How to Consolidate Your Loans
When you consolidate your loans, you give yourself a more manageable way to repay your borrowed educational finances. With several different loans, you may have to juggle multiple payment due dates for several different amounts at a variety of different interest rates. Consolidating your loans with a single lender combines all of your active loans into one sum with one interest rate and with a single repayment plan.
Pick a Lender
Borrowers who seek to consolidate their loans should begin the process by shopping for the best consolidation package among lenders. Borrowers should pay attention to each lender's specific consolidation benefits, including any interest rate reduction opportunities. Borrowers should also seek a lender that makes them comfortable. If a lender has a reputation for pristine customer service, or if the lender makes representatives available to discuss any of your questions or concerns at any time, then working with that lender may mean a more pleasant overall experience for you.
Weighted Interest Rates
When you combine several loans, the lender you choose to organize your consolidation will consider all of your outstanding loans, their interest rates, and the remaining balances that you have to repay. In gathering this information, the lender will calculate a weighted interest rate that will apply to your newly consolidated loan.
The formula for this weighted interest rate is as follows:
(Loan A Balance x Loan A Interest Rate) + (Loan B Balance x Loan B Interest Rate)
Loan A Balance + Loan B Balance
Additional loans would be added to this equation in the same fashion. As an example, if a borrower wished to consolidate a subsidized Stafford loan ($3,500 at 6.0%) and a Perkins loan ($4,000 at 5.0%), the equation for the new weighted interest rate would look like this:
($3,500 x 6.0%) + ($4,000 x 5.0%)
$3,500 + $4,000
Calculating this equation would show the weighted interest rate to be approximately 5.5% for the consolidated $7,500 loan balance. The weighted interest rate will always fall between your highest and lowest loan rates. Depending on your remaining loan balances, this change to your interest rate could mean that you will end up paying slightly more than what your original loans required. However, the new sum should be very close to the original amount, and the convenience that consolidation brings may still make it a good move.
Watch Out for Scams when Consolidating
Consolidating your loans should be offered free-of-charge. While some loans may carry specific fees initially, these fees are usually deducted from the total loan amount at disbursement. If a lender or loan manager tries to convince you to pay an upfront consolidation fee, then you may be facing a scam. To avoid this type of scam, review your consolidation plan very carefully, and ask about any fees or charges that you don't understand. When in doubt, consider other consolidation sources and compare their terms. That way, you will know if the fees you see are widely accepted or simply a single lender looking to make more money.
