Student loan consolidation may increase your student loan interest rate. Consolidating federal student loans means you are applying for a Direct Consolidation Loan to combine multiple loans into one new policy. You will make single monthly payments with a new loan instead of worrying about several student loan bills.
Your new loan will have a fixed interest rate, meaning it will remain the same for its entire lifetime. This fixed rate will be a weighted average of the student loans you consolidate, rounded up to the nearest eighth of a percentage.
Your new rate may not necessarily have a lower interest rate if you combine larger loans. Here’s a closer look into federal student loan consolidation, the interest rates that result from the process, and options to lower interest rates.
Lower Monthly Payments
Although you may get higher interest rates by simplifying your student loans into one new policy, you can extend your repayment options to make lower monthly payments.
In addition, your consolidation loan’s principal amount will carry outstanding interest from the student loans you combine. Therefore, interest may accrue on a larger principal amount than you would without consolidating.
Refinancing Student Loans
You can get a lower interest rate by combining your student loans with a private lender. Student loan refinancing allows you to get a new private loan to pay off your student loans. Your new rate will depend on your credit status and financial situation. Consider refinancing if you are in a better economic state than when you first got your student loans.
Student loan refinancing, like student loan consolidation, simplifies your multiple student loans to make single monthly payments. Refinancing also allows you to combine federal student loans with private student loans. However, remember that you may lose interest benefits associated with your federal student loans when you turn them into private loans.
You may also apply for student loan refinancing with a cosigner who meets the qualifications of the private lender you select. Your co-signer's credit score and income status may help get you a lower interest rate. Be sure to consider all your options for private lenders before settling with one.
So, Does Consolidating Student Loans Lower Interest Rates?
Consolidating student loans does not necessarily lower your interest rate. Your new rate will be a weighted average of the multiple federal student loans you combine, rounded up to the nearest one-eighth of a percent. Larger student loans may give you a higher interest rate for your new consolidation loan.
In addition, any outstanding interest from the student loans you combine will go to your consolidation loan’s principal balance. Therefore, your new interest rate may accrue on a larger principal balance than when you did not consolidate your student loans.
You may qualify for a lower interest rate by refinancing your student loans with a private lender. Private institutions base student loan interest rates on your or a co-signer’s credit score and financial situation. Be sure to compare rates between different private lenders to find the best deal that suits your situation.