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Paying for College

Word of the Day Wednesday: Fixed vs. Variable Interest Rates

Each Wednesday, MEFA will feature a Word of the Day where we’ll highlight a word (or sometimes a phrase) related to the college planning process. This month, we’re focusing on vocabulary related to college loans.

Today’s Word of the Day is Fixed vs. Variable Interest Rates.

There are two different types of interest rates associated with college loans. A fixed interest rate will remain the same for the entire life of the loan, so the monthly payment amount on a loan with a fixed interest rate will never change. A variable interest rate will change during the loan term, based on market conditions, so the monthly payment on a variable rate loan, and the amount of interest accrued on the loan, will fluctuate (go up or down) throughout the loan’s lifetime.

The description of a college loan should always include the type of interest rate — fixed or variable — and the range (if applicable) of potential rates associated with that loan.

Why does this matter to you?

As a college loan borrower, it's important to understand the terms of your loan. And knowing your loan’s type of interest rate is critical for both short-term and long-term planning. Many borrowers prefer the stability of a fixed interest rate, allowing for a stable financial budget, as the monthly payment amount will remain the same until the loan is paid off.

Some borrowers prefer the lower rate that may come with a variable rate loan. However, remember to always think long term. If interest rates rise, the monthly payment on a variable rate loan will also increase. Borrowers of variable rate loans must be sure that their budgets can handle a potential increase in monthly loan payments. In some cases, loans with a variable rate have no cap on how high the interest rate can rise.

Being a wise borrower means looking beyond just the rate and the short-term payments, and making an informed decision about what is best for the family, not only for today but for the future as well.

To learn more about MEFA’s straightforward and competitive loan rates and terms, visit our Loans Page.

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