I'm a Resident Physician (or I'm about to be one): Should I Consolidate My Student Loans?
After Monday’s posting, it should be abundantly clear that student loan planning can be complicated. There are a lot of moving parts, and sometimes seemingly insignificant actions or factors can have a significant impact.
I include a disclaimer below every article for a reason. It’s very easy to make a wrong move. If you’re considering taking action to improve your student loan situation, please be sure to review your options with a qualified professional who understands your situation.
Many of you are aware that you can consolidate your student loans into a single loan with a single interest rate. We will review what consolidation is, when you might consider doing it, as well as the pluses and minuses of implementation. Also, perhaps you’ve noticed that the title of this post is slightly different from other postings about student loans. Previously I’ve focused on student loan planning almost exclusively for residents, but for medical students that are about to graduate, there is an attractive strategy that they should consider implementing depending on their situation, goals, and objectives (forward this article to anyone you think might want to know about this strategy).
What is Federal Direct Loan Consolidation?
Please note that our discussion deals exclusively with consolidation of federal student loans. I will briefly touch on private student loan consolidation at the end, but until then, all references to consolidating student loans refers to federal student loans only.
Studentaid.ed.gov defines consolidation in this way: “A Direct Consolidation Loan allows you to consolidate (combine) multiple federal education loans into one loan. The result is a single monthly payment instead of multiple payments. Loan consolidation can also give you access to additional loan repayment plans and forgiveness programs.”
The website is also clear to note that while there are benefits, there are some important drawbacks to consider as well.
Benefits of consolidation may include the following:
A lower monthly payment (through access to income-driven repayment plans or the standard 30 year consolidated loan repayment time horizon);
Access to Public Service Loan Forgiveness (PSLF); and
Fixed interest rate.
Drawbacks may include the following:
Making payments over a longer amount of time means more payments and more interest;
Outstanding interest on the loans is capitalized (becomes part of the principal balance);
Restarting earned monthly repayment credits required for Public Service Loan Forgiveness (PSLF);
A slightly higher interest rate (the new rate is the weighted average of your student loan interest rates being consolidated rounded up to the nearest one-eighth of a percent); and
There is no going back.
Restarting the Public Service Loan Forgiveness clock.
One of the drawbacks I listed was restarting the earned monthly credits required for PSLF when you consolidate your student loans. Let me explain what I mean.
When you consolidate your student loans under a Federal Direct Consolidation, a single new loan is repaying all the federal student loans being consolidated. This simplifies your repayment process because now you only worry about one federal student loan.
Unfortunately, if you are seeking PSLF (and had already been making payments under an income-driven repayment plan), this might have been a big mistake. If you were making qualifying payments (and met the other qualifications for PSLF), you were accruing credit towards the 120 mandatory payments to achieve PSLF. However, by consolidating your federal student loans into a new loan, your repayment clock starts all over again.
Consolidation issues a new loan, so none of your previously made payments count.
A consolidation strategy for medical school graduates.
If you are about to graduate medical school, your loans will likely enter a six-month grace period in which payments are not required. This seems like a nice thing, but it may be in your interest to consolidate your federal student loans after graduation and before starting your internship. If you do so, payments will begin within 60 days of the new consolidation loan being issued.
So what’s the big deal about that?
I’ve referenced Ben White a few times in my writing already. Aside from the training I received to obtain the Certified Student Loan Professional® designation, Dr. White’s book Medical Student Loans: A Comprehensive Guide, is the best thing that I’ve read to improve my understanding of student loan planning. It’s certainly the best book out there, in my opinion, for student loan planning for medical professionals.
In fact, Dr. White recently made both of his student loan books free to those who are willing to subscribe to his website—he states that it’s easy to unsubscribe if you want to afterwards. I don’t have a financial relationship with him and he has no idea who I am, but it’s worth pointing out a great book for those of you who want to learn more about student loan planning.
Back to the point we were discussing.
In Medical Student Loans: A Comprehensive Guide Dr. White writes:
In short, starting your federal consolidation when you finish medical school will do three things to save you money:
Reduce the amount of capitalized interest on your loan, which reduces the rate at which it will grow for a long time.
Temporarily increase the amount of your REPAYE unpaid-interest subsidy
Help you achieve loan forgiveness a few months faster
Max out the student loan interest deduction for the year of graduation
What this means is that by beginning payments earlier through consolidation, you reduce the amount of interest that would have accrued and capitalized (made a permanent part of the original loan principal) had you permitted your loans to sit in the grace period for six months. Also, if you had no income to report as a med student, your monthly payments under income-driven repayment would be $0 (until you recertify your income). If you were married to a working spouse during medical school, this issue becomes a little more complicated and is beyond the scope of this brief article.
If you determine that REPAYE is the right plan for you, you will also benefit from the government forgiving 50% of your monthly unpaid interest on unsubsidized loans. Even if you’re not going for PSLF, that’s something worth looking into.
Finally, Direct Consolidation Loan payments count toward the 120 mandated payments for PSLF. Even payments of $0 count, so as long as you meet the other requirements, you begin the path to forgiveness a little earlier than you would have had you waited out through the grace period.
So by consolidating your federal student loans right after graduation you may actually achieve PSLF a few months earlier.
Should I consolidate my private student loans?
It’s worth noting that consolidating your student loans doesn’t really change your debt situation any more than clearing your desk of paperwork and stuffing everything in a drawer completes the paperwork. It may simplify things, but it doesn’t change the fact that you owe the same amount of money that you did before the consolidation.
If you have private student loans, instead of consolidating them, consider refinancing them. If you can refinance to a better rate, you may achieve consolidation anyways when multiple private loans are consolidated into a single privately refinanced loan.
Some final thoughts.
If you’re a medical student about to graduate, it’s worth considering the potential benefits of consolidating your student loans. Just make sure you weigh all your options beforehand. If you’re not a med student, but know someone who is, consider forwarding this article to them if you think they would want to know about the strategy we discussed.
Those going for PSLF who have been making payments for some time in an income-driven repayment plan should think twice before they consolidate their federal student loans. Remember, federal loan consolidation will restart the repayment clock towards your 120 required payments.
Next week we’ll review whether or not (and when) you should refinance your student loans.
These are my opinions, unless I’ve specifically cited other material. The information and ideas I’ve presented are for informational purposes only. Before you implement anything, make sure you have a thorough discussion with a qualified professional who understands your situation.