The interest rate on a consolidation loan is the weighted average of interest rates on the loans being consolidated, rounded up to the nearest 1 / 8 percent and the capped at 8.25%.
For example, suppose a student has Stafford loans issued on or after July 1, 2006. These loans have a fixed interest rate of 6.8%. When they are consolidated by themselves, the consolidation loan will have an interest rate of 6 and 7/8ths of a percent, or 6875%. So, the interest rate rises slightly.
If the borrower has a mixture of various loans including interest rates, the weighted average will be somewhere between the two. For example, if the borrower has $ 5000 Perkins loans (5.0%) and $ 10000 Stafford loans (6.8%), the weighted average is
$ 5,000 * 5.0% + $ 10,000 * 6.8%
—————————— = 6.2%
$ 5,000 + $ 10,000
The weighted average of 6.2%, is then rounded to 1/8th of a percent, producing a consolidation loan interest rate of 6.25%.
It should be noted that the weighted average does not fundamentally change the underlying cost of borrowing. It preserves the cost structure, including each of the interest rate insofar as it applies to a portion of the overall balance of loans. For example, the consolidation loan in the previous paragraph indicates that the $ 15000 loan balance of consolidation, $ 5000 will be 5.0%, and $ 10000 to 6.8%, with an interest rate equivalent 6.2%.
If you are ready for the consolidation of various interest rate, the weighted average interest rate will remain between the two. Make no mistake, if someone tries to suggest that this will save you money by giving you a lower interest rate. The interest rate may be lower than the higher your interest rate, but it is also higher than the lower your interest rates. More importantly, the amount of interest you pay on the maturity of the loan is roughly the same.
(For the mathematically inclined, there is a slight difference due to the depreciation of various forms of curves interest rates each. In the example given above 10-year, $ 10000 at 6.8% has a monthly payment of $ 115.08 and the total interest paid $ 3809.66, $ 5000 to 5.0% a monthly payment of $ 53.03 and the total interest paid $ 1364.03. If we add them, you get a total monthly payment of $ 168.11 and a total interest paid $ 5173.69. Using the weighted average, $ 15000 to 6.2% has a monthly payment of 168 , $ 04 and total interest paid $ 5165.01. Then, using the weighted average yields very slight decrease in the monthly payment (in this case, 7 cents), and total interest paid ($ 8.68 ) because of a type of triangle Act. Of course, when you consolidate the interest rate is rounded to 1/8th of a point, therefore 15000 $ 6.25% monthly payments of $ 168.42 and the total interest of $ 5210.42, leading to a slight increase. Well, you pay a tiny bit of a premium for consolidation, due to the rounding of interest rates.
The interest rate on PLUS loans loophole may reduce the interest rate of 8.5% fixed-rate PLUS loans 0.25% due to the consolidation.
If you were delaying the loan interest unsubsidized Stafford capitalising it, most lenders add interest capitalized in the main when you consolidate. (Lenders can take an interest in most quarters, but most capitalize once when the repayment of loans to enter or other ready to change.)
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