Consolidation Rates & Repayment

Learn more about how federal loan consolidation rates are determined. We'll also explain how the repayment of consolidation loans works.

Calculating Federal Loan Consolidation Rates

The rates of your federal consolidation loan are calculated according to a formula specified in federal law. The interest rate will reflect the weighted average of your current loans' interest rates, and this figure is rounded to the nearest 1/8th of a percent. Your consolidation loan's interest rate cannot exceed 8.25% according to current federal statutes. This rate remains stable for the life of the consolidation loan, which protects borrowers against the risk of rate increases associated with variable-rate loans. On the down side, borrowers with a fixed rate will not benefit when market interest rates decrease.

The federal loan consolidation rate you receive will also depend on what type of loans you are consolidating. For instance, if you wanted to consolidate a Perkins loan with a 5% interest rate with a Direct Stafford loan with a 7% interest rate, your rate would actually increase because of the effect of the weighted average. If you currently have variable-rate loans, your consolidation loan's interest rate may be calculated differently. Ask your lender for information on how your new rate will be determined.

Repayment Periods of Consolidation Loans

You will have to begin repaying your consolidation loan within 60 days of when the funds are disbursed. The repayment period, or term, of the loan is usually between 10-30 years. The term will vary according to the amount of student loan debt you have and which repayment option you chose. Your lender will consider student loans that you do not include in the consolidation in setting your maximum repayment period. You can always opt to pay back your consolidation loan without penalty before your repayment period expires.

Not every federal loan is eligible for all repayment plans. You can check with your lender to determine which loans qualify for which repayment option. For instance, Direct PLUS consolidation loans cannot be paid back on an income-contingent payment schedule. For all borrowers of federal consolidation loans, there are no application fees and no premature payment penalties. In addition, most forms of federal consolidation loans are available without a credit check. However, some borrowers, such as PLUS loan holders applying for Direct Loan consolidation, may be subject to credit checks.

Is loan consolidation right for you? Find out some of the more common reasons people consolidate their student loans.