Consolidating your student loans can be very useful for reducing your monthly payments, refinancing your debts, or accessing government relief programs. However, before taking the step, it is important to know what the interest rate will be by combining all your current debts.
Consolidating your debts is not a leap of faith; it is a vital decision that must be taken carefully. One key piece of information you must keep in mind is the amount you would end up paying if you consolidate all your debts into one, to know how it will affect your budget.
Although it may seem difficult at first, it is not rocket science. With a little patience and a calculator, you will be able to determine the interest rate on your student loan in a few minutes.
How to calculate your interest rate in five steps
- Multiply the loan balance of each of the loans you want to consolidate by its statutory interest rate. This is different from the 0% offered during the payment pause.
- Add the individual results from Step 1.
- Divide the results from Step 2 by the Direct Consolidation Loan balance.
- Multiply the amount you got in Step 3 by 100.
- Round the resulting value to the nearest one-eighth of 1%.
An example will help you better understand the method:
- Loan 1: Balance $1,000; Interest Rate: 6%
- Loan 2: Balance $1,000; Interest Rate: 6.4%
- Direct consolidation loan balance: Loan 1 Balance + Loan 2 Balance = $2,000.
Method:
- Loan 1: $1,000 x 0.06 = $60
- Loan 2: $1,000 x 0.064 = $64
- $60 + $64 = $124
- $124 / $2,000 = 0.062
- 0.062 x 100 = 6.2%
- 6.2% rounded to the nearest one-eighth of 1% = 6.25%
- Direct Consolidation Loan Interest Rate: 6.25%
Consolidation isn't for everyone, but if you decide it's the best path for you, stay informed about all your options. Do the math and decide if it's what's best for your finances.