Student Loan Consolidation Rates: Student loan debt is a growing problem in America, with over 44 million borrowers owing more than $1.5 trillion in student loans.
As college costs continue to rise faster than inflation, many graduates are saddled with massive debt that can feel overwhelming.
One option for managing student loans is consolidation, which allows you to combine multiple federal student loans into one new loan.
Consolidating can lower your monthly payment and interest rate while simplifying repayment.
However, consolidation also has some drawbacks to consider.
In this article, we’ll explore loan consolidation rates, the pros and cons, and, most importantly – how consolidation affects interest rates on your student loans.
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What is Student Loan Consolidation?
Student loan consolidation allows you to bundle multiple federal student loans into one new loan issued by a private lender.
This new consolidation loan pays off your existing loans, allowing you to make only one monthly payment to one servicer.
You must have at least $5,000 in federal student loan debt across two or more loans to be eligible. Private student loans from banks or other lenders cannot be consolidated.
The most common types of federal loans that can be consolidated are Direct Subsidized Loans, Direct Unsubsidized Loans, subsidized/unsubsidized Federal Stafford Loans, PLUS loans, Perkins Loans, and more.
Consolidation can simplify repayment since you only have one loan with one interest rate, servicer, and monthly bill.
It can also lower your monthly payment through extended repayment terms, though you pay more interest over the life of the loan.
The Benefits of Student Loan Consolidation
There are several potential advantages to consolidating your federal student loans:
1. Simpler Repayment
Instead of keeping track of multiple loan servicers, payments, and deadlines, you’ll have just one monthly bill to pay. This can make repayment less stressful and easier to manage.
2. Lower Monthly Payment
By extending your repayment term, consolidation stretches out costs over a longer period, which can reduce your monthly minimum payment. This helps free up cash if money is tight after college.
3. Single Interest Rate
With consolidation, existing loans are paid off and replaced with a new loan with an interest rate based on the average of your old rates.
This new single rate may be lower than rates on some of your high-interest loans.
4. Flexible Repayment Plans
Federal consolidation loans qualify for income-driven repayment plans, an affordable option that ties payments to your income and family size. Your payment could be as low as $0/month.
5. Deferment or Forbearance
If you’re struggling to pay after college, consolidation offers the option to postpone payments through deferment or forbearance if you qualify temporarily.
6. Get Out of Default
If you’ve defaulted on any federal loans, consolidation can get you out of default by paying those loans off immediately. This removes default from your credit history.
7. Longer Repayment Term
Stretching out debt over an extended term of 12-30 years reduces the monthly burden, though you pay more interest.
8. Interest Rate Discount
Some lenders offer an interest rate reduction of 0.25% when you enroll in auto-debit payments.
The Downsides of Student Loan Consolidation
While consolidation can ease repayment, there are some drawbacks to consider:
1. No Change in Total Debt
Consolidation doesn’t lower your overall debt; it restructures it into one loan. You must make payments or pursue forgiveness programs if you want debt relief.
2. Loss of Borrower Benefits
Any perks from original loans, like interest rate discounts or principal rebates, don’t carry over to a new consolidation loan.
3. Single Interest Rate
While consolidation may lower rates on some loans, it could also raise rates on others if the blended rate on the new loan is higher. Run the numbers carefully.
4. Repayment Term Resets
When you consolidate, your repayment term is reset, essentially erasing any progress you’ve made in payments toward forgiveness on original loans.
5. One Shot at Consolidation
You can only consolidate once, so the benefits are a one-time offer. If you consolidate and acquire new loans, you can only reconsider some things together.
6. Potentially Higher Total Costs
Although monthly payments decrease, paying over an extended term means you pay more interest overall, increasing total costs.
7. Ineligibility for Some Repayment Plans
Depending on the lender, consolidation loans may not qualify for income-driven plans, an affordable option for borrowers.
It’s important to weigh the pros and cons of consolidation carefully based on your situation. Your savings depend on your loan balances, interest rates, and repayment terms.
How Consolidation Affects Student Loan Interest Rates
One of the biggest considerations with consolidation is the impact on your interest rate, which significantly influences total repayment costs.
Here’s how it works:
When you consolidate loans, the interest rate on the new consolidation loan is fixed at the weighted average of all your current loan interest rates, rounded up to the nearest one-eighth of 1%.
This new rate will fall somewhere between all your existing rates.
For example, let’s say you have:
- $15,000 loan at 6% interest
- $10,000 loan at 7% interest
- $5,000 loan at 4% interest
To determine the new consolidation rate:
- Add up the balance of all loans: $15,000 + $10,000 + $5,000 = $30,000
- Multiply each loan’s balance by its interest rate:
- $15,000 at 6% = $900
- $10,000 at 7% = $700
- $5,000 at 4% = $200
- Add the results of step 2: $900 + $700 + $200 = $1,800
- Divide this sum by total loan balances: $1,800 / $30,000 = 0.06
- Round up to nearest eighth: 0.06 = 6% consolidated interest rate
In this case, consolidation kept the interest rate at 6%. However, consolidation could increase or decrease your overall rate depending on your mix of loan balances and rates.
Run the numbers for your situation to see if consolidation offers the interest savings you expect.
Online consolidation calculators can help model different scenarios.
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Where to Get the Best Consolidation Interest Rates
Federal student loans are all consolidated through the Direct Consolidation Loan program, so lenders don’t compete on interest rates.
But rates have changed over the years for new Direct Consolidation Loans:
- Loans issued before 7/1/2006: Variable rates, adjusted annually, capped at 8.25%
- Loans issued 7/1/2006 – 6/30/2013: Fixed 6.8%
- Loans issued 7/1/2013 – 6/30/2014: Fixed 5.625%
- Loans issued 7/1/2014 – present: Fixed rate based on 10-year Treasury note + 2.125%, capped at 8.25%
This means more recent consolidation loans often have lower interest rates. But private lenders that offer student loan consolidations, like SoFi, Laurel Road, and Earnest, may beat federal rates.
Comparing options from multiple private lenders can help you find the best rate.
Here are some tips to get a low consolidation interest rate:
- Check for rate discounts – Many lenders offer autopay and other discounts of 0.25% or more to lower rates.
- Add a cosigner – Rates are based on credit, so adding a cosigner with high credit scores can secure better rates.
- Look for intro rates – Some lenders provide introductory discounted rates for the first 12-48 months, lowering costs.
- Consider variable rates – They start lower than fixed rates, though your rate could rise when the index is pegged to rise.
- Improve your credit – Boosting your credit score before consolidating can qualify you for the best rates.
Shopping around and negotiating with lenders can help you lock in the lowest rate possible.
Even a small rate reduction makes a big difference in the lifetime costs of a large student loan.
Should You Consolidate Your Student Loans?
Here are some instances when student loan consolidation could be worth considering:
- You have multiple loans – Consolidation reduces administrative burden when balancing monthly loan payments.
- You want lower monthly payments – Extending the repayment term through consolidation drops the monthly minimum due.
- You want to lower your rate through aggregation – Consolidation may achieve a blended rate below high-rate loans.
- You can get better rates now than originally – Older loans at higher fixed rates can be improved through consolidation.
- You need access to affordability programs – Federal consolidation provides income-driven repayment plans and possible loan forgiveness.
- You want to rehabilitate a defaulted loan – Consolidation can get your loan out of default so payments count toward forgiveness and improving your credit.
Alternatively, avoid consolidating in these cases:
- You lose borrower benefits – Make sure any perks from original loans aren’t valuable enough to outweigh consolidation incentives.
- You have big high-rate loan balances – If lower-rate big balances dominate, consolidation could raise rates on smaller loans.
- You have variable interest rates – Consolidation turns existing variable rates into a fixed rate, removing flexibility.
- You’ve made progress toward forgiveness – Any payments made before consolidation no longer count toward forgiveness quotas.
- You have private student loans – These cannot be consolidated with federal Direct or FFEL loans.
Carefully comparing the pros and cons of your situation can determine if consolidation is right for you.
Use online calculators to estimate potential savings based on your loan details.
Other Ways to Reduce Student Loan Costs
Beyond consolidation, here are a few other strategies to minimize costs:
- Make extra payments to pay loans off faster and reduce total interest
- Enroll in auto-debit payments for interest discounts of 0.25% or more
- Deduct student loan interest on your taxes to lower taxable income
- Apply for income-driven repayment plans to cap payments at an affordable percentage of income.
- Pursue student loan forgiveness programs tied to public service, teaching, military service, or income level.
- Consider student loan refinancing from a private lender at lower rates (though this costs federal borrower benefits).
- Ask lenders about reductions to interest rates and other savings if you have a hardship
- Contact your servicer to request deferment or forbearance if you need temporary relief
The right approach depends on your loan types, balances, interest rates, income, and career.
Compare all options to make the smartest financial decisions about managing student loans.
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The benefits of consolidation, like simplified repayment, lower monthly bills, getting out of default, and flexible plans, can make consolidation worthwhile for some borrowers but not others.
Shop around for lenders that offer the lowest student loan consolidation rates, and crunch the numbers to see if consolidating saves money based on your situation.
Consolidation can relieve, but be wary of tradeoffs like higher long-term costs or lost borrower benefits on original federal loans.
For many, consolidation offers an affordable way to take control of student loans. Still, it’s smart to consider other ways to pay down principal faster, reduce interest, and pursue aid programs.
You can manage student debt and reach financial freedom with the right repayment strategy.