

Variable rates can offer savings in the short term or when the economy is on a downswing. But there's a risk that you'll end up with an unexpectedly high bill if your rate sharply increases.

What is a variable rate on a student loan?

A variable rate on a student loan is an interest that increases and decreases as the economy goes up and down. Generally, variable rates are less expensive during an economic downturn, when most lenders charge lower rates to encourage people to take out loans. But if the economy is on an upswing rates tend to go up, too.

The variable rate you receive with a loan is actually a combination of two interest rates: a benchmark rate and a margin rate.

Benchmark rate

Also called a base rate, a benchmark rate is what makes a variable interest rate, well, variable. It's an interest rate that regularly changes based on trends in the lending market, usually every month or every three months. And it's often the rate that the federal government central banks uses when lending money to financial institutions like banks.

Factors that affect benchmark rates can include how much people want to take out in loans versus how much money financial institutions have to pay it out, or how much the currency is worth. If the Federal Reserve lowers or increases the federal funds rate, that often directly or indirectly impacts benchmark rates.

Margin rate

A margin rate is a fixed interest rate that a lender charges on top of the benchmark rate when you take out a variable-rate student loan. This rate stays the same over the life of your loan. It ensures that lenders make the same profit off the interest, regardless of increases or decreases in the benchmark rate.

Lenders base your margin rate on factors like you or your cosigner's credit score, income and debts. Generally, the lowest margin rates go to borrowers with an excellent credit score of at least 760 and a debt-to-income ratio under 20%.

Ask about the variable rate cap

Most lenders also have variable rate cap to protect borrowers from sky-high interest rates. This means that a lender will never charge more than that rate cap, regardless of how high benchmark rates get. Typically this is around 18%, though it varies by lender.

What benchmark rates do lenders use for variable-rate student loans?

LIBOR and prime rates are the two most common benchmark interest rates that lenders use to determine variable-rate loans.

LIBOR rate

The LIBOR rate, or London Interbank Offered Rate, is the most common benchmark rate on private student loans. The LIBOR rate is based on the average short-term interest rate that financial institutions qualify for through London's interbank market — a financial system where international financial institutions trade among themselves.

LIBOR rates come in several types. But as a student loan borrower, you only need to know about two of them: the one-month LIBOR, which changes monthly, and the three-month LIBOR, which changes every three months.

Prime rate

The prime rate is more local than the LIBOR rate — it's based on the federal funds rate of the Federal Reserve, the benchmark of all US-based benchmarks. Typically, prime rates are the federal funds rate plus a few percentage points. The most common prime rate is published in The Wall Street Journal — known as the WSJ Prime rate — though you can sometimes find state or local prime rates as well.

It works like this: The Wall Street Journal polls the top 30 US banks to ask about their prime rate. If three-quarters or more banks change their rate, then The Wall Street Journal publishes a new interest rate.

But that doesn't mean it regularly changes from month to month. In fact, it can stay the same for several years or change in as little as a few weeks.

How to compare variable rate student loans

The best way to compare variable-rate student loans is to look at the benchmark rate and margin rates a lender charges. If two lenders use the same benchmark rate, then you can compare the range of margin rates

Most often, lenders prominently display the current range of variable rates. This only tells you the range of rates that you'll start with — not the range of rates you might pay over the life of the loan.

You can get a better idea of the rates you're going to pay by looking at the fine print below the variable rates your lender advertises. In some cases, you might have to click on an asterisk to see a disclaimer explaining how variable rates work.

You'll typically see something along these lines:

3-month LIBOR + 1.23%–9.45%.

Our example means that the lender offers variable rates combining the three-month LIBOR benchmark rate and a margin rate that can range from 1.23% to 9.45%. If the lender gives you only one margin rate — say 3% — then you'll pay 3% plus the current three-month LIBOR rate.

Compare variable rates from top student loan providers

Here's how variable rates break down on undergraduate student loans from four private student loan providers.

LenderBenchmark rateMargin rateVariable cap

Discover

3-month LIBOR

0.87%-10.62%, with 0.25% autopay

18%

EDvestinU

One-month LIBOR

1.88%-8.43%, with 0.5% autopay discount

Not available

SoFi

One-month LIBOR

1.12%-10.70%, with 0.25% autopay discount

13.95%

Earnest

One-month LIBOR

1.31%-11.51%

36%

Should I get a variable-rate student loan?

That depends on the state of the economy and how long you plan on taking to pay it off.

If variable rates are currently lower than fixed rates and you think you can repay the loan in under 10 years, a variable rate could help you save on interest. But if variable rates are currently higher than fixed rates, or you're considering a longer loan term, a fixed rate might be a better choice.

It also depends on how much flexibility you'll have in your income. Having a variable rate means your interest repayments could increase every one to three months. If you're not able to afford a potential student loan repayment increase, a fixed rate is a safer choice.

See more top private student lenders

Use the table below to compare variable and fixed student loan options.

Data indicated here is updated regularly

Name Product Min. Credit Score Max. Loan Amount APR
Ascent private student loans
540
$200,000
2.71% to 12.99%
EDvestinU Private Student Loans
675
$200,000
4.07% to 9%
Straightforward student loans for undergraduate and graduate students.
LendKey Private Student Loans
Varies by lender
4.99% to 11.06%
This connection service partners with Sallie Mae and WSFS Bank to offer competitive rates.
 Advantage Education Loan Refinance Loan
670
Starting at 3.74%
Refinance to a more flexible repayment plan with this nonprofit lender.
Alliant Credit Union Traditional Student Loan
680
$60,000
Starting at 4.56%
All-purpose personal loans from @pl_product_min_loan_amount@ to @pl_product_max_loan_amount@ with rates that stop at @pl_product_var_rate@.
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Compare up to 4 providers

Bottom line

Variable-rate student loans can help you save on interest if you have the flexibility and means to repay your loan over a short period of time. But you need to understand how variable rates break down to make an informed decision when picking a lender.

Read our guide to fixed-rate versus variable-rate student loans to make sure variable rates are the right choice before you apply for a private student loan.

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