It’s indisputable that consolidating all your federal student loans into one loan paid off over an extended time frame eases the monthly burden of student debt payments. However, what if the interest rates of your individual loans vary by several percentage points? Should you avoid consolidating in order to concentrate on paying off the higher rate loans first?
How Consolidated Loan Interest Rates Work
When you consolidate your federal student loans into one loan, your interest rate is an average of all your federal student loans interest rates. For example, say you you earned your Bachelor’s degree in four years and graduated in 2011 . If you borrowed conservatively ($2,500 of subsidized federal Stafford loans per school year), your interest rates are as follows: 2010/11 at 4.5%; 2009/10 at 5.6%; 2008/09 at 6%; and 2007/08 at 6.8%.
Since you borrowed the same amount each year, each interest rate represents an equal amount of money, which is called a weighted average. Thus, you can divide the sum of all your loans by four to get your consolidated rate of 5.725%. If you had different amounts at each interest rate, your interest rate would be based on a fraction of your total new loan. For instance, if you borrowed $3,000 as a freshman at 4.5% and $2,000 as a senior, your consolidated interest rate would drop.
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