How the Interest Rate Is Calculated for a Direct Consolidation Loan

Calendar Icon Updated January 15, 2019
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With a Direct Consolidation Loan, you can consolidate (combine) multiple federal student loans into one new loan that replaces the existing loans at no initial cost to you.

However, after you consolidate your loans under this program, you’ll have to repay the Direct Consolidation Loan plus interest.

What is Interest?

Interest is money that you must pay to a lender in exchange for the lender agreeing to loan you money. It is an amount that you must pay over and above the actual loan amount. Usually, interest is calculated as a percentage of the unpaid principal balance.

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Interest on Direct Consolidation Loans

All Direct Consolidation Loans have a fixed interest rate. This means that the rate will not change during the entire repayment term.

For a Direct Consolidation Loan, the rate is determined by taking the weighted average of the interest rates on the loans you are consolidating, rounded up to the nearest one-eighth of one percent. (When you consolidate several federal student loans that have different interest rates, the weighted average interest rate will typically fall somewhere in between the existing interest rates.)

There is no cap (limit) on how high the interest rate can be when it comes to Direct Consolidation Loans. (Prior to July 1, 2013, the weighted average interest rate for this type of loan was capped at 8.25%.)

Interest on Private Refinancing Loans

If you choose to consolidate (refinance) your private student loans (with or without including any federal student loans) with a private lender, the lender will use a different method to determine the interest rate you’ll get. (As a side note, it’s typically not a good idea to refinance your federal student loans into a private loan because you will likely lose the benefits—such as affordable repayment plans, cancellation options, and forgiveness options, among other things—associated with federal student loans.)

The interest rate on a private refinancing loan will ordinarily be based on your creditworthiness. This means that your credit score is the main factor used to determine the rate. If your credit score is now higher than when you took out your private student loans, you might be able to get a lower rate by refinancing with a private lender.

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In addition, some private lenders will use factors other than your credit score when determining the interest rate you’ll get. For example, some lenders will take into account your career experience, education, debt ratios, and your past history of meeting your financial obligations when assigning you an interest rate.

Eligibility Team

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