Lowering interest rates have made student loan consolidation interest rates an option being considered by many people. Nearly 80% of students have some type of student loan by the time they graduate and the average loan for a student is $10,000. For many students and parents, education loans have come from several sources, have varying interest rates, and have higher payments that one is comfortable with.
Education loans fall into two categories, Federal education and Private education loans. When a student is considering consolidation it is important to keep these categories separated. The method for calculating consolidation interest rates for federal education loans are strictly regulated by the government. The education loans provided by private lenders do fall under the same restrictions and requirements and can vary greatly depending of the lender gave the loan.
Student loan consolidation interest rate for education loan are calculated by taking the average rate of all of the loans and rounding up to the nearest 1/8%. The loan, then will fall somewhere between the highest interest and the lowest interest. The maximum rate is 8.25%.
There are some instances when an individual with a PLUS student loan will be able to receive a lower rate by consolidating. The cap on a PLUS student loan is 8.5%. However, when the PLUS is consolidated, the cap is 8.25%. By consolidating the PLUS loan a student can save 0.25%. This is called the PLUS Loan Loophole.
When private education loans are consolidated an individual will want to compare the interest rates and fees of different lenders. These are calculated just like a mortgage loan would be. Lenders calculate these loans on either the prime rate plus margin for the borrower and co-signer or the LIBOR. They usually charge between 1% and 5% origination fees depending on the credit of the borrower. This fee is included in the loan.
Deferred interest will also affect the total of a consolidation loan. Lenders usually capitalize the deferred interest of the original loan and include that in the consolidation. There also be discounts and benefits that must be paid back to the original lender when the loan is consolidated.
The benefit of consolidation is that all of a person's loans are in one location and the same interest rate is being paid. In addition, the repayment period is often longer than the original repayment period so the monthly payment will be lower. However, it is important to consider what the final cost of getting a consolidation will be compared to maintaining the original loan. It is also important to talk to a professional who can talk about the options that are available to help an individual find the best interest rates that are available.
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