Interest Rates

Below are the interest rates, effective July 1, 2008 – June 30, 2009, for Stafford and PLUS Loans in the Federal Family Education Loan Program (FFELP), for loans disbursed between July 1, 1998, and June 30, 2006. For a Stafford Loan disbursed between July 1, 2006, and June 30, 2008, the interest rate is 6.8%. For Stafford Loans disbursed on or after July 1, 2008, the interest rate for a subsidized loan is 6% and the interest rate for an unsubsidized loan is 6.8%. For a PLUS Loan disbursed after July 1, 2006, the interest rate if 8.5%.

The formula for the current interest rate of a consolidated loan is the weighted average of each loan’s interest rates rounded up to the nearest ⅛ of a percent (0.125), which is capped at 8.25%:

FFELP Loan Interest Rates
FFELP Loan Type	Status	Interest Rate
Subsidized Stafford Loans	Repayment or Forbearance	4.21%
Subsidized Stafford Loans	In-School, Grace, or Deferment	3.61%
Unsubsidized Stafford Loans	Repayment or Forbearance	4.21%
Unsubsidized Stafford Loans	In-School, Grace, or Deferment	3.61%
PLUS Loans	All	5.01%

Let’s apply the weighted average formula to some examples. The interest rate is determined by multiplying each loan amount by its interest rate. Then the weighted average is divided by the loan amount to calculate the new interest rate. In the following chart, the interest rate is 7.5% when rounded to the nearest ⅛ of a percent:

How Interest Rate is Calculated during Consolidation
Underlying Loan Balance	Original Interest Rate	Interest	Calculation
$3,500	7%	$245	900 ÷ 12,200 = 7.377% (.07377) 7.377% rounded up to the nearest ⅛th (or .125) = 7.5%
$3,200	5%	$160
$5,500	9%	$495
$12,200 total		$900 total

Let’s apply the weighted average formula to another example, which illustrates how different payment terms can affect the monthly payments of a consolidation loan:

Consolidation Interest Rates for Different Loan Balances
Loan	Amount	Interest Rate	Term	Monthly Payment	Cumulative Payments	Total Interest Paid	Weighted Average Interest Rate
Loan 1	$20,000	9%	10 years	$253	$30,402	$10,402	$1,800
Loan 2	$10,000	6%	10 years	$111	$13,322	$3,322	$600
Loan 3	$45,000	5%	10 years	$477	$57,275	$12,275	$2,250
Combined Total	$75,000	6.5%	10 years	$842.10	$101,052.12	$26,052.12	$4,650

Note that the total payments and interest during the life of the loan are nearly the same for the individual loans and the consolidation loan when calculated at a 10-year term using standard loan amortization. If the consolidation loan term is extended to 15 or 20 years, the monthly payments are lower, but the total amount of interest is higher:

Consolidation Loan Interest Accrual Comparisons Based on Repayment Schedule
Amount	Interest Rate	Term	Monthly Payment	Cumulative Payments	Total Interest Paid
$75,000	6.25%	10 years	$842	$101,052	$26,052
		15 years	$643	$115,751	$40,751
		20 years	$548	$131,566	$56,566

The lesson: Examine your loan amounts and interest rates carefully to see if it makes sense to consolidate.