Private student loan interest rate?

Is it better to take a fixed interest rate or variable interest rate private student loan in this year (2013)?

• I am just curious, now that Obama has signed the bill for lowered interest rates, whether fixed rate student loan or variable rate private student loan is cheaper or not. I don't know how one can logically make the best possible choice in this year, given the markets and economic downturn.

• Answer:

  To compare a variable rate with a fixed rate requires modeling how the variable rate will change over the term of the loan. During an economic downturn, variable rates tend to follow a pattern where the rates increase during the economic recovery by about the same amount as they decreased at the start of the economic downturn, but take about twice as long to do so. Interest rates dropped by about 5.5% to 6.0% over two years at the start of the credit crisis, so one would expect them to increase by this amount over four years during the recovery, or about 1.5% points per year for four years. Now the Federal Reserve has been manipulating interest rates to keep them low, and has stated that it will continue to do so until 2015 or when unemployment rates drop below 6.0%, whichever comes first. Unemployment rates will probably drop below 6.0% in 2015. So this suggests that interest rates will start increasing in 2015 (given that the market will anticipate the increase) and return to previous norms by 2018. If you model interest rates along these lines, it suggests that the equivalent fixed rate for a 10 or 15-year loan made now will be about 4% points higher than the current variable rate. New federal education loans will have the following fixed interest rates for 2013-14: Undergraduate Stafford loans (both subsidized and unsubsidized): 3.86% Graduate Stafford loans: 5.41% Grad PLUS and Parent PLUS loans: 6.41% Even borrowers with excellent credit who agree to start repaying their loans during the in-school period are unlikely to get variable rates with equivalent fixed rates that beat these rates. Also consider that federal student loans have more flexible repayment terms, such as income-based repayment and public service loan forgiveness, and more generous deferments and forbearances. Students should borrow federal first, as federal student loans are cheaper, more available and have better repayment terms.