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Understanding Student Loan Consolidation Rates

These days many recent graduates of colleges and universities have to deal with massive student loans. Often, seeing that lump of debt can be  overwhelming, and the process can be even more difficult when you are dealing with several different payments per month. Understanding student loan consolidation rates may help you to better deal with these issues.

Understanding Student Loan Consolidation

Student Loan Consolidation RatesBefore we can even discuss the rates, you need to understand what student loan consolidation actually is. Often when you are in college you get a new loan every year or even worse every semester and possible two loans per semester if you get one subsidized loan and one unsubsidized loan. So by the time a student graduates he or she might have between four and sixteen different student loans! But with consolidation, instead of making several separate payments throughout the course of the month, you can combine all the small loans into one single loan and make only one payment per month. Obviously, this is less confusing for you, and you’re less likely to forget one of the payments. Furthermore, you will be able to select from a few different plans that suit your needs and that address your current financial situation and salary.

Understanding Consolidation Rates

When we’re discussing consolidation rates, it’s usually a conversation about the interest on a loan. According to The SmartStudent Guide to Financial Aid,  “The interest rate on a consolidation loan is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest 1/8 of a percent and capped at 8.25%.” Basically, all of your interest rates will be averaged, and the consolidated one will be the result of the weighted average with a “cap” or limit on the maximum interest rate that they can charge you.

How Consolidation Weighting Works

You know how having to make one monthly payment is better than many, but how does the interest rate help? Well, actually it doesn’t. When you look at your Education loans, you probably notice that each loan has a different interest rate. Unfortunately, you can’t choose your lowest interest rate. However, by taking the weighted average of all of your current interest rates means that your interest payments will stay the same on the total balance. In other words, if you borrowed more at a low interest rate and less at a high interest rate the weighting will take that into consideration so that it still works out the same. Conversely, if you borrowed more at a high rate it will bring up the average interest rate for all of your loans but the total interest payment will be the same (other than for the rounding factor).

Consolidation Discounts

The other consideration is consolidation loan discounts. Unfortunately, only one of these still exists. Essentially, you can have a 0.25 percent (¼%) interest rate reduction if you decide to have the payments automatically withdrawn from your account. You might not think that this is a lot of money; however, it can add up as the years go on. Plus this way you won’t accidentally forget to make a payment (which will probably result in a penalty fee).  Therefore, having the money automatically taken out of your account is probably a good idea anyway. Basically, it’s a simple way to save a little bit of money each month and keep you from forgetting a payment at the same time.

Now, everyone has a different situation when it comes to student loans, so you need to speak with your loan providers and the federal agency in order to figure out what is right for you. In general, people are usually quite pleased when they see what the possibility of consolidation can do for them and their financial situations.

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About the Author:

Author Jason Harter works in the billing office of a University.

Image courtesy of Imagery Majestic / FreeDigitalPhotos.net

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