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The new Direct Consolidation Loan provides a single fixed interest rate that is equal to the weighted average of all the loans being consolidated, and the interest rate is rounded up to the nearest eighth of a percent (0.123%).A weighted average means that the loans with a higher balance influence the interest rate more than loans with a smaller balance – the overall impact of each old loan on the new interest rate is proportional to the comparative balance of that loan.In short, the term “consolidation” is used to describe the process of combining multiple loans into a single loan while the term “refinancing” is used to describe the process of using a more advantageous loan to repay an older loan.While refinancing is often used in other realms of finance (like mortgages) to describe repaying a single older loan with a new loan, consolidating with a private loan technically includes refinancing as well since the term and interest rate of the new loan are different from the old loans.

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However, private loans can’t be included in a federal consolidation loan.The new interest rate can be lower or higher than the weighted average of the old loans and can be fixed (the interest rate won’t ever change) or variable (the rate changes based on the market conditions).Private and federal loans can both be refinanced with a private consolidation loan.We start by discussing the basics of student loan consolidation and refinancing, and comparing the benefits and drawbacks of federal and private consolidation loans.We then detail a step-by-step guide to using and choosing consolidation loans.

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