Weighted Average Interest Rate: Optimizing Student Loan Repayment
When managing multiple student loans with different interest rates and balances, calculating a weighted average interest rate provides a single number that represents your overall borrowing cost.
Unlike a simple average, a weighted average accounts for the fact that larger loans have greater impact on your total interest burden.
For example, if you have a $5,000 loan at 4% and a $20,000 loan at 6%, the simple average is 5%, but the weighted average is 5.6%—more accurately reflecting that 80% of your debt carries the higher rate.
This calculation is essential for several strategic decisions: it helps evaluate whether refinancing makes sense (you need to beat your weighted average to benefit); it guides extra payment allocation using the avalanche method (target loans above your weighted average first); and it enables accurate comparison of consolidation offers.
The formula is: sum of (loan balance × interest rate) divided by total loan balance.
Federal loan consolidation uses this exact formula to set your new rate, rounded up to the nearest 1/8th percent.
Private refinancing may offer rates below your weighted average if your credit has improved since origination.
For borrowers with loans ranging from 3% to 8%, the weighted average typically falls between 5-6%, providing a benchmark for evaluating any financing decision.
Understanding this metric helps optimize repayment strategy and avoid costly mistakes like consolidating low-rate federal loans with high-rate private loans.