How weighted average interest rates work for student loan consolidation

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Direct Consolidation Loans help borrowers consolidate multiple federal student loans into one new one, usually with the goal of simplifying one’s finances. However, Direct Consolidation Loans don’t grant borrowers the benefit of a lower interest rate. Instead, they use a weighted average of the interest rates on loans included in the new Direct Consolidation Loan, rounded up to the nearest one-eighth of a percentage point.

In other words, you won’t save money on interest if you consolidate federal student loans with a Direct Consolidation Loan. Instead, you can go from juggling multiple student loan payments to just one, which can make debt repayment easier.

What is a weighted average interest rate?

A weighted average interest rate is the average of the current interest rates on existing student loans, adjusted for how much you owe on each loan. This method is considered more accurate than the average of your interest rates because it takes discrepancies within your debt load into account. In other words, if you owe only $1,000 at an extremely high interest rate and $10,000 at an extremely low interest rate, those rates won’t be weighted equally, since the balance is much higher with one rate.

How to calculate your weighted average interest rate for student loans

To come up with the weighted average interest rate for your student loans, you’ll multiply each loan’s interest rate by the loan balance, then divide the sum by the total loan balance.

Let’s say you owe $5,000 on one student loan at 5 percent and another $10,000 on a student loan at 3 percent. Use the following steps to figure out the weighted average interest rate you would be eligible for:

Step 1: Multiply each loan balance by the corresponding interest rate for the loan.

$5,000 x 0.05 = $250
$10,000 x 0.03 = $300

Step 2: Add the products of these calculations together.

$250 + $300 = $550

Step 3: Divide the sum of this calculation by the total debt load.

$550 / $15,000 = 0.0366, or 3.66 percent

Step 4: Round this percentage up to the nearest one-eighth of a percentage point.

3.66 percent rounds up to 3.75 percent

This weighted average is lower than the simple average of the two interest rates, which would be 4 percent. This is why the weighted average interest rate is used for Direct Consolidation Loans instead of the actual average of all interest rates combined; the weighted average is able to take into account that the borrower owes twice as much money on the loan with the lower 3 percent rate.

How Direct Consolidation Loans affect your student loan payment

Because Direct Consolidation Loans use weighted average interest rates, you won’t save money if you consolidate your federal student loans. Direct Consolidation Loans often extend the repayment timeline for your loans, so you may even pay considerably more interest over the long run.

There are other downsides to Direct Consolidation Loans, including the fact that any outstanding interest on the loans you consolidate becomes part of the original principal balance on your consolidation loan, meaning you’ll be paying interest on a higher balance. You may also lose out on perks like interest rate discounts, principal rebates and loan cancellation benefits, and any progress toward income-driven repayment plans or Public Service Loan Forgiveness will be reset.

With that said, a Direct Consolidation Loan does let you modify your current federal student loans without getting a private company involved. This means that you can qualify for federal student loan benefits like income-driven repayment plans, as well as deferment or forbearance, if you’re eligible. A Direct Consolidation Loan will also lower your monthly payment, since your repayment will be stretched over a longer timeline.

Next steps

Before you opt for a Direct Consolidation Loan for your federal student loans, understand your goals. Consolidating your loans this way will likely lower your monthly payment, but it may also increase the total amount you pay in interest over time.

If you’re looking to save money, you may choose to instead refinance with a private lender; instead of a weighted interest rate, you’ll be offered an entirely new rate, sometimes much lower than what you would pay through the federal government. Just keep in mind that refinancing in this way will take away benefits like income-driven repayment, deferment and forbearance.

Before you make any big moves, use a calculator to figure out how much you’d pay with both a Direct Consolidation Loan and a private student loan with your preferred terms. You can do this by figuring out the weighted average interest rate you could achieve with a Direct Consolidation Loan, then comparing that to student loan rates you may be eligible for with a private lender.

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Written by
Holly D. Johnson
Author, Award-Winning Writer
Holly Johnson writes expert content on personal finance, credit cards, loyalty and insurance topics. In addition to writing for Bankrate and, Johnson does ongoing work for clients that include CNN, Forbes Advisor, LendingTree, Time Magazine and more.
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