#1 Student Loan Lawyer
Updated on June 25, 2022
If you’re having trouble making your student loan payments, consolidation is a savvy move to keep payments manageable. But what is the interest rate? If you’re mathematically inclined, you can calculate it yourself! You can find the interest rate for your new Direct Consolidation Loan by adding the weighted average of your existing loans and then rounding up to the nearest eighth.
When you consolidate federal student loans, the new interest rate isn’t based on your credit score. Instead, your loan processor will determine your rate based on your existing loans. The interest rate for consolidated loans is set by taking the weighted average of the interest rates in the application, rounded up to the next one-eighth of one percent.
Because your rate will be based off of your existing interest rate, consolidation typically will not lead to a lower interest rate. So why do it? Consolidation may help you lower your monthly payments, qualify you for better student loan repayment plans, and make you eligible for forgiveness programs. If your loans are with more than one lender, it can also simplify your payments since you will only be sending payments to one servicer.
If you don’t care to crunch these numbers yourself, you can use the federal student loan consolidation interest rate calculator below to find what you’ll pay for your new loan.
Some borrowers with Federal Family Education Loans have an interest rate subsidy that lowers their rate. If they consolidate those FFEL Loans, they’ll lose that subsidy, which could increase the interest rate, but not the loan amount for the new debt.
How federal student loan consolidation rates work
The new loan will have a fixed interest rate. Several years ago, borrowers could choose a fixed or variable interest rate. While a variable rate might seem nice when you first take out a loan, rates can change, and so can payments! Now, all federal loans, including consolidation loans, have a fixed interest rate for the life of the loan.
Consolidation simplifies repayment. When you consolidate, you combine multiple loans into a single loan with one monthly payment made to one loan servicer. You can choose which servicer you want to work — with unless you work for the government or a nonprofit and want to qualify for the public service forgiveness program. In that case, you’ll have to work with MOHELA. Read more about the best student loan consolidation companies.
Consolidation may cause you to pay more interest. Consolidation may increase the interest you pay throughout the repayment term in two ways. First, when you consolidate, the outstanding interest is added to your principal loan balance, which will cause you to pay interest on interest. Second, consolidation extends your repayment period up to 30 years, depending on your loan balance. Ask your servicer about what repayment options get rid of your loans faster.
Learn More: How to Lower Student Loan Payments
What type of loans can be consolidated?
Direct Loans, including Direct Subsidized and Unsubsidized Loans, Parent PLUS Loans, and Graduate PLUS Loans.
FFEL Loans, including Stafford Loans and FFEL Consolidation Loans.*
Federal Perkins Loans.
Private student loans can’t be consolidated with the federal government. But you can refinance the debt with a private lender.
You can consolidate your student loans for free on the Federal Student Aid website, studentaid.gov.
* Most FFEL Consolidation Loans can be consolidated into the Direct Loan Program even if you don’t have another federal loan to add to your loan application. The one exception is Joint Spousal Consolidation Loans. In no case will the Education Department allow you to consolidate those loans a second time.
What are the eligibility requirements to consolidate a loan?
To consolidate a loan, you must be in repayment or in the grace period and not in active wage garnishment for the loan. Also, if you’re consolidating an existing consolidation loan, you typically must have another federal loan to consolidate it with.
Are there any fees for consolidating?
Although the Education Department charges origination fees when you borrow loans for school, it doesn’t charge any origination or loan application fees when you consolidate.
Can I consolidate if I have bad credit?
You don’t need excellent credit to consolidate federal loans. In fact, you don’t need any! You can consolidate with bad credit because the Education Department doesn’t base your eligibility on your creditworthiness — i.e., your credit history and score, DTI ratio, and other financial factors. You can consolidate so long as you have eligible loans.
Should you consolidate?
Federal student loan consolidation makes sense if you want to:
Qualify for student loan forgiveness. Since President Joe Biden entered office, the Education Department has overhauled the Public Service Loan Forgiveness Program and income-driven repayment forgiveness. Consolidation opens the doors to both programs, allowing you to qualify to have your debt wiped away after you’ve made the qualifying payments. Read more about the PSLF Waiver and IDR Waiver.
Lower monthly payments. Parents struggling with their student loan payments can consolidate and gain access to the income-contingent repayment plan. ICR caps their monthly payment at a portion of their discretionary income, ensuring they’ll have access to an affordable payment.
Get out of default. With consolidation, you can bring defaulted loans back into good standing within a couple of months.
Reset eligibility to pause payments. Federal loans have a limited amount of deferment and forbearance. If you run out and need to temporarily pause your payments, consolidating creates a new loan eligible for more deferment and forbearance options.
You can review the loan terms before the consolidation completes. If you’re unhappy with the terms, you can cancel the application, and your current loans will remain with the loan servicer.
Learn More: PSLF Changes
How to get a lower rate
If your goal is to save money on interest, refinancing your student loan debt is a better option than consolidation. If you have good credit, stable income, and a low debt-to-income ratio, or have a cosigner with those traits, lenders will offer you the lowest rates and best repayment terms.
Use an online marketplace like Credible to easily shop for the best student loan refinancing rates. You can submit one application without a hard credit check to get offers from several banks, credit unions, and online lenders.
The lenders will offer different fixed and variable rate loans depending on your creditworthiness. Most will also offer a rate discount if you enroll in automatic payments.
Refinancing is ideal if you have private loans with high-interest rates. But refinancing federal student loans comes at a cost: you’ll lose access to protections and federal loan benefits.
Learn More: Can You Refinance Student Loans After Consolidation?
If you’re struggling to repay your student loans, consolidation may be a good option. It can lower your monthly payments and make it easier to qualify for forgiveness programs. But it’s important to understand that consolidation won’t lower your interest rate. Refinancing is a better option to save money on interest.
To learn more about consolidation and whether it’s right for you, schedule a 10-minute call with me. I can help you understand your options and create a plan to get out of debt.