3 Easy Steps for Calculating a Weighted Interest Rate
Ok, so you took out some student loans and now you’re faced with paying them back. You understand that consolidation may be an option but you’re trying to figure out how the interest rate will be determined. If the terminology of "weighted average interest rate" has left you scratching your head, we can help.
To clarify, only the Direct Consolidation Loan program utilizes a weighted average interest rate. This program is run by the federal government, and only federally issued student loans are eligible.
What does "weighted average interest rate" even mean?
Your highest outstanding federal loan balance will have the biggest impact on what your consolidation interest rate will be. The bigger the loan, the more ‘weight’ it will have on the interest rate calculation. So, the interest rate on your biggest loan balance has the most influence on your consolidation rate. It may push your consolidation interest rate higher or lower.
After your weighted average interest rate is determined, the final step is to round up to the nearest 1/8th of 1 percent (.125). That is how the Direct Consolidation Loan program works.
Ok, how do I calculate the weighted interest rate?
You can find the weighted average interest rate in three simple steps.
- Multiply each of your loan balances by their interest rate. This will give you the per loan ‘weight factor.’
- Add all the per loan ‘weight factors’ together to get the total weighted factor.
- The last step is to divide the total (of all the weight factors) by the total of all the loan balances, then round to the nearest 1/8th of 1 percent.
Here's how that would look if you mapped it out. Let's say you have three loans:
|Total Remaining Balance||$21,000|
Multiply the balances by the interest rate:
$4,500 x 5.31% = $238.95
$10,500 x 5.84% = $613.20
$6,000 x 4.66% = $279.60
Add the weight factors together:
Now, take the total of the total of the weighted factors, and divide that by the total amount of your remaining balances:
$1,131.75 divided by $21,000 equals 5.3893%
Round this to the nearest 1/8th of 1 percent to get 5.5%.
If you prefer to do this online, you can use this simple yet snazzy consolidation calculator from Mapping Your Future. What’s great about this tool is it also provides an amortization (detailed payment) schedule showing you the breakdown of interest vs. principal that gets applied to every payment you would make.
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