The two dominant types of student loans
available are fixed-rate loans and variable-rate loans. As with
any financial decisions, there are definite pros and cons to
either. This article will discuss fixed-rate loans and the
specific factors used in determining if they are right for you.
For starters, one of the most commonly
referenced negative aspect of fixed-rate loans is that they can
result in higher interest. This is done in part to offset the
stability that is assured by a fixed rate. Furthermore, as a
general rule of thumb, fixed-rate loans taken through a private
lender almost always result in the highest possible interest
rate. Federal fixed-rates are generally lower, but still result
in an increased interest when compared to variable-rate loans.
Because of this, it is strongly recommended that you only borrow
the amount that you need. It can be tempting to request
additional funds in order to ensure your financial security during
school, but they will add up exponentially in the long run.
However, as was mentioned earlier, there are
definitely positive aspects to fixed-rates. For starters, they
offer a greater sense of stability. There is no guessing game
involved in planning your personal finances around a fixed-rate,
because the monthly payment remains constant. Furthermore, in
reference to the fixed-rate Federal Stafford Loan, the government
pays your interest while you are still in school. Oftentimes they
offer a grace period of around 6 months before repayment
commences. This allows you to graduate, get on your feet, and get
a sense of financial stability before you begin repaying your
education.
Up until 2006, student loans offered by the
federal government were variable rate loans. However, attempts to
consolidate federal loans with a private refinancing firm would
lead to a loss of the benefits that came with federal loans. In
an attempt to curb this trend, federal loans became fixed rate
loans.