Many federal loans and private student loans come with the option of locking in a fixed rate or allowing for the fluctuations of variable rate loans. Fixed rate student loans are loans that remain at a set interest rate, providing greater certainty in terms of monthly payments. They might have a higher starting rate than variable rate loans, but since the interest does not climb over the life of the loan, they can be much more economical for the borrower. However, as the Prime rate rises and falls, the monthly payments on a fixed rate loan may appear higher than monthly payments for variable rate loans.
Eligibility for a fixed rate loan is dependent on the type of loan in question, as several different loan varieties offer fixed rate options. For federal loans, students need to apply for the FAFSA to determine how much financial aid they can be awarded. They must be enrolled in a degree program at half-time status or greater. Many of these federal loans are distributed based on need. Private student loans, on the other hand, are disbursed by private lenders and should only be accessed by students who have used all federal funding options already. To qualify, they or their cosigner must have solid credit. If the lender is a bank, the borrower or cosigner are often required to be members.
Repaying a Fixed Rate Loan
Fixed rate loans are payed off in monthly installments just like any other loan, except the interest will be unchanging over the entire life of the loan regardless of whether the student falls behind on payments or pays it off quickly. Federal loans are the most lenient in terms of payment, with options of deferment, forbearance, and even loan forgiveness in extreme situations. Most loans have a grace period of some sort, which explicitly states the time at which a student must begin to pay off the borrowed amount. In most cases, the student may put off payments until six months after graduating or dropping down to below half-time status.
Types of Fixed Rate Loans
- Stafford Loan: The subsidized Stafford loan has the cheapest fixed interest rate of any federal loan, at 3.4%. Students may borrow up to $20,500 per school year. Those who exemplify need should take advantage of this resource.
- Perkins Loan: The Perkins loan is a federal loan fixed at a 5% interest rate. Like the Stafford loan, it is awarded based on financial need and may cover up to $27,500 worth of an undergraduate education. Students have until nine months after they graduate to begin making payments.
- PLUS Loans: PLUS loans are federal loans granted to parents to be used for their child’s education. At a fixed interest rate of 7.9%, parents may borrow up to the cost of tuition, not including any other financial aid. PLUS loans come with a 3% origination fee and a 1% federal default fee.
- Wells Fargo Student Loan: Wells Fargo offers both fixed and variable rate options for their private student loans. Their Collegiate Loan comes with fixed rates as low as 5.94% APR and may be awarded to students attending four-year schools with the desired credit or credit-worthy cosigners. The total amount awarded may cover education in full, minus the awarded amount of other financial aid.