Category Archives: Student Loans

Student Loans: Fixed or Variable?

I have about $29,000 in private student loans. I applied for a consolidation loan with Citibank. Once my credit was approved, Citi gave me the choice of 8% APR with a fixed rate or 6% APR with a variable rate. Which should I choose? Steve, MA

At first glance, the 6% annual percentage rate looks like the more attractive option because of its lower rate. However, this is variable which means the APR can increase over time, resulting in a higher monthly payment. This could catch you by surprise if you have not prepared for it. I would recommend the fixed 8% rate due to the fact that it gives you certainty when it comes to planning your finances in the future. You might question why I would recommend paying the higher rate, especially when paying 6% is more appealing than paying 8%. Assuming that there is no cap on your variable interest rate, it is a reasonable assumption that your APR could increase to 10% or higher and you will end up paying more.

In a related fixed vs variable rate situation, over the past five years, many homeowners took out “teaser” adjustable rate mortgages. These loans had lower interest rates than the prevailing fixed rates at the time. As a result, these ARMs made the payments more affordable at beginning of their terms. However, the party ended when interest rates increased and many of these homeowners were left unable to pay their mortgages. The moral of the story is that without being able to predict the future movements of interest rates, it is a safer bet to take the fixed rate over an adjustable one.

As an aside, one important thing to remember is that you are able to deduct student loan interest from your taxes if you meet certain criteria. For more information about deduction eligibility, please see Publication 970 on IRS’s website.

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