Should You Consolidate Your Federal Student Loans?

Financial Planning, How To

It’s indisputable that consolidating all your federal student loans into one loan paid off over an extended time frame eases the monthly burden of student debt payments. However, what if the interest rates of your individual loans vary by several percentage points? Should you avoid consolidating in order to concentrate on paying off the higher rate loans first?

How Consolidated Loan Interest Rates Work

When you consolidate your federal student loans into one loan, your interest rate is an average of all your federal student loans interest rates. For example, say you you earned your Bachelor’s degree in four years and graduated in 2011 . If you borrowed conservatively ($2,500 of subsidized federal Stafford loans per school  year), your interest rates are as follows: 2010/11 at 4.5%; 2009/10 at 5.6%; 2008/09 at 6%; and 2007/08 at 6.8%.

Since you borrowed the same amount each year, each interest rate represents an equal amount of money, which is called a weighted average. Thus, you can divide the sum of all your loans by four to get your consolidated rate of 5.725%. If you had different amounts at each interest rate, your interest rate would be based on a fraction of your total new loan. For instance, if you borrowed $3,000 as a freshman at 4.5% and $2,000 as a senior, your consolidated interest rate would drop.

How Much Your Interest Rates Can Vary

If you’re a graduate student this year, you could borrow money at two different rates to cover all your school-related expenses. The 2011-12 interest rates for graduate students are 7.9% for Direct PLUS Loans, and 6.8% for subsidized and unsubsidized loans.

Which Loans You Should Leave out of Consolidation

All the loans you choose to consolidate are inseparable. According to a Department of Education representative, you can’t pay off your higher interest rate loans first within your new consolidated loan, but you can leave out a loans and pay them off separately. The catch is, that the loans left out of the consolidation will still be under a 10-year repayment policy.


Say you have $55,000 in student loan debt with a potential consolidated rate of 5.75%, resulting in a payment of $346 for 25 years. Your total interest paid over time would be nearly $49,000.

Then you decide to leave your $5,000 Direct PLUS loan with a 7.9% interest rate out of the consolidation. The original 25-year consolidated payment would drop from $346 to $307, and the total interest would drop from $49,000 to $42,000.

The remaining $5,000 Direct Plus loan with a 10-year lifespan would result in an additional $60 monthly payment, with interest totaling under $2,250. Leaving the Direct Plus Loan out of the consolidation will cost you an additional $16 a month in loan payments for 10 years, but will save you over $4,500 in interest.

Play with Calculators

You can play with interest rates and payment results using the student loan calculator links on the Graduation Debt articles and resources page. Call your student loan servicer for other options for reducing your payments and interest as well. While it’s likely that you will never say, “Yippee!!” about your student loan payments, you can breathe a sigh of relief as your loan balance drops at a faster rate.

Reyna Gobel is a freelance journalist who specializes in financial fitness. She is also the author of Graduation Debt: How To Manage Student Loans and Live Your Life.

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