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Can Consolidating Your Federal Student Loans Lower Your Interest Rate?

Can Consolidating Your Federal Student Loans Lower Your Interest Rate?

One of the most commonly asked questions I receive is if completing a Direct Consolidation of your Federal student loans will lower the interest rate on your student loans. The answer is no.

No, consolidating your Federal student loans via a Direct Consolidation Loan will NOT lower your interest rate. In fact, you’ll end paying almost the SAME amount of interest as you were before consolidating your loans.

What is a Direct Consolidation of Federal student loans?

A Direct Consolidation is the process of taking your Federal student loans and consolidating (ie. combining) them into a single “consolidation” loan with a single interest rate and a single monthly payment.

What types of loans are able to be consolidated?

Almost all Federal student loans are eligible to be consolidated. This includes Direct loans and FFEL (Federal Family Education Loans) Program loans as well as Parent Plus loans.

Private loans can not be consolidated with Federal student loans.

Note: Unsubsidized loans cannot be consolidated with subsidized loans. Therefore, if you complete a Direct consolidation all of your Federal loans, you may end up with two loans instead of one: one unsubsidized consolidation loan and one subsidized consolidation loans.

How is the interest rate calculated on Direct consolidation loans?

Put simply, the interest rate on the new Direct consolidation loan will be the weighted average of the interest rates for all loans included in the consolidation, rounded to the next higher one-eighth of one percent.

Note: As of March 21, 2024, the maximum interest rate on Direct consolidation loans is 8.25%. This rate is variable and can adjust annually on July 1, based on a rate determined on June 1 for the following 12-month period.

So, why doesn’t consolidating lower my rate?

Since your consolidation loan is receiving the weighted average rate of the underlying loans in the consolidation, rounded to next higher one-eighth of a percent, you’ll like pay either the same amount of interest or just slightly more in interest.

How do I complete a Direct consolidation of my loans?

You can complete a Direct consolidation online via StudentAid.gov or via paper form. It’s a fairly simple process that takes about 20-30 minutes.

Note: You can not complete more than one “digital” Direct consolidation every six months via StudentAid.gov. If you need to do multiple consolidations within six months, it’s best to use the paper form.

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