Consolidation loans for students are an excellent way to reduce loan payment amounts and to simplify monthly loan payments by wrapping them all into a single payment.

On the other hand, consolidation loans usually also increase the total cost of a loan, since the repayment period is often extended by 10 or 20 years beyond the repayment periods of the previously-held loans.

Once students and grads have determined that a consolidation loan is right for them, the next steps is to determine what rate they will pay.

Bank Rates On A Consolidation Loan

Bank rates on a new consolidation loan are calculated in two ways, depending upon the type of loan. Bank rates for federal consolidation loans and private consolidation loans are calculated differently.

Federal Consolidation Loan Bank Rates

Federal consolidation loans are for students and grads whose existing loans are federal loans, such as Stafford Loans and PLUS Loans. The bank rate is calculated as a weighted average of the existing loans, with the calculation taking into account both interest rate and total amount of principal (loan balance) for the existing loans. The result is rounded up to the nearest 0.125%, with a cap bank rate of 8.25%. The interest rate for federal loans has nothing to do with the borrower’s credits core, and there are no loan origination fees for these loans.

Note that federal consolidation loans are always offered as fixed-rate loans.

Private Consolidation Loan Bank Rates

Meanwhile, bank rates for private consolidation loans are calculated on a case-by-case basis by each lender. The borrower’s credit score is taken into account, which determines the margin placed on top of the LIBOR or Prime Index rate. Private loans have an origination fee of 0% to 8%, based upon the borrower’s credit score.

Private consolidation loans can be either variable or fixed-rate loans, depending upon the loan selected by the individual borrower.