How to Calculate Weighted Average Interest RateEmail This Article
Summary: To calculate the weighted average interest rate of all your loans, multiply each loan amount by its interest rate. Add the results together, then divide that number by the sum of all your loan balances. Whatever that figure is, round up to the nearest 1/8 of a percent.
If you want to combine your federal loans together, the Direct Consolidation Loan program uses a weighted average interest rate. This becomes your new rate for the life of your consolidation loan, which can be a really long time (maybe 15 or 20 years, or even longer).
In the next section, what is a weighted average interest rate, we outline this even further with an example.
Note that federal consolidation is not your only option. In fact, it may not even be your best option. Student loan refinancing (through a private lender) is the only way to actually lower your interest rate. Refinancing also allows you to combine both federal and private loans together, as well as release cosigners on your loans. And if you are a parent who borrowed on behalf of your son or daughter, you may even be able to transfer your loan(s) to your child. Learn more about student loan refinancing.
What Is a Weighted Average Interest Rate?
It means that your interest rate will be based on the interest rates of the loans you would like to consolidate. And your highest outstanding federal loan balance will have the biggest impact on what your consolidation interest rate will be. The bigger the loan, the more ‘weight’ it will have on the interest rate calculation. It may push your consolidation interest rate a little higher or lower, but it likely won’t change much. After your weighted average interest rate is determined, the final step is to round up to the nearest 1/8th of 1 percent (.125). That is how the Direct Consolidation Loan program works.
Weighted Average Interest Rate Formula
You can find the weighted average interest rate for the loans you want to consolidate in three simple steps.
- Multiply each of your loan balances by their interest rate. This will give you the per loan ‘weight factor.’
- Add all the per loan ‘weight factors’ together to get the total weighted factor.
- The last step is to divide the total (of all the weight factors) by the total of all the loan balances, then round to the nearest 1/8th of 1 percent.
Here's how that would look if you mapped it out. Let's say you have three loans:
|Total Remaining Balance||$21,000|
Multiply the balances by the interest rate:
$4,500 x 5.31% = $238.95
$10,500 x 5.84% = $613.20
$6,000 x 4.66% = $279.60
Add the weight factors together:
Now, take the total of the total of the weighted factors, and divide that by the total amount of your remaining balances:
$1,131.75 divided by $21,000 equals 5.3893%
Round this to the nearest 1/8th of 1 percent to get 5.5%.
Once you know your weighted average interest rate, you are better prepared to compare Direct Consolidation Loan options and benefits with those of a private student loan refinance, which may offer more competitive rates, cosigner release, and other benefits not included in the Direct Consolidation Loan program.
Weighted Average Interest Calculator
There are a number of calculators online to help you compute the weighted average much faster than doing it by hand. Here’s one of our favorites due to its simplicity and ability to add up to 20 loans:
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