Title: Student Loan Consolidation Rate in Federal and Private
Category: student loans
Students and their parents can use student loan consolidation that will
allow them combine their education loans into one loan from a single
lender. That new loan - consolidation loan - will be then used to pay off
the balances of the originating loans.
The process of consolidating student loans is similar to refinancing a
mortgage. It's a great way to improve own finances as it gives the
borrower a number of benefits, such as: lower monthly payment, lower
interest rate, longer repayment schedule, lack of application fees and of
credit check as well as deferment and forbearance options.
Not all of those benefits are available in every consolidation loan;
which of them a borrower receives depends on whether he or she takes a
federal or private consolidation loan. While both federal and private
consolidations provide similar results with regards to lowering monthly
payments and longer repayment schedules, there are significant
differences regarding the interest rates and deferment and forbearance
In this article I will discuss the issue of the student loan
consolidation rate and how it is determined in federal and private
First of all, it's important to remember that usually it is not a good
idea to include any of your federal education loans if you decide to take
a private student consolidation loan. Why? For two main reasons. First,
doing so may increase your effective interest rate and second, you will
most likely lose a number of important borrower benefits, such as:
flexible repayment terms, generous loan forgiveness, deferment,
forbearance and cancellation provisions. In most cases, they don't come
with private student consolidation loans.
Interest rate is always among the most important factors in every loan as
it determines the cost the borrower pays to the lender for using the
money being borrowed. The higher the interest rate, the longer the total
cost of taking the loan will be. Also, getting a fixed interest rate is
preferable to a variable rate, as it is just much easier to live with the
fixed rate and not to worry that it may significantly go up and
negatively impact your financial well being.
Many people believe that all student loan consolidations - both federal
and private - result in a fixed-interest rate loan. However, it's only
true for the federal student loan consolidations, but in most cases the
private consolidations don't feature fixed interest rates. Because the
private consolidation loans belong to the consumer loans, they are
credit-based and have to carry variable interest rates.
To the contrary, all federal student consolidation loans carry a fixed
interest rates, because they are taxpayer-supported. They are government-
funded and policed by the Department of Education (ED). Some of them are
also directly provided by the ED; they are called "Direct Loans". Those
federal consolidation loans are based on government programs and not only
the federal Direct Consolidation Loans (Direct Loans), but also the
federal loans provided by private lenders under the FFELP (Federal Family
Education Loan Program) follow the same formula for determining the fixed
interest rates. That formula is simple - the fixed interest rate on a
federal student consolidation loan is calculated as the weighted average
of the interest rates on all loans that get consolidated. The result is
then rounded up to the nearest 1/8th of a percent and capped at 8.25%
(i.e. the federal loan interest rate can't be higher than 8.25%). The
fixed interest rate means that it is locked in for the whole term of the
consolidated loan; it makes the life of the borrower much less stressful
than that of somebody that has to take a private consolidation loan.
On the other hand, interest rates in most of the private consolidation
loans are variable - they change during the length of the loan, according
to the changes in the base. Those bases differ from loan to loan, but the
lenders usually choose one of these - either the Prime Rate or the 3-
month LIBOR Rate. The second one has been significantly lower over the
last few years, thus it's more advantageous for the borrowers. The
lenders arrive at the final interest rate by adding a margin determined
by the borrower's credit rating.
There are a few ways available to the borrowers to bring down the
consolidation loan interest rate and they are available in both federal
and private consolidations. For example, you can get a 0.25% instant rate
reduction when you agree to have your monthly loan payments direct-
debited from your bank account. Later on, you may also earn another
interest rate reduction if you continually make on-time monthly payments
for a certain number of months (e.g., 24, or 36, or 48 months).
Any interest rate reduction will usually mean thousands of dollars in
savings, so try as much as you can to use all opportunities to earn those
reductions and save a lot of money.