If you choose to consolidate your loans, the new interest rate will be the weighted average of the previous interest rates on the loans you've selected to consolidate, rounded up to the nearest one-eighth of one percent. This is done by multiplying the balance of the loan by the interest rate as a decimal (4.3% = .043). Then taking the sum of the loan balances and dividing it by the sum of the multiplied amounts to get your new interest rate expressed in decimal form. To see it in the percentage form, multiply the answer by 100.
For example, let's say you have the following two loans:
- Loan A with a balance of $5000 and an interest rate of 4.3%
- Loan B with a balance of $6000 and an interest rate of 2.3%
You decide to consolidate these loans and want to know what the new interest rate is. We'd want to calculate the weighted average of each to find out the new interest rate. By following the math above:
- Loan A multiplied = 5000 * .043 = 215
- Loan B multiplied = 6000 * .023 = 138
Take the sum of the balances:
- Loan A + Loan B = 5000 + 6000 = 11000
Add the sum of the multiplied amounts:
- Loan A multiplied + Loan B multiplied = 215+138 = 353
Then divide the two sums to get your new weighted interest rate:
- 353/11000 = 0.03209
- 0.03209 = ~3.209%
- Rounded up to the nearest one-eighth = 3.25%
So your new loan would have an interest rate of 3.25%
It's important to note that there is no cap on the interest rate of a Direct Consolidation Loan. Read more at: https://studentaid.gov/manage-loans/consolidation