A lot of students take a loan to finance their studies. That loan is either a federal loan or a private loan. And many people find them attractive. Student debt consolidation is a process for giving up the iterative and teasing process of interest rate calculations. Consolidating your loan most probably will help you, but if you missed small details, you could end up paying up to more than an additional $5.000. This means unless there are strict rules and everything looks clear, and student debt consolidation may harm your budget. And one thing to bear in mind is that paying less monthly payment does not mean spending less in the long run. Consolidated loans carry interest rates more than your actual lowest interest rate. They are somewhere in between the highest and the most economical.

Interest

student debt consolidation

 

In most of the articles about loans, loan repayment, disbursement of loans you will probably see the word “interest.” If you borrowed money, you should pay the interest rate to the lender company for the money. But the case is a little bit different than mortgages and other types of loans. Mortgages are calculating for a month, while interest rates are adding daily. That’s why it costs you much more if you do pay not consolidated student loan in time. If you are lucky that your loan is subsidized federal credit, then you do not pay for the interest rate. For the unsubsidized direct loans, you ought to pay both interest rate and the primary loan itself. In case of insisting not to pay accrues (accumulated interest rates), this amount can be converted to your actual capital cost. And depending on the program, you could have some additional time, called a grace period, that you are free to pay back your loan.

Now let me introduce general interest rates between 1 August 2018 and 1 July 2019. You should note that they are only for the federal (direct) loan.

  • Undergraduate degree interest rates: both subsidized and unsubsidized loan interest rates were 5.05%
  • The Direct unsubsidized loan interest rate for graduate and professional workers: 6.6%
  • Direct PLUS Loan for parents, graduates, and professionals: 7.6%

Those percentages represent fixed rates which means it is stable during a lifetime of your loan.

Calculation of interest rates

student debt consolidation

 

After a sequence of actions like student debt consolidation, the interest rates are calculating. This is the teasing process, and many students fail to understand all terms. Calculating the amount of your interest rate:

  • The number of days after your last payment is counting.
  • Multiply that number with the loan balance.
  • Multiply the product of the operations above with interest rate factor.

Interest rate factor is using to determine how much interest rate is accumulated on your balance.

The product of interest is the number after the third multiplication. The interest rate of student debt consolidation can be accumulated if not paid in time. Capitalization is the term for accruing interest rate.

Capitalization

student debt consolidation

 

  • When you think paying your interest rates are not necessary, then the interest rates cause you trouble. First, they increase day by day. Then they become the primary loan, not interest. So it means having $5.000 loan with interest rate, can be shown as $6.000 after a while. In the deferment period the loaner, particularly student should not pay for the loan. Then the unsubsidized direct loan with interest rate accrues on your genuine balance.
  • In the student debt consolidation, unpaid interest amount will be capitalized even in the period of not paying the loan. In deferment or forbearance periods people do not pay for their loan, but the interest rate flashes up.  Unsubsidized loans are exposing to the suspension of loans. Forbearance is not limited to one loan type.
  • In the grace period, 6 months after graduation, although you are not obliged to pay your loan, the interest rate must be paid.
  • Giving up on the loan repayment plans such as PAYE (Pay As You Earn), REPAYE (Revised Pay As You Earn) or Income-based loan repayment.
  • After your income changes, if you forgot to recertify your loans.
  • If you have loans to be paid back by PAYE or IBR, but you are objecting to paying with these programs. Then you must be sure that your interest rates will be accumulating.

Setting up rates

student debt consolidation

 

In loan regulations, it has been decreed that every single student should be able to manifest their loans and forbearance. And private companies providing student debt consolidation are interested in having interest rates. Because it facilitates the process of earning a lot. Let’s say if one bank gives $4.000 loan and have an interest rate of 5.01%. In unsubsidized loans, your %5 of interest rate will not be paid by the government. After several months your monthly payments decreases and of the principal loan. The interest rate decreases as well.

We demonstrated how the rate is calculating above. You can find out how many days passed after your last payment for the first time.

Let me explain interest rates with a simple exemption.

  • If one person possesses a rate of $10.000 and his interest rate is 6.8%, his daily interest rate is $1.86. It means that he should pay an additional $1.86 per day.  
  • And you are repaying with Standard Repayment Plan, and your monthly loan is $120. Your monthly amount (let’s say $140) subtracting the left part (mainly half) of the past months. The remaining $80 is accounted for the $10.000 the total amount of the loan.
  • Direct loans have calculated monthly loan fee by the number of documents. Here we introduce some statistics that represent loan fee correlation with the actual amount.
  • Direct PLUS Loans have different terms than other federal loans. In the term of 2017 – 2018 the fee is 4.25% for Direct PLUS Loan.

Weighted average

When you are consolidating multiple loans, the interest rate is the weighted average of all other interest rates.

For example, currently, for $5.000 loan, the interest rate is 3.4%. But if you have loaned more than $7.500, the interest rate will be 6.8%

So for four loans with double $5.000 and one $7.500 and $10.000 your combining interest rate will be

(2*5000*3.4)+(7500*6.8)+(10000*6.8) / (2*5000+7500+10000) = 5.56%

After consolidating your all loans into one, you will pay with the interest rate of 5.6%.

So if you were paying the loan in 10 years term, then it converted to 20 years, but the student debt consolidation interest rate felt down. Overall, the loan consolidation process is complicated, but have several advantages and disadvantages to itself. Most of the students prefer to refinancing their studies after consolidation. Private companies serve for that, and they offer a variety of options to help both parents and students.