For students struggling to pay back their student loans, consolidating multiple federal loans into one can provide better rates and help lessen the financial burden of repayment. However, Direct Consolidation Loans don’t guarantee 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. The calculation for this is important for borrowers to understand before the consolidation process.

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 considers discrepancies within your debt load.

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.

What loans use a weighted average interest rate

Most loans offered by the federal government are subject to a weighted average interest rate. This includes Direct Loans and FFEL Program Loans.

Different types of interest rates used for student loans

Student loans typically offer two interest rates: fixed or variable. Fixed interest rates remain the same for the life of the loan. Variable interest rates can change depending on market conditions. When refinancing, the lender will typically choose different rates based on the type of interest rate that you choose.

How to calculate a weighted average student loan interest rate

To determine 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.

If you don’t want to do the math on your own, simply search for an online weighted average student loan interest calculator.

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.

How to lower your student loan interest rate

Consolidating your federal student loans through the federal program can provide several benefits, but a lower interest rate isn’t one of them. If you’re looking for opportunities to reduce your interest rate, here are a few to consider:

  • Refinance your student loans: Depending on your credit history and income, you may be able to secure a lower interest rate than what you’re paying right now by refinancing your loans with a private lender. If you can’t get a lower rate on your own, consider adding a co-signer to your application. Keep in mind, though, that refinancing federal student loans will result in you losing access to federal benefits such as loan forgiveness programs, income-driven repayment plans and more.
  • Set up automatic payments: If you haven’t already, consider setting up autopay on your federal student loans. Most federal servicers offer a 0.25 percent discount on your interest rate if you get on an automatic payment plan.

If you decide to stick with your federal student loans, you may not be able to score a lower interest rate, but you can potentially reduce your interest charges by doing the following:

  • Research forgiveness and repayment assistance programs to help you pay down your balance more quickly.
  • Pay more than the minimum amount due every month.
  • Use the debt snowball or avalanche method to tackle low-balance or high-interest loans.
  • Pay half of your monthly payment every two weeks, so you end up with one full monthly payment yearly.
  • Put your small windfalls, such as tax refunds, work bonuses and gifts, toward your student loans.
  • Get an extra job or side hustle and put all that money into your loans.

Regardless of your approach, it’s important to take your time to understand all of your options and choose the path that works best for you.

The bottom line

When consolidating federal student loans, you can turn multiple loans into a single loan that only requires you to make one monthly payment. However, the interest rate may be determined through weighted average interest rates rather than negotiating a new rate. This may mean your interest rate will not necessarily improve after consolidating.