Many college students will accrue several thousands of dollars in student loan debts throughout the progression of their academic careers. Trying to get the best student loan consolidation rates could save thousands of dollars. Whether these loans are federal or private student loans, the interest rate significantly influences the amount that the borrower will repay over the next several years. The majority of borrowers choose to combine all of their student loans with the purpose of attaining an overall student loan consolidation rate that is substantially smaller than the separate rates.
Federal vs. Private Student Loans
A plethora of students will be forced to acquire both federal and private student loans to facilitate their ability to meet the expense of all of their scholastic costs. Both types of loans have their benefits but what the majority of students fail to understand is that these two types of loans can by no means be combined; federal loans can be consolidated with federal loans only and private loans can only be consolidated with private loans. In other words, like must be merged with like. If you are deliberating consolidating loans as a way to achieve a more affordable interest rate and lower monthly payment, you will still possess two separate payments due each month. In any case, for many borrowers, the combined student loan consolidation rate is often lower than those of the individual balances. So, although you will still have two separate accounts to maintain, one federal and one private, it is oftentimes advantageous in both short- and long-term situations to make the most of the lower rates and complete the consolidation process.
How is a Student Loan Consolidation Rate Calculated?
Like the vast majority of factors in economic affairs, interest rates fluctuate from day to day and from person to person; there are copious amounts of influences that impact the consolidated interest rate an individual will receive. As every consolidation request is unique, it is difficult to estimate precisely what the new interest rate will become. In general, the newly adjusted rate will be the weighted average of the current student loan rates. For example, if a borrower has two loans with an eight percent interest rate and three loans with a six percent interest rate, the new rate would be calculated as follows:
There are five individual loans; two-fifths of the loans are at an 8% interest rate plus three-fifths at a 6% interest rate. Multiply the individual rates and the weighted average (rounded to the nearest eighth) becomes the new student loan consolidation rate.
New Rate = (.08 x .40) + (.06 x .60)
New Rate = (3.2%) + (3.6%)
New Rate = 6.8%
Essentially, the new consolidated rate is equal to the rates the borrower were originally paying but the loans are recombined into a single bill that usually has a more flexible repayment program with less expensive recurrent payments.
What are the Benefits?
Many borrowers choose to consolidate their loans for the comfort and convenience of having one all-encompassing payment. Even if an individual has both federal and private loans, two accounts are easier to maintain than four or more. The chief advantage of student loan consolidation is if the borrower has particular types of federal student loans. Some of the federal student loan consolidation rates are capped at 8.25%. Therefore, if a borrower had numerous federal loans with interest rates exceeding this figure, he or she can save colossal sums 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 student loan consolidation rate.