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School Loan Consolidation
What is a weighted average?
The weighted average is determined by
the current balance and the current interest
rate of each loan that is being
consolidated. The higher the balance, the
greater "weight" is placed on the interest
rate of that loan.
The following shows a weighted average
interest rate calculation for a loan
application received by the lender:
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Step 1
Multiply the outstanding balance of each loan to be
consolidated by that loan's current interest rate. A
variable rate loan should be included in the calculation at
the rate at which it is currently accruing. (If you are
currently receiving a .25% interest rate reduction due to
your monthly payments being automatic, the rate we use is
the rate prior to the .25% deduction)
Example :
Before you set up automatic payments from your checking or savings
account, your interest rate was 5.5%. You signed up for automatic
payments so your interest rate went down to 5.25%. The rate used to
calculate your interest rate on your Consolidation loan is 5.5%.
Example : Outstanding loan balances are
$3,500, $3,200, and $5,500
respectively---for a total of $12,200. The
current interest rates for the loans are 7%,
5%, and 9%, respectively.
$3,500 x .07 = $245
$3,200 x .05 = $160
$5,500 x .09 = $495
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Step 2
Add the results of all calculations made
under Step 1. Then divide this sum by the
outstanding balance of all loans being
consolidated.
Example :
$245 + $160 + $495 = $900
$900 ÷ $12,200 = .07377 or 7.377%
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Step 3
Round the result of Step 2 up to the nearest
one-eigth percent, not to exceed 8.25%.
Example : 7.377% is rounded up to 7.5%
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