You don’t need to be a math major to understand how student loan debt consolidations work.
In fact, student loan consolidation programs are actually pretty easy to understand.
Heck . . . I guarantee you’ll have a solid understanding of how student loan consolidation programs work within five minutes. You ready?
Okay, let’s get started . . .
What is a student loan consolidation?
A student loan consolidation is simply a fancy way of saying that you are combining all your student loans into one convenient loan. Yep, that’s really all there is to it.
Why do students combine their loans?
Well, there are a bunch of reasons why students consolidate loans. The big reason is because it makes financial sense. If you have some loans at high interest rate, and some at a low – it often makes sense to consolidate so that you have one comfortable monthly payment.
Another reason why students consolidate is because it allows student to defer paying back their loans for a period of time. Some programs even allow student to defer their student loans for up to 3 years.
What are interest rates on consolidated student loans?
The interest rate on a consolidated loan is simply the weighted average of all rates on the loans you’re consolidating. The interest rate you’ll get is also rounded up to the nearest 1/8th of a percent, but it can’t exceed 8.25%.
So let’s break this concept down in plain English:
Pretend like you have the following two loans . . .
$5,000 Perkins Loan at 5%
$10,000 Stafford Loan at 6.8%
Here’s the math to figure out your consolidated interest rate:
$5,000 * 5.0% + $10,000 * 6.8%
———————————————– = 6.2%
$5,000 + $10,000
Now you’re probably tempted to think that 6.2% is the weighted average – but remember that it needs to be rounded up to the nearest 1/8th of a percent. So your consolidated interest rate would be 6.25%.
So remember that your consolidated interest rate will always be between your highest and lowest interest rates. The amount of interest you’ll pay over the lifetime of your loan will probably equal the same as if you never consolidated at all.
So how much does it cost to consolidate your loans?
Some loans like Stafford and Plus might charge some fees, but most of the time you should never pay a dime for consolidating your loans. If you ever spot anyone trying to take a fee for a loan . . . stay clear. It’s probably a scam.
What are typical interest rates these days?
Federal student loans taken out on or after July 1, 2006 have an interest rate of 6.8%*. Federal student loans disbursed before July 1, 2006 will remain variable interest rate loans. These loans will re-adjust every July 1 based on the results of the 91-day Treasury Bill Auctions. Currently, interest rates for these loans are:
- Stafford Loans for students in grace: 6.62%
- Stafford Loans for graduates in repayment: 7.22%
- Parent PLUS Loans disbursed after July 1, 1998 but before July 1, 2006: 8.02%
- Parent PLUS Loans disbursed after July 1, 2006: 8.50%
- Consolidation Loan Rates: The weighted average of the existing rates on loans included in the consolidation
What types of loans may be consolidated?
Eligible loans include Stafford, Parent PLUS, Graduate PLUS, Perkins, consolidation loans (when included with additional eligible loans), Supplemental Loans for Students (SLSs), Health Professions Student Loans (HPSLs), Loans for Disadvantaged Students (LDSs), Nursing Student Loans (NSLs), and Health Education Assistance Loans (HEALs).
What’s the first step in consolidating loans?
If you’re looking for a way to consolidate your various federal student loans into one monthly payment, you should consider applying for a Student Loan Consolidation with Student Loan Solutions.