Most college students will rack up thousands in student loan debts over the course of their academic career. Whether these be federal or private student loans, the interest rate greatly affects how much the borrower will repay over the next twenty or thirty years. Most borrowers opt to combine all of their loans in order to get an overall loan consolidation rate that is considerably lower than the individual rates.
Federal vs. Private Student Loans
Most students will have to take out both federal and private student loans in order to pay for all of their educational expenses. Both types of loans have their advantages but what most people do not realize is that these two loans can never be combined; like must be merged with like. If you are considering consolidation as a means for a more reasonable interest and lower monthly payment, you will still have two separate bills each month. The good news is that for the majority of borrowers, the combined student loan consolidation rate is often lower than that of the separate accounts. So, even though you will still have two accounts to contend with, one federal and one private, it is often beneficial in both short- and long-term positions to take advantage of the lower rates and complete the consolidation process.
How is a Student Loan Consolidation Rate Calculated?
Like most things in the financial world, interest rates vary from day-to-day and from borrower to borrower; there are numerous factors that contribute to what an individual will receive as a consolidated interest rate. As each consolidation case is unique, it is difficult to judge precisely what the new interest rate will become. Generally speaking, the new rate will be the weighted average of the current loan rates. For example, if a borrower has two loans with a seven percent interest rate and three loans with a five percent interest rate, the new rate would be calculated as follows:
There are five individual loans; two-fifths of the loans are at a 7% interest rate plus three-fifths at a 5% interest rate. Multiply the individual rates and the weighted average (rounded to the nearest eighth) becomes the new loan consolidation rate.
New Rate = (.07 x.40) + (.05 x.60)
New Rate = (2.8%) + (3%)
New Rate = 5.8%
Basically, the new consolidated rate is equal to the rates the borrower were initially paying but now the loans are combined into one payment that typically has a more flexible repayment program with affordable monthly installments.
What are the Benefits?
Most borrowers prefer to consolidate for the ease and convenience of having one all-inclusive payment; even if they have federal and private loans, two accounts are easier to manage than five or more. The major benefit from loan consolidation comes into play if the borrower has certain federal student loans. Some of the federal student loan consolidation rates are capped at 8.25%. Thus, if a borrower had several federal loans with interest rates above this number, he can save massive amount of money by consolidating at a lower interest rate.
Overall, consolidation benefits most borrowers by allowing longer repayment periods, smaller monthly installments, and a typically lower overall loan consolidation rate.
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