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What does a "variable interest rate" on my federal student loans mean? Can someone explain how that works?

betty - 2007-05-31 06:39:18 - Personal Finance

Some of my interest rates are fixed at 6.8%. The rest are variable. I don't completely understand what a "variable interest rate" on my students loans really means... I need help understanding as much as possible... Thank you!

Best Answer:

The reason some of your loans hold a fixed interest rate of 6.8% is because those Federal Stafford Loans were disbursed after July 1st, 2006, when all Stafford Loans disbursed after that date were given a fixed interest rate. When dealing with the rest of your Student Loans, did you take out any Private Student Loans? If so, those loans would hold a different interest rate than your Federal Student Loans. Your Federal Student Loans which carry a Variable interest rate mean that every July 1st your interest rate is subject to change which is dictated by the Federal Government. The Federal Government sets the interest rate every July 1st based on what the Federal T-bill is being traded at. The only way to have your Variable interest rate Federal Student Loans obtain a fixed interest rate is through the FFELP Consolidation Loan Program. What happens is all your Federal Student Loans will be added together and based on a weighted average of your current interest rates; a new fixed interest rate will be applied to your Federal Student Loans. I hope this makes it a little more clear for you. For more information on current Federal Student Loan interest rates please visit the source below.

Answers:

Variable means it will go up or down with the market.

It means they can go up and down and are not fixed. This is not good, refinance with a fixed rate.

Variable interest rate means that month to month, the interest that is charged can vary. For example: January 6.8% February 7.0% March 7.5% April 8.0% You get the idea. The interest rate can also go down as well. So, if you owe $50,000, the monthly interest will be based on the current monthly rate. If you pay $300 on the principle, then the next month will have the interest on $49,700.

The other answers are somewhat true. A loan with a fixed interest rate will never change. A loan with a variable rate will change. Frequently (though maybe not in your case) the student loan interest rate is set once per year. If you have one of those loans the interest rate will change to a new rate on that reset date. Normally the way the rate changes is described in your loan documentation. Your loan rate is most likely tied to an index and it may then have a margin. The index is usually some easily trackable interest rate and will normally be published in the Wall Street Journal. An example is LIBOR and another is Prime. You will see those terms in the interest rate section. Next - if you have a "margin", the new interest rate will be computed by taking the base interest rate (the index) and adding the margin to it. The sum of this addition will become your new interest rate. It is possible that the rate will be rounded (up or down) to a more even number - it depends on the loan contract. Usually the interest rate then stays the same for one year. HOWEVER - your specific loan may be different. You will have to read your loan documentation. If you are not sure how to do that - go to the Financial Aid office and ask for help. Do not be embarrassed - this is a normal question and they get it all the time. If you are out of school or away from school - you can call the company where you send your payments. They may be a bit less helpful though.

The reason some of your loans hold a fixed interest rate of 6.8% is because those Federal Stafford Loans were disbursed after July 1st, 2006, when all Stafford Loans disbursed after that date were given a fixed interest rate. When dealing with the rest of your Student Loans, did you take out any Private Student Loans? If so, those loans would hold a different interest rate than your Federal Student Loans. Your Federal Student Loans which carry a Variable interest rate mean that every July 1st your interest rate is subject to change which is dictated by the Federal Government. The Federal Government sets the interest rate every July 1st based on what the Federal T-bill is being traded at. The only way to have your Variable interest rate Federal Student Loans obtain a fixed interest rate is through the FFELP Consolidation Loan Program. What happens is all your Federal Student Loans will be added together and based on a weighted average of your current interest rates; a new fixed interest rate will be applied to your Federal Student Loans. I hope this makes it a little more clear for you. For more information on current Federal Student Loan interest rates please visit the source below.