Debt consolidation is a great way to keep your debts in check. But do you really know what happens when you consolidate your loans?
Some people believe that they can get lower interest rates when consolidating their federal student loans into a new package. This can happen, but not in all cases.
See, the interest rates of these consolidated loans are simply the average of the original loans that were consolidated. If you pulled out four loans at different interest rates, then you will get an interest rate for your consolidated loan equal to the sum of all the previous rates divided by four.
For example, you’d get an average interest rate of 5.95% if you borrowed loans at 6.7%, 6%, 5.8% and 5.3%.
But here’s the perk that makes consolidation so attractive: they are calculated using weighted averages instead of plain averages. Let’s say you borrowed $2,500 in one school year and $2,000 in another – both at an interest rate of 5.0%. Consolidating the two loans into will lower the interest rate since the latter loan is significantly lower than the former.
The exact rates are a bit tricky, though, so you may want to fiddle around with a few student loan calculators for good measure. The government has a pretty good one HERE. Go check it out and see what you’ll end up with in the long run.