The drop in interest rates has made considering student loan consolidation interest rates more attractive. Students may be paying larger monthly payments on loans and need to lower the payments. Or, they may have several separate loans that are paid to different lenders each month with varying interest rates. With almost eight percent of students carrying an average $10,000 loan, there can be many reasons to want to consolidate.

When one has federal education loans student loan consolidation interest rates are very straightforward. The method for setting the interest rate on these loans is established and the regulations are very strict. However, the rates vary greatly on private education loans and are calculated with many factors included. When one is consolidating student loans they will want to consolidate their federal education loans separately from their private education loans to take advantage of the benefits available.

When consolidating a student loan the government takes the interest average of all the loans and rounds up to the closest one-eighth percent. The interest rate will be between the highest and lowest interest that is currently paid to a cap of 8 1/4%.

There are some instances when an individual with a PLUS student loan will be able to receive a lower rate by consolidating. The cap on a PLUS student loan is 8.5%. However, when the PLUS is consolidated, the cap is 8.25%. By consolidating the PLUS loan a student can save 0.25%. This is called the PLUS Loan Loophole.

Calculations for private education loans are based on the prime interest rate or LIBOR and the margin for the borrower and co-signer. The margin is the credit score that a person has. In addition, there is an origination fee that is usually between one and five percent which is added to the loan. This is why is is important to compare lenders and the rates that they will charge for consolidation.

The total amount of the loan can also be increased when other costs must be added. Capitalization of deferred interest from the original loan may be included in the loan if the original loan had deferred interest. If there were any discounts offered with the original loan they normally must be paid back and will be included in the loan as well.

The benefits of consolidation is that all of a person’s loans are in one location and the same interest rate is being paid. In addition, the repayment period is often longer than the original repayment period so the monthly payment will be lower. However, it is important to consider what the final cost of getting a consolidation will be compared to maintaining the original loan. It is also important to talk to a professional who can talk about the options that are available to help an individual find the best interest rates that are available.

Looking for the lowest student loan consolidation rate? Undergraduate student loans may be the best option for you.

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