04.09.09 | Know Your Federal Consolidation Rate in Advance
Applying the basic laws of probability one knows if they flip a fair coin they have an equal chance of it landing on heads or tails. Now suppose I told you I knew for a fact that it was going to land on tails for whatever reason; that knowledge would be quite valuable. Borrowers who consolidate their federal loans have the same preemptive window of knowledge.
Every July 1 the new interest rates goes into effect, and the new rates are pegged at certain margins above the three-month treasury yield in late May. That means you will know what your interest rates will change to in advance of consolidating. The reason this is so important is because when calculating the interest rate on your federal consolidation it is a standard formula. It is the weighted average of all your loans and the interest rates they hold rounded up to the nearest eighth percent and then fixed for the life of the loan.
If you know in advance that some of your interest rates are going down on July 1 it would make sense to consolidate after July 1 to bring down your total weighted interest rate. If you see they are going up you will want to consolidate before July 1.
Keep in mind for those of you who already hold fixed interest rates, the July 1 rate changes will not impact you. The rate changes will only impact those who have a variable interest rate.
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