How to calculate fixed interest rate for student loan consolidation?

This article presupposes that you know what a federal student loan is and what federal student loan consolidation is. We shall therefore only touch upon the benefit of consolidation here, which is that the monthly repayments on a consolidated student loan is lower than the total of monthly repayments that would have to be made if the different loans were not consolidated.

The lower monthly repayment on a consolidated student loan is due to a lower, fixed interest rate applicable after consolidation and, often, a longer repayment period. We shall now look at how this fixed interest rate is calculated. The fixed interest rate for a consolidated federal student loan is the weighted average of the interest on each unconsolidated loan that is being consolidated, rounded up to the nearest one-eighth of 1 per cent but within a ceiling specified at 8.25 per cent. Let’s work out an example.

Suppose we are consolidating the following three outstanding federal student loans taken by a single individual:

• USD 10,000 at 5.99% interest … (a)
• USD 7,500 at 6.79% interest … (b)
• USD 5,000 at 5.39% interest … (c)

First step:

Multiply each loan balance by its interest rate. So, we have:

10,000 x 5.99 = 59,900 … (d)
7,500 x 6.79 = 50,925 ….. (e)
5,000 x 5.39 = 26,950 ..… (f)

Second step:

Add the products: (d) + (e) + (f), i.e.: 59,900 + 50,925 + 26,950 = 137,775 …. (g)

Third step:

Total the outstanding loan balances: (a) + (b) + (c), i.e.: 10,000 + 7,500 + 5,000 = 22,500 … (h)

Fourth step:

Divide the sum from (g) by the sum (h), i.e.: 137,775 / 22,500 = 6.123 … (i)

Fifth step:

Round up (i) to the nearest 1/8th per cent, i.e.: round up 6.123 to the nearest 1/8th per cent = 6.125

Thus, the fixed interest rate for this consolidated loan would be 6.125 per cent.

Rounding up of decimals:

To assist you in calculation after the fourth step, the following should help:

If the decimal place of the rate is .001 through .125, round it up to .125.

Similarly, if it is .126 through .250, round it up to .25.

If .251 through .375, round up to .375.

If .376 through .500, round up to .5.

If .501 through .625, round up to .625.

If .626 through .750, round up to .75.

If .751 through .875, round up to .875.

If .876 through .000, round up to .00

Summary:

In this article, we have taken a look at how the fixed interest rate on a consolidated federal student loan is calculated. Remember, though, that student loan consolidation is a specialist business because there are many rules and regulations in place – such as rules of debt forgiveness – which can change with time, and which you cannot be expected to be always aware of. Therefore, do calculate your fixed interest rate as shown in this article, but do select a professional consolidator too.