Student Loan Consolidation Rates - Figuring Total Interest
One of the biggest reasons people opt for student debt consolidation loans is in order to pay lower interest. Here, we will take a look at how that interest is computed.
You may well have heard about how student debt consolidation loans get you in the way of absolute financial freedom, i.e., a life free from debt, but have you ever stopped to wonder how student loan consolidation rates of interest are computed?
If you have a student consolidation loan and have not stopped to figure out your interest rate, it may be time to do so. If you think about it, this is an important thing to do considering that the only things that truly matter in these loans are the interest rates and how much money is owed after interest.
Student debt consolidation loans were invented because people have a tendency to take on more debts than they can handle at one time. People are trying to juggle so many debts at any point in time, from mortgages to credit cards to other loans and debts. People simply needed and demanded a solution to the stress of mounting debt and multiple monthly payments. These problems are especially common in students.
With the high cost of education, students needed a way to wipe out their loans. And what better way to wipe out loans than to take out a debt consolidation loan? Debt consolidation loans are an offspring of the need to wipe out the average consumer's myriad of debts. At their very simplest, debt consolidation loans are granted by debt consolidation loan companies or the government. What they do is round up all your debts and pay for them. A debtor, on the other hand, pays only a single monthly payment.
People who have come to rely on and like debt consolidation loans do so because the loans make it easy for them to manage their debt by eliminating the necessity for multiple payments, due dates, and interest rates. Interest rates are considerably lower on consolidation loans than they are on high interest loans such as credit cards, and the payment terms are extended to between ten and thirty years. Simplified, all of this means that debt consolidation loans can make managing debt much easier.
There are two types of debt consolidation loans for students. The United States government offers one and various private lending institutions offer the other. Each of these loan types has a different formula with which they compute your interest rate, and the federal loans have a cap on the amount of interest that they can impose on a loan. Private student loan consolidation has much more variable interest.
So, just how are student loan consolidation rates of interest computed?
Interest rates from private debt consolidation lenders vary. Typically, the interest rate takes into account the current LIBOR rate. For consolidating student loans, one such company offers loans at the interest rate of one-month LIBOR average plus 1 to 1.75% of total credit offered, for example.
The interest rate will then raise quarterly, at the rate of one month LIBOR plus 5-5.75% depending on the amount loaned. Atop the interest, one is also faced with paying origination fees, which equal between zero and five percent of the amount of credit given to the borrower.
On federal student debt consolidation loans, the student loan consolidation rates of interest are fixed, and are equal to the weighted average of the interest rates of all the loans, rounded to the nearest 1/8 percent. The interest rate is capped at 8.25%.