4 Steps In Deciding Variable vs Fixed Rate Student Loan Refinancing

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  • 4 Steps In Deciding Variable vs Fixed Rate Student Loan Refinancing
Author: Joseph Reinke, CFA

When we refinance our student loans, we ask ourselves one simple question: Does refinancing save me money? The marketing geniuses at lending companies know this. That is why you see student loan refinance advertisements with big bold words saying how much an average person saves.  However, as we point out in our Ultimate Student Loan Refinance Guide, the decision is not that simple. This especially holds true when considering variable vs fixed rate student loans.

Determining when to refinance using a variable rate student loan instead of a fixed rate is a complex topic.  This guide will take you through four factors that assist you in answering the question: “Is refinancing with a variable rate student loan the right choice for me?”

Quick words of advice, if you are trying to keep you financial life simple… stick to fixed rate loans and don’t bother reading the rest of this guide!

Note: If you’d like free help, be sure to become a Member of FitBUX and use our Free Student Loan Refinance Service.

FitBUX's Free Student Loan Refinance Service

Table Of Contents

Factor 1: Current Variable vs. Fixed Interest Rates

This is the easiest factor to analyze. If the proposed interest rate on the variable rate student loan is greater than your fixed interest rate student loan, then keep your fixed rate loan and go enjoy the rest of the day. Simply put, in today’s interest rate environment, rates will most likely go up from where they are today.  There is no upside in sight for you under that scenario.

If the starting interest rate offered on the variable rate loan is lower than the rate of your current fixed rate loan, you should proceed to the second factor below.

Factor 2: What is the Cap Rate?

All variable rate student loans have interest rates that move up and down.  Most do so on a monthly or annual basis. The interest rate cap (a.k.a. the Cap Rate) is simply the highest interest that you can be charged over the life of the loan. For example, if the Cap Rate is 9.0%, then the highest interest rate you can be charged is 9.0%. (Note: Fixed rate loans don’t have a cap because the interest rate doesn’t move).

The Cap Rate is important because variable rate monthly payments start off being lower than your fixed rate payments. However, if interest rates rise your monthly payment under a variable rate student loan could end up being greater than it would be under your current fixed rate loan.

When evaluating your Cap Rate, there is no “magic” number. For example, one simply can not say “9.0% is too high. Therefore, I should not refinance with a variable rate student loan if the cap rate is 9.0%.”  Instead, you must look at the Cap Rate relative to your fixed interest rate.

As a general guideline, if the Cap Rate on the variable rate student loan you are being offered is greater than your fixed rate loan by 1.5% or less, then refinancing into the variable rate student loan would make sense. For example, if your fixed interest rate is 6.0% and the cap rate is 7.5% or lower, then refinance into a variable rate student loan.

If, using our example, the cap rate is greater than 7.5% then the variable rate student loan has a high amount of risk and you need to proceed to the third factor below.

If you’d like to watch a video example, click here.

FitBUX Student Loan Refinance Give Away

Factor 3: What is the Loan Term?

The third factor to consider when contemplating refinancing with a variable rate student loan is the term.  Is your variable rate student loan 2 years, 5 years, 10 years, etc..?

Historically, interest have tended to go up slowly.  Therefore, the shorter the loan term, the less likely the interest rate is going to increase dramatically. Thus, if you have a short-term loan, your interest rate is less likely to increase to the Cap Rate.

In general, a variable rate student loan with a term of less than 4 years is considered low risk, all else being. This also applies if you plan on paying off the loan in less than 4 years. Conversely, a variable rate loan with a term greater than 7 years is considered high risk and you will need to analyze the last factor below.

If you are offered a variable rate student loan with a term between 4-7 years, a deeper analysis must be performed and we recommend using our free student loan refinance service for help.

One of the advantages of the fixed rate loan is that you don’t have to worry about the interest rate changing over the life of the loan.

If you’d like to watch a video example, click here.

Factor 4: What is the Student Loan Balance?

The last factor to analyze when determining if you should use a variable rate student loan or a fixed rate loan to refinance is the size of the loan.

Let’s assume you owe $1,000 on a variable rate student loan and the current interest rate on that loan is 2% and the Cap Rate is 8%.

Let’s pretend that the interest rate on the loan changes overnight from 2-8%. What would happen to my monthly payment? The required monthly payment only goes up by $2.75.  On the other hand, if the amount you owed was $100,000, the monthly payment would increase by $274 a month.

Therefore, the lower your student loan balance is, the lower amount of risk you are exposed to when considering a variable rate student loan.  Determining what loan balance is appropriate highly depends on your income level and how quickly you plan on repaying your loans.

If you’d like to watch a video example, click here.


In general, if the above factors are low and you plan on paying off your loans quickly, you may want to consider refinancing your student loans into a variable rate loan instead of using a fixed rate loan.

If the above factors are considered moderate risk, you may want to limit your exposure to variable rate loans at approximately 50% of your income.  I.e. if you make $100,000 per year limit your variable loan balance to $50,000 or less.

If the above factors are high risk then you may want to avoid variable rate loans altogether and stick to a fixed rate loan.  If you do want to use a variable rate loan we would not recommend more than 10%-20% of your annual income, i.e. you make $100,000 per year your variable rate loan balance would be less than $20,000.

Of course, each situation is different.  If you would like us to take a look at your personal situation, let us know. Sign up at Fitbux.com today and use our one-of-a-kind technology to evaluate your situation. Its’ free….

Current Variable Interest Rates:

5 Year: 2.4%
10 Year: 2.9%
15 Year: 3.25%
20 Year: 3.6%

Be sure to shop fixed and variable rates among the ten best student loan refinance companies.

Additional FAQ

Below are questions we often get with regards to variable rate student loans:

Are fixed or variable loans better?

Generally speaking, if you are trying to keep like simple, stick to Fixed rate loans.

Are Federal student loans fixed or variable?

They are fixed rate loans.

What is the dander of variable rate loans?

It is the potential to have higher interest rates which impact your monthly payments.

Can you switch from variable to fixed?

Yes but you'll probably have to refinance which means you get the rate you currently qualify for which may be disadvantageous to your situation.

Article by:  Joseph Reinke, CFA, Founder of FitBUX


Joseph Reinke, CFA

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About the Author

Joseph Reinke is a Chartered Financial Analyst (CFA) Charter Holder and founder of FitBUX which has helped over 14,000 young professionals on their journey to financial freedom. Joseph has been personally investing since he was 12 years old.

In addition, he has experience in student loans, mortgages, wealth management, investment banking, valuation, stock trading, and option trading. He has been on 100s of podcast and has been invited to 100s of universities to discuss financial planning with their soon to be graduates.

  • […]  The cap rate on the proposed variable rate student loan is the second risk factor you must consider when contemplating using a variable rate loan to refinance your student loan. This video is best used in conjunction with the following guide….http://fitbu.. […]

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