Interest is the cost you pay to borrow money and pay it back to the lender over time. Interest is calculated as a percent that the lender applies to your principal loan amount. Interest adds to the total cost of your loan. There are two types of interest rates that could be attached to your student loan: fixed interest and variable interest.
Fixed Interest Rate
Fixed interest rates remain the same throughout the life of your student loan. Fixed interest rates are often higher than variable interest rates at the time of applying for your loan, but fixed rates are generally considered to be the safer option because your interest rate will not change unless you choose to refinance. All federal student loan interest rates are fixed. Private student loan lenders typically offer both fixed and variable interest rates.
Variable Interest Rate
Variable interest rates are based on an index that is a value quoted in the financial markets. Usually, the lender adds an additional amount, called a margin, to the index to calculate your variable rate. The index, and therefore, the variable interest rate may change throughout the life of a student loan. This type of rate may increase or decrease due to changes in the economic environment. This makes variable interest rates the more enticing and risky option. Private student loan lenders typically offer both fixed and variable rates.
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