Fixed vs Variable Student Loan Rates (December, 2017)

[smg]

Very happy to report that I got offered the best rates from Earnest for refinancing.  Not sure whether to choose their fixed or variable APR.

Loan Amt: ~$80,000

Current Loans: 6.8% and 4.0%

New Loans:  3.25% fixed or 2.57% variable APR over 5 years are their best products.

 

The difference in interest paid, over the life of both loans, is like $1,250.  Not that much over 5 years.

I plan on paying it off much sooner anyway.

 

Was looking into what affects their variable APR loan and it's tied to LIBOR, they say current LIBOR rate is 1.34%, and they add a margin of 1.48 for total of 2.82%.  (you get to deduct 0.25 with autopay, thus 2.57%).

 

Questions:

First, I can't seem to verify a LIBOR of 1.34%.  I checked several sources online and the USD LIBOR Overnight rate (the lowest one) is 1.43.  Isn't that a little concerning?  I also read some predictions, for instance, by Kiplinger, that the feds will likely increase their rates twice next year.  I know that Fed rate does not affect LIBOR, but they almost always move in lock-step with each other.  So from that I conclude that the LIBOR rate will increase twice next year as well.

Anyone else hear rumors about what the rates will do next year?

Any other thoughts about what might be a safe move here?  I'm refinancing because I want a better rate, but also just in case something happens to me like I get into an accident or something and need to make minimum payments for a long period of time.

 

Thanks

 

[jz]

If the economy behaves wonderfully, with 3%+ GDP growth, the Federal Reserve implied it would raise FFR 1% over next 12 months.  I believe this will happen.

[smg]

that implies variable interest rates will go up too.

[DMFA]

If you're going to pay it quickly, the interest rate risk is much lower. You want the rate lowest when the principal is highest. In that regard, it's going to take a big rate hike relatively quickly for the variable to end up being worse.

That said, even if you stretch it all the way out to 5 years (still on the whole relatively quick for student loans fwiw), your principal is still low enough so that this really is only a question of $1,450 in finance charges over 5 years...like $25/month. Difference is about $500 over 2 years; again, like $25/month. That's even assuming your variable rate doesn't go up at all.

Anyway, that's your max spread for superiority of variable over fixed. I personally like variable, but you're talking less than a dollar a day, so either choice is a right choice.

[Dicast]

Your’re splitting hairs on this one. Nothing wrong with 3.25% fixed if you are worried. I did mine fixed at 3.5% and the wife’s as variable. Her’s will be a bit cheaper but not by much.

[EMscout]

I had a similar choice. Went with the fixed rate for piece of mind. It was a good decision for me and while I never followed up to crunch the numbers, my gestalt is that it was a wash. I came out a head with a few less white hairs (pun intended)

[Zaphod]

smg wrote:

Very happy to report that I got offered the best rates from Earnest for refinancing.  Not sure whether to choose their fixed or variable APR.

Loan Amt: ~$80,000

Current Loans: 6.8% and 4.0%

New Loans:  3.25% fixed or 2.57% variable APR over 5 years are their best products.

 

The difference in interest paid, over the life of both loans, is like $1,250.  Not that much over 5 years.

I plan on paying it off much sooner anyway.

 

Was looking into what affects their variable APR loan and it’s tied to LIBOR, they say current LIBOR rate is 1.34%, and they add a margin of 1.48 for total of 2.82%.  (you get to deduct 0.25 with autopay, thus 2.57%).

 

Questions:

First, I can’t seem to verify a LIBOR of 1.34%.  I checked several sources online and the USD LIBOR Overnight rate (the lowest one) is 1.43.  Isn’t that a little concerning?  I also read some predictions, for instance, by Kiplinger, that the feds will likely increase their rates twice next year.  I know that Fed rate does not affect LIBOR, but they almost always move in lock-step with each other.  So from that I conclude that the LIBOR rate will increase twice next year as well.

Anyone else hear rumors about what the rates will do next year?

Any other thoughts about what might be a safe move here?  I’m refinancing because I want a better rate, but also just in case something happens to me like I get into an accident or something and need to make minimum payments for a long period of time.

 

Thanks

 

Click to expand...

Its five years, variable will likely win in this case even if the ending rate ends up higher. There is only one scenario out of many, and its the least likely that would end up in the fixed rate being cheaper over time.

The reason for the LIBOR trouble is there are a spectrum of durations for it, overnight, 1 month, 3 month. Usually these loans are tied to 1 or 3 month.

[smg]

Its five years, variable will likely win in this case even if the ending rate ends up higher. There is only one scenario out of many, and its the least likely that would end up in the fixed rate being cheaper over time.

The reason for the LIBOR trouble is there are a spectrum of durations for it, overnight, 1 month, 3 month. Usually these loans are tied to 1 or 3 month.

Click to expand...

I checked different LIBORs, the overnight, 1 wk, 1 month, etc.  None of them match up.  Now they just changed recently in the past few days, don't know if the loan service provider updated their content yet.

I'm probably going to do the fixed.  Good times.

[Zaphod]

smg wrote:

Its five years, variable will likely win in this case even if the ending rate ends up higher. There is only one scenario out of many, and its the least likely that would end up in the fixed rate being cheaper over time.

The reason for the LIBOR trouble is there are a spectrum of durations for it, overnight, 1 month, 3 month. Usually these loans are tied to 1 or 3 month.

Click to expand…

I checked different LIBORs, the overnight, 1 wk, 1 month, etc.  None of them match up.  Now they just changed recently in the past few days, don’t know if the loan service provider updated their content yet.

I’m probably going to do the fixed.  Good times.

Click to expand...

The 1 month LIBOR is 1.53, sounds pretty close. It will tell you exactly which one in the disclosure, or should. Given your low amount and spread between the two, fixed is fine of course. I have a variable on one of mine and its been over a year and even with all the increases its still below the level of the fixed offering, and my balance is far enough lower it wouldnt matter now anyway.

People in general make too much of this difference and are overly concerned about it. But again, not really a big deal in your low amount small spread case.

[Craigy]

I just agonized over this and went with 2.49% variable through ELFI.  Their fixed offer was 3.19%

Even if there are two or three rate increases next year, it will probably not be enough to cover the .7% spread.   And hopefully after a year, we should hopefully be getting close to payoff anyway.  Plus, as we pay down the loan, the pain of a rate increase gets smaller and smaller.

Once/if it ever exceeds 3.19%, the savings we made on the front end from the variable rate should still be more than the cost of future rate upticks.

I don't know if you can really go wrong either way, unless you have a long payoff horizon.

[NavigoDoc]

The rate of loan when less then 1% is really a wash if you are planning on paying them off in 3-5 years. At $80,000 you are talking at likely less than $1,000 difference, thus go with the one that makes you feel more comfortable. Sometimes (as in most of the time) it's worth paying a little extra for peace of mind.

[billy]

I went with the variable.  Plus with earnest you can refinance every 6 months, so once you have more attending money, retirement money saved up etc, plus a lower balance you can get a better rate even if the rates are rising.  a year ago I went variable and it went from 2.3-2.9 (I had the option of 3.1 fixed at the time), I just re refinanced and have the 2.57 rate now.  If the rate approaches over 3 again in 6 months I plan on refinancing again and shopping around. Your amount is small enough that I'd risk the variable

[smg]

To close the thread, I ended up taking the fixed at 3.25%.  I am grateful for everyone's advice and knowing that I had a good deal one way or another.  I chose fixed for piece of mind, sometimes happiness isn't only measured in $$$.

[Craigy]

Craigy wrote:

I just agonized over this and went with 2.49% variable through ELFI.  Their fixed offer was 3.19%

Even if there are two or three rate increases next year, it will probably not be enough to cover the .7% spread.   And hopefully after a year, we should hopefully be getting close to payoff anyway.  Plus, as we pay down the loan, the pain of a rate increase gets smaller and smaller.

Once/if it ever exceeds 3.19%, the savings we made on the front end from the variable rate should still be more than the cost of future rate upticks.

I don’t know if you can really go wrong either way, unless you have a long payoff horizon.

Click to expand...

To update with ELFI, they literally "adjusted" the rate up literally before the first payment, to the high 2s, close to 3%.  I don't get the impression that the rate was ever going to be 2.49%.  Good news is that they let us reapply immediately for the fixed rate, which somehow has dropped to 3.09%.  So now we're at the fixed rate.

For what that's worth.