Student Loan Consolidation Rates

For most of us, student loans are a prime source of funding our college education. We often hope that after completing our college, we will land a decently paying job, that can take care of all our student loans. However, sometimes, situation has something else to offer. Owing to the current economic meltdown, many graduates are finding it increasingly difficult to land a job in the first place, let alone a decently paying one. Although, there is a grace period of six months on federal student loans and some private loans, the situation rarely improves even after six months. After that, the monthly EMI begins, which becomes a nightmare for the unemployed students. Some of them turn to student loan consolidation option, which provides some relief from the pile of debt. In this article, we will estimate the student loan consolidation rates for federal and private loans.

What is a Consolidating Loan

As a student, you and your parents may have borrowed money from various private lenders. A single federal student loan is rarely sufficient to cover all your academic and living expenses. As a result, people often end up borrowing from several financial institutions. The interest rates for these financial institutions also vary to a great deal. Every month, you are required to pay a separate amount towards each of these loans. A consolidating student loan is a loan which sums up the debt amount of all the loans into one single loan. As a result, you are required to pay towards only a single loan. This relieves you of the hassles of interacting with several different money lenders every month. The interest rates on a consolidating loan is calculated by averaging the interest rates of the separate loans. The accurate calculation of federal and rates is provided later in this article.

Student Loan Consolidation Rates Comparison

Consolidating loans may seem like an obvious choice for any student stuck up in the pile of debt. These loans have a cap of interest rate of 8.25%, meaning you won't have to pay interest rate any more than that. Since, one direct consolidating loan can take care of multiple smaller loans, your credit report gets a boost as it records a paid status for numerous loans, in spite of the same impending debt amount. Best student loan consolidation rates can be obtained on federal student loans such as Direct and FFEL Stafford Loans, PLUS Loans, Federal Perkins Loans and others. Since, these loans may have a interest rate more than 8.25%, you will end up paying much less on a consolidating loan as it cannot have an interest rate beyond 8.25%. However, there are certain limitations on the benefits you can avail from this loan. Firstly, consolidating student loan provides maximum benefits on federal student loans only. Private loans may already have interest rates less than 8.25%, in which case you will end up paying roughly the same amount after consolidating your loans.

Student Loan Consolidation Rates

Student Aid on the Web defines the student loan consolidation interest rates as weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of 1%, to a maximum of 8.25%. Following example will give you a clear understanding of private and federal student loan consolidation rates.

Mark, a student has loan A of amount $10,000, loan B of amount $5,000 and loan C of amount $3,000. Mark is paying 6.25% interest on loan A with a monthly payment of $625, 8.5% on loan B with a monthly payment of $425 and 8.75% on loan C with a monthly payment of $262.5. Mark's total impending debt can be consolidated into a single loan of amount $18,000 ($10,000 + $5,000 + $3,000). The interest rate on a consolidated loan can be found out as,

$625 + $425 + $262.5 = $1312.5

Divide the above amount with consolidated loan amount of $18,000 to arrive at a figure of 0.0729. Converting it to a percentage you get an interest rate of about 7.29%. The last step is to round the interest rate to one eighth of 1%, which is 7.25%.

This was all about the estimate for student loan consolidation rates. Evaluate your options wisely before going for a consolidating loan. Hope this article was resourceful.