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How fast does variable rates go up?

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  • How fast does variable rates go up?

    I'm debating if I should refi my student loans fixed or variable - Variable is lower but how fast does it go back up? Since fixed rates are so low now would it be better to do fixed even if I plan on paying it off within the next 1-3 years?

  • #2
    It’s been 4+ years since I’ve had to worry about student loans, but my recollection is that there is a cap set out by the lender detailing how quickly the rates can rise and also the maximum rate they can get to, so that would be the first place I would look.

    The second part of your question takes some assumptions, but if you’re planning on paying it off in 1-3 years then, depending on the spread, the variable rate is almost surely better. Even if it at some point the variable rate exceeds the fixed rate you could have gotten now, you would have already paid some back at a lower rate, so your average loan rate would still likely be lower than the fixed rate. When I had my variable rate it kept going down, so I didn’t have to worry about it, but those were my thoughts at the time when I decided on the variable rate.

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    • #3
      I'm wondering the same thing. I've got an offer from Laurel Road to refi at 2.46% fixed vs 2.03% variable for 5 years. Have 1.5 yrs of training left and will opt for the $100/month payments while still in residency/fellowship. After fellowship graduation, I'll likely pay it off in less than 5 years. I'm thinking I'll go with the variable rate.

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      • #4
        Variable Rates: The current index for variable rate loans is derived from the 30-day Average Secured Overnight Financing Rate (“SOFR”) and changes in the SOFR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%. There is no limit on the amount your interest rate can increase at one time. The Index is currently published by the Federal Reserve Bank of New York (“New York Fed”). If the Index is no longer available, it will be replaced by a replacement Index according to the terms of the promissory note.”

        How fast can the rate change? The overnight rate is the focus of the Fed.
        The margin component will stay the same but the base rate changes. Stable low rates have been Fed Policy since 2009. That has not always been the case. When and if they are raised, you will feel it the next month. I’ll let you forecast the FED. The cap at Larelroad is 9%.

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        • #5
          Probability of significant rate increase is low (above 4%). It would cause a significant problem with the overall economy. That said, taking the fixed rate is essentially insurance.
          DynamicHipScrew
          I LUV BONEZ
          DynamicHipScrew When one has a lead time of 18 months before any significant capital inflow, I'd take the fixed rate. If they go down in the meantime, you can refi again to the lower rate.

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          • #6
            was thinking at times of higher interest that variable would be the way to go. Its just that interest rates seem so low now that's only bound to go up

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            • #7
              Originally posted by kev777zero View Post
              was thinking at times of higher interest that variable would be the way to go. Its just that interest rates seem so low now that's only bound to go up
              Another way to decide is the interest rate differentials rather than the absolute rate. The current differential is extremely small.

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              • #8
                When I was on a variable rate, it was tied to the 1-month LIBOR. You can look at historical data to see how it has trended in the past to get an idea. For the first several months after getting the rate, my rate went up. Then things dropped significantly and I ended at a much lower rate. Certainly some risk, but if you're planning to pay it off quickly, like I had, there is likely more benefit to the variable rate.

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