Learn How to Minimize Your Student Loans Consolidation Rate

If you have several outstanding education loans, it may benefit your financial situation to consolidate them into one loan. There can often be many benefits to this course of action, including lower monthly payments, and the ability to lock in a favorable interest rate in the face of rising rates nationwide. Particularly if you are just starting out in the corporate world and cannot necessarily afford multiple minimum payments, this program can do you a lot of good, even though it lengthens the amount of time in which the loan is paid back.

One factor involved in the consolidation of student loans is the interest rate. For loans from the federal government such as Stafford loans or PLUS loans, the Direct Loan Servicing Online website makes it easy to consolidate these loans by applying online. The Direct Consolidation Loan's interest rate is calculated by taking a weighted average of the interest rates of all loans being considered, as of the application date. This rate is then rounded to the nearest higher 1/8 of one percent, and is then fixed for the rest of the term of the loan. It cannot exceed 8.25 percent, so if the average interest rate of your federal student loans is higher than that, the new loan's rate is set at this lower number. This can be a real benefit to borrowers who are consolidating during a period of high interest rates.

To calculate the weighted average interest rate, the balance of each loan is multiplied by its interest rate to get the "per loan weight factor." Then, all of these loan weight factors are added together, and the loan amounts are added together as well. The "per loan weight factor" is then divided by the total loan amount, multiplied by one hundred, and then rounded to the nearest higher one-eighth of one percent. The lower of this rate and 8.25 is the new student loan consolidation rate.

For privately funded student loans, consolidation loan interest rates are usually higher than those offered by the government for Stafford and PLUS loans, however refinancing the balance still can have the same benefits. Although not as low as the government rates, interest rates can often be locked into private consolidation loans that are lower than those of preexisting privately funded loans. And of course, monthly payments are lowered through this process as well. It is important though, for borrowers with a mixture of private and government loans to not mix the two when consolidating, as taking out a privately funded consolidation loan to pay off government debt wastes the benefits that the government offers, such as lower interest rates and more favorable repayment terms.

In summary, refinancing education loans from both the government and through private sources can benefit the borrower by locking in an interest rate during a period of low rates. For government loans, a weighted average of the interest rates on all of the outstanding loans is applied to the new loan, but privately funded consolidation loans are set at the going interest rate for personal loans of this nature.