Fixed-Rate Private Student Loans? They Do Exist - But There's a Hitch
Federal loans used to be the only fixed-rate loans on the market. Currently, you can get them directly from the federal government at rates as low as 3.4%. The problem is that the government often does not provide enough in loans to cover 100% of the difference between a family’s savings and grant aid and the actual cost of tuition—so many are forced to turn to private loans.
If you’re familiar with private student loans, you probably know that one of their basic characteristics is the variable rate. This means that the bank can adjust your interest rate at any time—usually up—without notice. A variable rate makes it very difficult for students to judge whether or not they can actually afford the loan and what their monthly payments will be—but they’re a fact of life for private loans.
No longer. Wells Fargo and U.S. Bank recently announced their intention to offer fixed-rate private student loans. These allow students and their families to know exactly what their interest rate will be every month—and budget much more easily for the future.
Do some serious thinking about the type of debt you’ll have tolerance for after graduation, your likely salary in entry-level jobs in your field, and your budget
These loans may be predictable, but they are not cheap. U.S. Bank offers a 7.8% fixed rate, with an up-front fee that can increase that annual percentage rate to as much as 8.46%. Wells Fargo doesn’t charge an up-front fee, and its rate is as low as 7.29%--if you have perfect credit and are attending a well-regarded private school. If your credit is tarnished and you are attending a trade school or community college, you could pay as much as 14.21%.
Why Take Out a Fixed-Rate Private Loan?
Compare these fixed interest rates to the variable rates currently on offer at both banks. At U.S. Bank, your interest will range from 3.39% to 10.22%, while at Wells Fargo, you could pay anything from 3.4% to 11.74%. So the fixed rates for both banks are on the high side—even at their lowest range.
The interest rates may be higher than expected for variable rate loans—but most variable-rate loans start off on the low side and end up on the high side. So you’ll eventually be paying on the high end of the interest rate anyway.
The banks are gambling that some students will pick certainty over a potentially lower rate that could rise later on. And even though the interest rate is higher than what it might be (for a while) with a variable rate loan, students with these loans still know exactly what they’re paying every month and how long it will take to pay off their student loans. For many students and their families, no surprises in their student loan bills is worth the extra cost.
Is a Fixed-Rate Private Loan Right for You?
It depends on your circumstances. Fixed-rate private student loans are more expensive as you start out, so they’re often best for students who feel comfortable with a higher debt load immediately after graduation. Whether you borrow at a fixed or variable rate, however, private loans are more expensive than federal loans—and some experts believe you should avoid borrowing more than your federal limit to attend any school.
Bear in mind that your financial advisors will not tell you when it’s too expensive to attend their school. They are not financial planners—and you have to go to them armed with a strong understanding of your own debt limits. Do some serious thinking about the type of debt you’ll have tolerance for after graduation, your likely salary in entry-level jobs in your field, and your budget—and don’t take on any private student loan debt that goes above your limit.
More About Understanding Student Loans
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- Questions You Should Ask Before Applying for Student Loan Forbearance
- The Bank on Students Act: What It Is, and How It Could Help Student Borrowers
- How the Death of a Co-Signer Can Affect Your Student Loan
- Peer-to-Peer Student Loans: What They Are, and How They Can Help You Pay for College
- If You're Unable to Work Because of a Disability: What Happens to Your Student Loan?
- New Rules for Debt Collectors: How They Could Affect Your Student Loan
- Having Trouble Repaying Loans? The Department of Education May Be in Touch