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.
“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 borrower’s 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:
Multiply each of your loan’s amounts by its own interest rate. This calculation yields individual “loan weight factors.” You should have as many “loan weight factors” as you have loans.
Add each of the resulting loan weight factors together to find the total loan weight factor.
Add each of your loan amounts together to find your total loan amount.
Divide your total loan weight factor by your total loan amount. To view this number as a percentage, multiply by 100.
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 borrower’s credit history, overall financial health, and current financial market conditions — not 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 lender’s 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.
Needless to say, a major indicator of your financial well-being is indicated in your credit score.
How Applying for Private Student Loans Affects Your Credit Score
Whenever you apply to take out a loan, a credit inquiry from one or several credit reporting agencies will likely occur. If you have a solid credit history, the effects are usually minimal. However, the effects will typically be larger for someone with little-to-no credit. According to an article by Bev O’Shea posted on Nerdwallet, whatever impact your credit score suffers should fall off after 12 months, and after about 24 months, the inquiry should disappear from your credit report entirely.
There’s also an important distinction between a “soft” and “hard” credit inquiry.
A “soft pull,” as it’s known, can be done just in connection with pre-qualification for a loan, whether it’s a credit card offer you receive in the mail, mortgage, student loan, or car loan. Some employers will do a soft pull of your credit as well. Soft pulls do not impact your credit score.
A “hard pull” generally requires your consent and happens when you apply for the credit you’re seeking. It’s the hard pulls that show up on your credit report. It’s important to monitor your credit report and dispute any hard inquiries you didn’t authorize.
In the case of private student loans, a prequalification will not affect your credit, whereas applying for a loan will show up on your report.
Applying for Multiple Private Student Loans
So, what if you submit multiple applications? Will they all affect your credit score? It’s hard to know for sure, as credit-scoring model companies don’t provide a lot of detail about their models. Generally speaking, credit-scoring models appear to take into consideration that if an applicant has multiple inquiries for a student loan they may be shopping for the best rate. One key point is that the closer those inquires are together, the less impact it may have on your credit score.
In other words, shopping around to find the best loan option for you should not affect your credit score dramatically and is likely not a major cause for concern. By applying for multiple private student loans, you can see which lender will actually give you the best rate – important when it comes to saving money over the life of your loan.
ELFI offers a variety of private student loan options for financing your undergraduate or graduate education, as well as private student loan options for parents.* Check out our full list of frequently asked questions or contact ELFI at 1-844-601-3534 to speak with a Personal Loan Advisor.
*Subject to credit approval. Terms and conditions apply.
Note: Links to other websites are provided as a convenience only. A link does not imply SouthEast Bank’s sponsorship or approval of any other site. SouthEast Bank does not control the content of these sites.
Meet Daniel, a college graduate with an entrepreneurial spirit. He started his own tutoring business five years ago, and with the burden of student debt weighing him down, he decided to refinance his student loans this past year.
After applying for student loan refinancing with about 10 different companies, Daniel decided to go with ELFI. Here's why.
He wanted to make sure that he could get the best terms that he could. His new terms with ELFI saved him $162/month, and he's paying his loans for 5 fewer years. His loans were also consolidated into one monthly payment.
He wanted a company that matches you with one representative that assists you through the entire process. Amanda Scott, an ELFI Personal Loan Advisor, helped Daniel through the entire process of refinancing his student loans. As he says, "she was the very first phone call and the very last call I had with Education Loan Finance."
By refinancing his student loans with ELFI, Daniel freed up additional money every month that he can now use to provide for his growing family, fund the construction of his new home, save for retirement, and support his tutoring business.
"It's a relief knowing that I have refinanced these loans – and that I can now go on with the rest of my life."
*This is a paid testimonial. Education Loan Finance is a nationwide student loan debt consolidation program offered by SouthEast Bank, which is based in Tennessee. ELFI is designed to assist borrowers through consolidating outstanding loans into one single loan that effectively lowers your cost of education debt and/or makes repayment very simple. Subject to credit approval. See Terms & Conditions at www.elfi.com/terms. The interest rate and monthly payment for a variable rate loan may increase after closing. Interest rates will be based on the term of your loan, your financial history, and other factors, including your cosigner’s (if any) financial history. For example, a 10-year loan with a fixed rate of 6% would have 120 payments of $11.00 per $1,000 borrowed. Rates are subject to change.
Graduates seeking enriching careers like doctors, nurses, and pharmacists can often graduate from school with a large amount of student loan debt. Student loan debt can be especially burdensome during residency. Many healthcare professionals look to Public Service Loan Forgiveness (PSFL) for relief. Public Service Loan Forgiveness is a federal government program under the U.S. Department of Education's Direct Loan Program offered to forgive qualified candidates of their Federal Direct Loans. The PSLF program can be a good option for healthcare professionals, but it is vital to understand the qualifications. According to USA Today, the PSLF program has had 41,000 submissions, and only 206 applicants have qualified. When choosing how to proceed with your student loan debt, it is essential to be well informed and have all the facts before making a decision.Let's review the requirements of the Public Service Loan Forgiveness program, take a look at student loan refinancing, and review the qualifications of both programs to see which option could be right for you.
Facts About Public Service Loan Forgiveness
If you are a borrower of student loan debt and you work within the public or non-profit sector, you have probably heard of the PSLF program. If you ever played the game "telephone" as a kid, you'll know that word-of-mouth from multiple individuals can get information and facts mixed up. According to Federal Student Aid, a division of the U.S. Department of Education, the "PSLF Program forgives the remaining balance on your Direct Loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer." To fully understand this Act, let's review the legislative history. The program created under the College Cost Reduction and Access Act of 2007 (P.L. 110-84) was designed to encourage student loan borrowers to remain and pursue careers in the non-profit and public sectors, as salaries in the private sector tend to be higher.
Loans Eligible for Public Service Loan Forgiveness
Certain federal loans are eligible for PSLF. The eligible loans for PSLF are non-defaulted loans under the William D. Ford Federal Direct Loan Program. You may know this as the Direct Loan Program or Direct Loans. According to the Department of Education, the loans provided under this program are:
Undergraduates, vocational, or graduate students. Must be enrolled half-time in participating schools.
Direct Unsubsidized Stafford
Undergraduates, vocational, or graduate students. Must be enrolled half-time in participating schools.
For parents of dependent students accepted for enrollment half-time in participating schools. As of July 1, 2006, graduate students are eligible.
Individuals with student loans that have defaulted but have made satisfactory arrangements to repay the loans. The Federal Family Education Loan Program and the Federal Perkins Loan Program, don't qualify on their own for the PSLF program. However, if you have a loan within one of these two programs and consolidate them into a Direct Consolidation Loan, they can qualify. Now that we understand the type of eligible loans we'll take a look at some qualifications.
Qualifying Repayment Plan
Borrowers seeking the PSLF program must have federal Direct Loans and be on a "qualified payment plan" known as an Income-Driven Repayment Plan (IDR). The 10-Year Standard Repayment Plan qualifies for PSLF, but to have a balance remaining, you must enter into an Income-Driven Repayment plan. If you do not enter an Income-Driven Repayment Plan, you won't have a loan balance left to forgive since you will have paid it off by the time you qualify for PSLF.
Revised Pay As You Earn Repayment Plan or REPAYE Plan
Bases the monthly payment on you (and spouse's) adjusted gross income, family size, and state of residence.
Pay As You Earn or PAYE
Monthly payments are based on your adjusted gross income and family size. You must be experiencing a financial hardship to qualify. You must also be considered a "new borrower" as of 10/1/2007 or after, or be someone who received an eligible Direct Loan disbursement on 10/1/2011 or after.
Income-Based Repayment or IBR
Monthly payments based on your adjusted gross income and family size. Must be experiencing a financial hardship to qualify.
Income-Contingent Repayment or ICR
Based on your monthly adjusted gross income and family size. Typically chosen if an individual can't qualify for the Pay As You Earn Plan or Income-Based Repayment.Any changes to your income or your spouse's income will affect your student loan payment. For example, if your salary increases, your student loan payment will as well. If you are married, both your income and your partner's income are combined. Two combined incomes will increase your total income, likely increasing your monthly payment. Keep in mind: On an Income-Driven Repayment plan, be aware of the overall loan balance. A review of the total debt amount will take place when applying for a mortgage, credit card, or auto loan. A standard evaluation process for financial institutions is reviewing a borrower's debt-to-income (DTI) ratio. Borrowers who have high DTI ratios may receive higher interest rates on their loans because financial institutions view these borrowers as higher risk. Your federal student loan balance could end up costing you in terms of higher interest rates on other types of loans.
120 Qualified Payments
If you are on a qualified repayment plan, the next step is making 120 qualifying payments. If the total student loan balance is of concern and you plan on paying extra monthly, do so with caution. When paying over the minimum amount you will need to contact the loan servicer. For example, a common federal student loan servicer is FedLoan Servicing. When you contact the federal student loan servicer, you have to request that the extra amount paid is not applied to cover future payments. To qualify for PSLF, you cannot receive credit for a qualifying Public Service Loan Forgiveness payment if no payment is due. You will also need to pay the full amount on the bill for it to be considered a qualified payment. A common misconception about the PSLF program is that payments need to be consecutive. Payments do not need to be consecutive to count as qualifying in some circumstances. For example, if you work for a qualifying employer and made qualified payments, but then begin to work for a non-qualified employer, you will not lose credit for the qualified payments made before working for the non-qualifying employer.1It is essential to know that your payment cannot be any later than fifteen days after your due date to be considered a qualified payment. On loans placed into an in-school status, grace period, deferment, or forbearance, you cannot make a qualifying monthly payment. If your loan is in deferment or forbearance to make a qualified payment, you must contact the servicer and request the status waived. According to the federal government, the best way to ensure that you are making on-time payments is to sign up for direct debit with your loan servicer. You need to be working full-time for a qualified employer while making payments on the loan.1https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service#qualify
Your employer plays a vital part as to whether or not you can qualify for PSLF. A qualifying employer should be a government agency or certain types of non-profit organizations. If PSLF is important to you and part of your financial plan, it is imperative that you verify this internally. If at any point your employer is no longer a qualified institution, they are not responsible for notifying you. For example, in the healthcare industry, it is not uncommon for hospitals to convert from a non-profit to a for-profit institution. To qualify for PSLF, you need to be working full-time for a qualifying employer. Requesting the Employment Certification Form annually from your qualified employer can keep you on track for the program.
Applying for Public Service Loan Forgiveness
The Public Service Loan Forgiveness program is common among borrowers with federal student loans, but the qualifications are not well-known. For that reason, we have gathered some documents and information for you. First, you should complete and submit the Employment Certification Form for Public Service Loan Forgiveness annually. If you change employers, you should also have this form completed by your new employer. If you do not submit your Employment Certification Form yearly, you will need to submit it when you apply for the PSLF program. When applying for the PSLF program, you will need to submit one for each employer where you worked while making qualified payments. If you are looking for the Employment Certification Form you can download it here.You can download the PSLF application here. Once you've completed your forms, you have three options for submission. Forms can be mailed, faxed, or submitted through your student loan servicer. Mail your completed application to:U.S. Department of Education FedLoan Servicing P.O. Box 69184 Harrisburg, PA 17106-9184 To fax your information use 717-720-1628. The last option provided for submitting your Public Service Loan Forgiveness is uploading the application to the servicer.
The Reality of Public Service Loan Forgiveness
The PSLF program only allows forgiveness for certain types of federal loans as described above. To date, the Public Service Loan Forgiveness program has rejected 99% of applicants2. If you want to qualify for PSLF successfully, you must pay close attention to the detailed eligibility requirements of the program. Many of the requirements of the PSLF program can be difficult to understand or even find. To the benefit of those who refinance, student loan refinance companies are obligated by law to disclose information regarding their offerings. Some would say that student loan refinancing has a straightforward process when compared to the PSLF program. Not only is student loan refinancing transparent and held to a number of standards, but it can also really empower borrowers with options. Borrowers who previously had little control over their student loans can now choose what repayment plan works best for their financial future.There is no “one-size fits all” answer. You need to know your options for managing your student loan debt. Whether you choose to pursue Public Service Loan Forgiveness or refinance your student loans is your decision. Understand that if you choose to pursue PSLF, there is a possibility you will not qualify. Remember, according to an analysis done by USA Today, only 1 percent of student loan borrowers who applied for the PSLF program have qualified. When deciding what path to take, consider what your financial goals are and what sets you up for the most success in the future. 2https://ifap.ed.gov/eannouncements/091918FSAPostsNewReportstoFSADataCenter.html
Student Loan Refinancing
Student loan refinancing has gained popularity within the last five years. Private companies are offering student loan refinancing as a way to make student loan debt more manageable. Many benefits can be achieved when qualified borrowers refinance their student loans. Most notably they can change repayment terms to fit their financial goals and lifestyle, and combine multiple federal and private loans into one single loan with a simple monthly payment, while likely reducing the amount paid over the life of their loans. The new interest rate provided is based upon a borrower’s credit history and credit score, in addition to other eligibility criteria, depending on the financial institution. Overall, refinancing student loans can have an impact on a borrower’s interest rate, repayment terms, and benefits.
When you take out federal studentloans, all borrowers receive the same interest rate on a given Federal Direct Loan. The federal government does not review a borrower’s or cosigner’s credit history or credit score. When you refinance your student loans, the private company will take a look over your credit history and credit score. The private student loan refinance company will also review additional information, like income. Many companies that refinance student loans will offer both variable and fixed rate loans. If you previously had a variable rate loan and qualify to refinance, you can select a fixed rate loan instead and vice versa.Refinancing provides qualified borrowers the opportunity to make changes to existing student loan terms.
Repayent Terms & Cosigners
Federal student loans do not provide borrowers with an option regarding the repayment terms on the loan. Some federal loans provide a 10-year standard repayment plan, but other federal loans can span 25 to 30 years. When refinancing your student loans, you can select from the repayment terms offered by the company. Many companies offer repayment terms of 5, 7, 10, 15, and 20 years. Can you imagine paying off your student loan debt in five years? Many borrowers find that repaying their student loans faster has helped them to save money on interest. Having the ability to select repayment terms can allow borrowers the flexibility to reach other financial goals in their life. Generally, the repayment term selected will affect the interest rate on your new loan after you refinance.If you took out a private loan for college, it is likely you may have needed a cosigner. When you refinance student loans, you could potentially remove the cosigner from the loan if you have established the necessary credit to take out a loan on your own. Removing a cosigner relieves the cosigner from the financial burden and responsibility of student loan debt and frees up the cosigner’s credit. Be prepared when refinancing your student loans in case there is a loss of benefits.
Loss of Benefits
Federal loans offer benefits for borrowers that may not be available through a private lender like a student loan refinance company. It’s imperative to read the guidelines and fully understand them before moving forward with refinancing your student loans. One of the biggest setbacks of student loan refinancing is that once you’ve refinanced your student loans through a private company, you no longer qualify for the PSLF Program.When you refinance your federal student loan, the debt is paid off by the student loan refinance company, and a new loan is issued to you by the refinance company. Therefore, there is no federal student loan anymore. Since that loan is now paid off, there is no balance to forgive, and in turn, you cannot utilize PSLF. This is not the only drawback of refinancing.Many student loan refinance companies offer different benefits regarding deferments or forbearances and make decisions on a case-by-case basis. Benefits that may have been utilized while repaying your federal student loan may no longer be available through a private lender.
Public Service Loan Forgiveness or Student Loan Refinancing? Which is Right for You?
Now that you have an understanding of the options available to you as a healthcare professional, consider what makes the most financial sense for your situation.Student loan refinancing may be a better option if you want to pay off your debt quickly since student loan refinancing allows you to change repayment terms and may have lower interest rates. Changing repayment terms can allow you to pay down your debt faster or even extend repayment. Another situation where refinancing may be a more attractive offer is if rates achieved by refinancing are lower than rates on your federal loan or your private loans. By achieving a lower interest rate, you will be paying less interest over time. If you are not planning on applying for PSLF for your federal loans, or you have private student loans that carry high-interest rates, you should look into the options available for refinancing student loans. However, by refinancing your federal student loans you will lose many benefits and protections available to federal student loan borrowers. Keeping your federal protections may be more beneficial than refinancing your student loans. Whether you choose to pursue PSLF or student loan refinance, you should be knowledgeable about the requirements and the pros and cons of each option.
Subject to credit approval. Terms and conditions apply.
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