Am I eligible to refinance my student loans?

Interest Rates on Direct Consolidation Loans

Federal Student Loan Interest Rates

Direct Consolidation Loans have fixed interest rates. When you consolidate your federal student loans, the interest rate on your new consolidation loan will be roughly the same as the combined rates on your current loans. What this means: Your interest rate will not go down, but it also won’t go up by much either. 

Calculating the Weighted Average

The interest rates on Direct Consolidation Loans are based on this calculation: The weighted average of the interest rates of the federal student loans being consolidated, rounded up to the nearest 1/8th of one percent.

It sounds more complicated than it really is. The following example shows how the calculation is made.

Current federal loan balances:

  • $5,000 loan at 3.4%
  • $7,500 loan at 6.8%
  • $10,000 loan at 6.8%

The interest rate on the Direct Consolidation Loan would be:

($5,000 x 3.4%) + ($7,500 x 6.8%) + (10,000 x 6.8%) ÷ ($5,000 + $7,500 + $10,000) = 6.04%

This would be rounded up to the nearest 1/8th of one percent, or 6.13%.

Monthly Payment Before Consolidation (standard repayment, 10 year term) Monthly Payment After Consolidation (extended repayment, 20 year term)

$5,000 loan at 3.4%: $50.00

$7,500 loan at 6.8%: $86.31

$10,000 loan at 6.8%: $115.08

Total: $251.39

$22,500 consolidation loan at 6.13%: $162.82

There is no cap on the interest rates on Direct Consolidation Loans.

Getting a Lower Interest Rate

The federal government does not offer a way to consolidate student loans at a rate that’s lower than the weighted-average calculation. So, even if market interest rates go down, you cannot get a better rate with a Direct Consolidation Loan.

As a result, the only way to get a lower rate is to take out a private refinance loan that pays off your higher rate federal student loans. Private loans are credit-based, so unless you have an excellent credit rating you will probably need a creditworthy cosigner to qualify for a lender’s lowest interest rates.

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Am I eligible to refinance my student loans?