×

Weighted Averages and Student Loans

September 25, 2016

One of the best reasons to refinance or consolidate student loans is to obtain a lower interest rate, thereby helping you save money over the life of your loan. During the refinancing or consolidation process, you may wonder how your interest rate might change or how the new interest rate is calculated and applied across multiple loans, especially when they include a variety of high and low rates. Both of these questions, as well as a few others associated with a student loan debt consolidation, will be answered as we explore the definition, process, loan association, and calculation of weighted averages.

 

What is a Weighted Average?

Mathematically defined:

Weighted average is a mean calculated by giving values in a data set more influence according to some attribute of the data. It is an average in which each quantity to be averaged is assigned a weight, and these weightings determine the relative importance of each quantity on the average. Weightings are the equivalent of having that many like items with the same value involved in the average.

 

While lofty in explanation, the mathematical definition does emphasize one important clue: weighted averages determine the relative importance of each quantity in the average. This kind of emphasis means that important details like previous loan amounts and interest rates will not be overlooked. However, to better explain what a weighted average is and how it pertains to student loans we want to first explain where it takes places, and with which type of student loans it is associated.

 

Weighted averages typically only apply to federal student loans that are consolidated by the Direct Consolidation Loan program (not refinanced loans offered by private lenders). When this federally-backed program consolidates multiple federal student loans into one payment, they must somehow figure out what the borrowers new interest rate will be. This is where weighted averages enter the equation. The new interest rate on the consolidated loan will be a fixed interest rate that is based solely on the weighted average of the interest rates of the loans being consolidated, rather than reflecting current rate trends based on economic conditions or considering the credit history of the individual borrower. This resulting number is rounded up to the nearest one-eighth of 1 percent, and generally reflects a midpoint between the highest and lowest interest rates from the original, individual loans.

 

How Is the Weighted Average Calculated?

Calculating the weighted average of federal student loans can be achieved through this simple, five-step process:

  1. Multiply each of your loans amounts by its own interest rate. This calculation yields individual loan weight factors.You should have as many loan weight factorsas you have loans.
  2. Add each of the resulting loan weight factors together to find the total loan weight factor.
  3. Add each of your loan amounts together to find your total loan amount.
  4. Divide your total loan weight factor by your total loan amount. To view this number as a percentage, multiply by 100.
  5. Round the resulting percentage from step five to the nearest one-eighth of a percent. This should present the final interest rate or the weighted average for the newly consolidated student loans.

 

How Are Interest Rates Calculated When Refinancing Student Loans with a Private Lender?

When a person refinances student loans (whether privately or federally-funded) with a private lender, weighted averages usually no longer apply, such as with a consolidation loan from Education Loan Finance. Instead, a new interest rate offer is calculated based on the borrowers credit history, overall financial health, and current financial market conditionsnot weighted averages. Remember, weighted averages only apply to federally consolidated loans. Furthermore, with private lenders, borrowers often have the flexibility to exclude select low-interest portions of their student loan debt from the refinance package if the original rate is more favorable than the rate being offered.

 

Do the Math

Along with calculating what your weighted average may be, should you choose to consolidate your federal student loans, be sure to find out what your options may be with a private lenders refinancing program? Refinancing student loans may offer the greatest money-saving opportunities, but it is important to understand that when federal loans are refinanced with a private lender, some benefits including income-based repayment, loan forgiveness, deferments, and forbearances may be lost. Our best advice is to compare federal student loan consolidation to refinancing with a private lender and do the math to find out what you may potentially save and what benefits and special considerations your new lender offers before you make any final decisions.

6 Things to Do Before Applying To Refinance Your Student Loan Debt

Leave a Reply

Your email address will not be published. Required fields are marked *

2019-07-03
Measuring the Costs of Employee Turnover

Best-selling business management author Jim Collins was asked during a 2001 interview if he had identified a good business response to the economic slowdown that had gripped the nation. His widely quoted answer is as relevant today as it was at the time:   “If I were running a company today, I would have one priority above all others: to acquire as many of the best people as I could [because] the single biggest constraint on the success of my organization is the ability to get and to hang on to enough of the right people."   Nearly 20 years later and in a highly improved economic climate, Collins’ words still encapsulate the biggest challenge facing HR departments of corporate giants and small start-ups alike: finding and retaining quality team members. In an era of competitive recruitment and job-hopping staff, your company risks losing monetary and human capital each time a valued employee chooses to leave. Employee turnover impacts your bottom line and your company's culture. To set wise employee retention policies, you first need to assess the costs of staff turnover accurately and measure the full impact of employee loss.  

Direct Costs of Replacing Employees

A talented employee exiting your company costs you money. Estimates of how much employee turnover costs can vary by industry and employee salary. A study by Employee Benefit News estimates the direct cost to hire and train a replacement employee equal or exceed 33% of a worker’s annual salary ($15,000 for a worker earning a median salary of $45,000). Cost estimates are based on calculatable expenses like these:
  • HR exit interview & paperwork
  • Benefit payouts owed to the employee
  • Job advertising, new candidate screening & interviewing
  • Employee onboarding costs
  • On-the-job training & supervision
You can track the expenses of your company’s employee turnover using this online calculator, or create a spreadsheet to determine how actual costs add up to affect your bottom line.  

Full Impact of Employee Loss

Josh Bersin, a human resource researcher, writing for LinkedIn, refers to employees as a business’s “appreciating assets.” Good employees grow in value as they learn systems, understand products and integrate into their teams. When one of these valuable employees leaves, the business loses more than just the cost of hiring and training a replacement. Bersin cites these additional factors contributing to the total cost of losing a productive employee:
  • Lost investment: A company typically spends 10 to 20% of an employee’s salary for training over two to three years.
  • Lost productivity: A new employee takes one to two years to reach the level of an exiting employee. Supervision by other team members also distracts those supervisors from their work—and lowers the team’s collective productivity.
  • Lost engagement: Other team members take note of employee turnover, ask “why?” and may disengage.
  • Less responsive, less effective customer service: New employees are less adept at solving customer problems satisfactorily.
  According to Bersin, studies show the total cost of an employee’s loss may range from tens of thousands of dollars to 1.5 to 2 times that employee’s annual salary.  

Strategies to Slow Employee Turnover Rates

An effective exit interview helps you and your HR team pinpoint the drivers of your company’s employee turnover. You may find that hiring practices need to be refined or employee engagement should be enhanced. Changes to the break room space, such as fresh fruit or games, will allow your employees to relax and come back to work with fresh eyes and a better attitude. This will keep up the workplace morale, shaping your company culture to include perks appealing to younger workers and will lead to increased job satisfaction. Today’s employees are career-oriented and highly motivated. Keep them on your team with other opportunities such as:  
  • Pathway for advancement within the company
  • Professional development & advanced education
  • Flex-time & work-from-anywhere options
  • Management support & recognition
  • Lifestyle rewards or amenities like catering & concierge services
  • Culture of shared values & volunteerism
 

Add Student Loan Benefits Through ELFI

Student loan repayment tops the financial-worries checklist of many recent graduates. Older team members question their ability to pay for educating their children. New, highly desirable HR benefits like student loan contributions and financial literacy education are emerging from these employee concerns—and ELFI for Business is leading the way for employers to incorporate them into hiring packages. You can connect with ELFI directly from your HR portal and access multiple ways to contribute to employees’ student loan debt. We offer new-hire onboarding booklets, educational newsletters and onsite consultations filled with information for you and your employees. Reach out to us at 1.844.601.ELFI to add cutting-edge benefits to your HR employee package!  

Learn More About ELFI for Business

  NOTICE: Third Party Web Sites Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the web sites that have links here. The portal and news features are being provided by an outside source – The bank is not responsible for the content. Please contact us with any concerns or comments.
2019-06-17
Why Do Employees Leave?

Today’s tight labor market and frequent employee turnover are challenging U.S. employers to view company cultures with a critical eye. A report by the Work Institute found that some 42 million (one in four) employees would leave their jobs in 2018. What is the cost of replacing so many experienced people in an organization? According to the report, last year’s “employee churn” costs hovered at $600 billion—a figure that could increase to $680 billion by 2020. Of further concern to companies is the growing realization that young team members are most inclined to move on after a relatively short period of employment. In a recent survey, 59% of respondents felt they should begin looking for a new position after only one to two years on a job. Older employees continuing to work past retirement age or re-entering the workforce are adding stability to many companies, but the turnover trend has serious implications for the long haul. Why are employees leaving and what can employers do to stem the tide? Data gathered by HR organizations and research firms reveal some interesting trends about motivating and retaining current and future employees.  

Top 4 Reasons Employees Leave a Company

The current employee shortage has upended traditional hiring models. Companies are racing to reshape their corporate cultures and embrace the values of a more limited workforce. Although improved pay and benefits packages continue to be important, these four workplace problems are the leading reasons why employees pick up—and move on.  
  • Not enough work-life balance. Team members value their time and don’t want employers to waste it. Their enthusiasm and performance will wane if they are weighed down with busy work and meaningless meetings. Younger employees appreciate flexible schedules, the ability to work from home, and a workload that is challenging without spilling over into personal time.
  • Poor management. Supervisors who are unable to engage their employees or unwilling to help them grow by providing positive feedback are commonly cited as reasons to leave. Today’s professionals respond to personal interaction and appreciate public shout-outs and ancillary rewards like gift cards, tickets, and free meal vouchers.
  • Lack of recognition & career advancement. Employees who excel like to be recognized for their extra effort. They also need to see a clear pathway for furthering their careers. Today’s staff members expect companies to help them grow professionally while providing access to career development and mentorship programs.
  • No company engagement. When a company does not have (or cannot properly communicate) its goals and values, employees lack a shared sense of purpose. Businesses fostering a sense of community are better able to inspire, engage, and retain employees.
 

Create a Satisfying Workplace to Keep Valuable Team Members

In many ways, today’s workforce is looking for the same type of job satisfaction as high performers of past generations. Respect, appreciation for a job well-done, opportunities for advancement, challenging work, and monetary rewards still lead to employee satisfaction and engagement. According to Gallup research, 34% of employees are engaged at work, but 53% are not engaged and likely to leave a job for another offer. To involve these employees and access their potential, employers are putting greater emphasis on corporate culture assets like these:  
  • Relevant workplaces with a clear mission & shared values
  • New-hires who contribute to the corporate community
  • Greater creative freedom & autonomy for staff when possible
  • Updated technology to support performance
  • Employee input as valuable business partners
 

Learn More About The Act Regarding Student Loans and Employers

 

Student Loan Benefits Appeal to Workers of All Ages

Many young employees begin their careers with a heavy burden of student loan debt. They worry about the monthly toll payments will take on their starting salary. Will they have enough money to travel, buy a home, or start a family? Worries about student debt repayment are not limited to the youngest workers. Some data suggest that these concerns cut across age groups and include professionals over age 55. Older workers may have taken on student loan debt to fund advanced degrees or send a child to college. Widespread student loan debt suggests that companies offering repayment contributions and other related benefits have a distinct advantage in attracting and engaging their workforce.    

Improve Retention With Cutting Edge HR Benefits From ELFI

As an ELFI business partner, you can add value to your benefits package with monthly contributions to student loan debt. You’ll also plug into resources like newsletters, webinars and onsite consultations. Connect with ELFI from your HR portal and discover how significant student loan benefits are to your team members—and how cost-effective they are for your company.  

Tops Ways to Engage Millennials at Work

  NOTICE: Third Party Web Sites Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the web sites that have links here. The portal and news features are being provided by an outside source – The bank is not responsible for the content. Please contact us with any concerns or comments.
2019-06-12
Should You Pay Off Student Loans Immediately or Over Time?

When you start your post-college career, you may be tempted to breathe a sigh of relief. Before you do that, you have important decisions to make. You’ll have to stretch your paycheck to cover your new lifestyle and associated expenses: a furnished home or apartment, vehicle, insurance, and hopefully a 401K contribution. If you are like 70% of college graduates, you also have student loans that need to be repaid.   In most situations, it's going to be most beneficial to pay off your loans as quickly as possible so that you are paying less towards interest. The average college graduate's starting salary, however often cannot allow for enough additional income to cover more than the regularly scheduled student loan payments.  Most student loans have a six-month grace period so you can do some budgeting and planning first - if you need to. We don't suggest using the grace period unless you find it necessary to organize your finances. During a deferment such as a grace period, the interest could still be accruing depending on the type of loan that you have.   If you determine that you may be better off establishing sound financial footing and a workable monthly budget before you begin repaying those daunting loans. Keep these tips in mind as you formulate a strategy for debt payoff.  

Student Loans Have Advantages

Varying types of debt are governed by different laws and regulations. Banks often base interest rates for consumer credit loans on your established credit rating. Interest rates for auto loans or credit card debt tend to be higher than a mortgage or student loan interest. As you review your debt load and make a plan, remember: student loan debt comes with a few "advantages" that other types of debt don’t offer.  
  • Preferential tax treatment: With a new job, you will be paying taxes on your income. Student loan interest is deductible up to $2,500 and can be deducted from pre-tax income.
  • Lower interest rates & perks: Federal student loans have lower interest rates and are sometimes subsidized by the government.
  • Lender incentives: Private student loans may come with incentives from the lender that make them a better deal than other credit types. These include fee waivers, lower interest rates, and deferment options.
  • Flexible payment plans: Options for lower payments and longer terms are available for both federal and private student debt.
  • Build your credit score: You can build your credit score with student loan debt. Now, depending on whether you’re making on-time payments or not, you could negatively or positively affect your credit. If you chose to make small payments during deferments, or a grace period, and regular on-time payments you will be more likely to establish a favorable credit record and reduce the amount of interest you pay overall.
 

Programs to Help You With Student Loan Payments

There are few options for loan forgiveness with regular debt, but student loans offer opportunities to reduce or eliminate your debt. These may come with commitments and tax implications, so be sure you fully understand them if you decide to take advantage of these programs.  
  • Loan forgiveness: Federal student loans may be forgiven, but you'll want to be sure that you're following all of the requirements needed of the program. Be sure before choosing this option that the federal loans you have qualify for the program. Also, keep in mind there could be taxes due on the amount that is forgiven. Some student loan forgiveness programs include PAYE (Pay as You Earn) and REPAYE (Revised Pay as You Earn), Public Service Loan Forgiveness, and Teacher Loan Forgiveness.
  • Loan Consolidation: Multiple student loans can be consolidated into one payment with the interest rate determined by a weighted average of your current loans - interest rates. Combining multiple loans may be easier to manage on a modest starting salary. Consolidating federal loans usually doesn’t require a good credit score, either.
  • Refinance, and you could achieve a lower interest rate: Lenders like Education Loan Finance specialize in student loan refinancing, and have options like variable interest rates and flexible terms. Refinancing your debt could make student loan debt easier to manage than other types of credit.
 

Pay Off High-Interest Debt First

Before you decide to pay off your student loans, think about the financial obligations you’ll be taking on. Instead of carrying a credit card balance or making low payments for an auto loan, it makes sense to continue your low student loan payments and pay off more expensive debt first or debt with a higher interest rate. In the long run, you’ll save money and build your credit score.   If you still have doubts about not paying off student debt first, consult a professional financial advisor for help prioritizing your goals and setting up a budget that lets you achieve them.  

Click Here to Learn More About Student Loan Repayment