Student Loan Consolidation Interest RatesEmail This Article
As a student loan borrower, you have options when it comes to repayment. And those options come with consequences for your interest rate. If you’re on the fence between federal consolidation versus student loan refinancing (there is a difference), here are some important things you need to know regarding the interest rates.
Federal Direct Consolidation Loan Interest Rates
Direct Consolidation Loans have fixed interest rates. When you consolidate your federal student loans, the interest rate on your new consolidation loan will be roughly the same as the rates on your underlying loans. This is because the federal government only offers the convenience of combining your loans together with an interest rate that is based on a weighted average of your loans based on their balances. What this means: Your interest rate will not go down, but it also won’t go up by much either. Direct Consolidation Loans have fixed interest rates. When you consolidate your federal student loans, the interest rate on your new consolidation loan will be roughly the same as the combined rates on your current loans. What this means: Your interest rate will not go down, but it also won’t go up by much either.
Calculating the Weighted Average On Your Student Loan Consolidation
The interest rates on Direct Consolidation Loans are based on the following: The weighted average of the interest rates of the federal student loans being consolidated, rounded up to the nearest 1/8th of one percent.
It sounds more complicated than it really is. The following example shows how the calculation is made.
Current federal loan balances:
- $5,000 loan at 3.4%
- $7,500 loan at 6.8%
- $10,000 loan at 6.8%
The interest rate on the Direct Consolidation Loan would be:
($5,000 x 3.4%) + ($7,500 x 6.8%) + (10,000 x 6.8%) ÷ ($5,000 + $7,500 + $10,000) = 6.04%
This would be rounded up to the nearest 1/8th of one percent, or 6.13%.
|Monthly Payment Before Consolidation (standard repayment, 10 year term)||Monthly Payment After Consolidation (extended repayment, 20 year term)|
$5,000 loan at 3.4%: $50.00
$7,500 loan at 6.8%: $86.31
$10,000 loan at 6.8%: $115.08
|$22,500 consolidation loan at 6.13%: $162.82|
There is no cap on the interest rates on Direct Consolidation Loans.
Student Loan Refinance Interest Rates
In today’s marketplace, interest rates range from around 2.48% APR (variable) to more than 8.80% APR (fixed). The federal government does not offer a way to consolidate student loans at a rate that’s lower than the weighted-average calculation. So, even if market interest rates go down, you cannot get a better rate with a Direct Consolidation Loan.
As a result, the only way to get a lower rate is to take out a private refinance loan that pays off your higher rate federal student loans. Private loans are credit-based, so unless you have an excellent credit rating you will probably need a creditworthy cosigner to qualify for a lender’s lowest interest rates.
To qualify, you typically need a minimum credit score (FICO Score®) of 680 with proof of income or employment that dates back two or more years. Every lender is different and the terms to qualify will vary, so it’s best to shop around and go through the application process to see if you are approved and the rate you may qualify for.