 The current interest rate cap for student loan refinancing is 8.25%, but that doesn't mean that you can't enjoy a lower rate. Federal government set Federal student loan consolidation interest rates, so comparing lenders based only on rates won't uncover the best deals. If you want to comprehend how these savings work, you need to understand how the student loan consolidation rate is determined.
Student loan consolidation rate
Your interest rate will be a weighted average of your current federal loan interest rates, rounded up to the nearest 1/8 of a percent. For instance, consolidating a $14,000 loan at 7.14% with a $7000 loan at 5.0% would have a consolidation rate of 6.5%. See how this is calculated.
| How the Formula Works | Example Calculation with 2 Loans | Step 1
Add up your total interest for all your federal student loans | $14,000 loan x 7.14% + $7,000 loan x 5.00% = | Step 2
Divide by total student loan amount to get your weighted average interest rate | $1349.60 in total interest/$21,0000 in total loans | Step 3
Round this rate up 1/8 of a percent to get your base consolidation rate before Borrower Benefits. | Weighted Average Rate = 6.427%
Base Consolidation Rate = 6.5%
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Be careful if any lender who says they can save you money by providing you with a lower base interest rate than your current loan—they can’t. The rates for student loan consolidation are dictated by the Federal Student Loan Consolidation Program. Nevertheless, there are two ways that you can lower your consolidation interest rates.
1. Consolidate before your grace period ends
Your consolidation rate is determined by the current interest rate of your Federal Student Loans. What many graduates don’t realize is that the interest rate on their loan during the grace period is 0.60% lower than when the loan moves into repayment status. This means that you can enjoy the advantages of lower interest rate payments for up to 30 years just by refinancing during within the first 6 months after graduation.
2. Shop around for borrower advantages
Where lenders do differ, is in the money saving incentives they propose borrowers. One student loan refinancing company may offer a discount for on-time payments. Another might offer a percent reduction for automatic withdrawal of payments.
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