American College of Physicians: Internal Medicine — Doctors for Adults ®


Saddled with debt? Consider consolidating your loans

From the December ACP-ASIM Observer, copyright 2002 by the American College of Physicians-American Society of Internal Medicine.

An example of consolidation
Online resources

By Jason van Steenburgh

If you're like most residents, the tough economic climate has left you relatively unscathed. Instead of fretting over an investment portfolio that you've just started building, you're probably more concerned about the mountain of student loan debt that looms in your future.

Financial planners, however, say that many debt-burdened residents can make the slow economy work to their advantage by consolidating their many student loans into one low-rate package. You'll not only get a great interest rate—a byproduct of a slumping economy—but your interest rate and monthly payments will never go up.

Consolidating your loans can also help eliminate hassles when you begin to repay your loans. Rather than write several checks each month for many different loans—and worry about 10 or 15 blemishes on your credit record if you're late with a payment—you write one check for one piece of debt.

Getting started

Only federal student loans—those funded by the federal government's Title IV program—are eligible for federal consolidation. These include Stafford loans, Perkins loans and HEAL loans, among others.

Now is a great time to consider consolidating your loans because the current interest rate, 4.06%, represents an all-time low. (Just a few years ago, by comparison, the rate was more than 8%.) Consolidation allows you to lock in that rate for the duration of the repayment period, for up to 30 years.

"If you haven't already done it, you should be thinking about it now. If you're not, your head is in the sand. The lower the rate, the better!" said Edward M. Tilghman, a financial planner for American Express.

Experts say you should consider consolidating now because the advantages of consolidation could soon be a thing of the past. Last April, the Bush administration proposed eliminating the program's fixed rate, arguing that the low interest rates mean hundreds of millions in lost revenue for the government.

Although the proposal did not get far in Congress, Mohan D. Boodram, director of admissions and financial aid at Harvard Medical School, said it could come back. As other programs face cuts from flagging tax revenues, "The consolidation program could be an attractive source of funds," he explained.

Three criteria

To get the most from consolidation, you need to answer three questions: Are your loans in grace or deferment? When can you afford to begin repaying your loans? What will interest rates do next year?

  • Grace period. Many loan programs automatically give students from several months to a few years before they have to start repayment. During this grace period, interest does not accrue on loans subsidized by the government. (For example, subsidized federal Stafford loans carry a six-month grace period, while unsubsidized or private loans typically begin accruing interest as soon as you receive the money.)

    If you consolidate during your grace period, your interest rate will be 0.6% lower. That may seem like a small number, but it can save you thousands over the life of a large loan.

    Because interest does not accrue on federally subsidized loans during the grace period, you don't want to consolidate too early. "You'll be closer to your earning years without interest building on your debt," said Pamela J. Nyiri, director of financial aid at Yale University School of Medicine.

    Lenders sometimes mistakenly say you cannot consolidate during your grace period. Christina E. Ciaccio, MD, a first-year internal medicine resident at Northwestern University Medical Center, asked her lender about consolidating during her grace period.

    "They said I had to wait until the grace period was up and then we could talk about it," she said. With the help of a financial advisor, she was able to consolidate her loans before her grace period expired and get the discounted interest rate.

  • Repayment delays. Before you consolidate, determine how much time you'll need before you can afford to begin repayment. Most loans allow you to apply for deferment, giving you an interest-free delay (on subsidized loans) before repayment that is similar to a grace period. If your training will be longer than three years, take the maximum amount of deferment time available for your present loans—in many cases three years—and consolidate just before your deferment runs out.

    Always consolidate before your deferment period ends. As is the case with consolidating during a grace period, your interest rate will be 0.6% lower. After you consolidate, you can get an additional three years of deferment, depending on your loan servicer, because you have in essence taken out a new loan.

    Brian Dilley, a financial planner for the Chicago-based Young Physicians' Group (a division of Mediqus), said that misperceptions about deferment plague the consolidation process. "People are afraid that if they consolidate, they are no longer able to defer, but it's not true," he said. "You go through the same process again."

    If you qualified for deferment before consolidation, you will qualify after consolidation. Most lenders will refresh your deferment eligibility after you consolidate.

    In general, you qualify for deferment if your debt payment is more than 20% of your gross income and your income after debt payment is below the federal poverty level for your state. The best way to determine if you qualify is to ask your lender. Deferment is granted for one year at a time, after which you must reapply.

    (For information on another delayed repayment tactic called forbearance, see "Why forbearance is the last resort for relief.")

  • Fluctuating rates. Unless you will run out of deferment before July, wait until late spring to complete the consolidation process. The interest rate for federal student loans changes every July 1. By late spring, you can find out if the rate is going to rise or fall either by checking with your medical school's director of financial aid or by checking the AAMC's site.

    Prepare for a spike in rates by completing your consolidation paperwork before June. If interest rates are going up, file your paperwork immediately. The process can take a few weeks, so make sure you leave enough time before the new rate kicks in. If the rates are going down, file after July 1.

A look at the process

Before you get started with consolidation, determine what type of loans you have, who holds them and your repayment status for each of them. You can obtain this information through your lenders, who typically send you regular mailings.

Once you're familiar with your loans, separate out the public debt. Those are the loans you can consolidate.

If all your loans are with a single holder such as Sallie Mae, you must consolidate with that holder or through the Federal or Direct Loan Consolidation programs. However, if your single holder does not offer the full range of repayment options, or if you have multiple holders, you can shop around for third parties who offer the best consolidation packages.

"With so many lenders hungry for this business, there is a lot of misleading information," warned Paula Craw, director of student financial services with the Association of American Medical Colleges.

Watch for false incentives. A common marketing ploy claims, "We offer the lowest rates allowable by law." That's nothing to get excited about, experts say, because interest rates for federal student loans are set uniformly, so everyone offers the same base rates.

Harvard's Mr. Boodram warned residents to steer clear of companies that make another empty claim: "No fees to consolidate." "Nobody charges you to consolidate," he said. "It's not allowed."

That said, some lenders do offer legitimate interest rate incentives. A common incentive is to give a small rate decrease, perhaps 0.25%, to borrowers who pay using automatic withdrawal. According to American Express' Mr. Tilghman, the lender gets the dual benefits of prompt payments and immediate knowledge of problems with the account.

Some lenders will cut their rates by up to 1% if borrowers make a number of consecutive payments on time, usually 36, 48 or 60. Some borrowers who take advantage of this incentive also agree to automatic withdrawal, which can complicate matters.

Mr. Boodram advised having the lender initiate automatic withdrawals from your bank account, rather than having your bank send the money to your lender. If the lender is in control, he explained, it is responsible if a payment is missed.

If, on the other hand, your bank makes a mistake when paying the lender, it is your responsibility. You could be back-billed for the extra interest that had been discounted, which could cost several hundred dollars.

Also be sure to read the fine print for statements about how you lose benefits. The following, a fairly typical disclaimer, appears on a consolidation Web site:

"Borrowers are eligible for this discount on a one-time only basis. Borrowers lose eligibility for the interest rate discount if they receive a deferment or forbearance after the discount has been applied." In this instance, you would forfeit the benefit incentive if you delayed payments through deferment or forbearance. Check with the loan servicer before consolidating to see what its policies are.

Mr. Tilghman advised against working with banks that offer private consolidation with low but floating interest rates. "It may be cheap today, but if rates go up, you could be paying more, even more than the federal loans that have a maximum rate of 8.25%," he said.

Many lenders also offer graduated repayment, a plan by which payments start out low for the first few years and get higher as repayment continues.

You can begin the process with most lenders simply by requesting consolidation forms. Regardless of where you choose to consolidate, make sure you have the terms of the agreement in writing, because lenders' terms can change constantly.


An example of consolidation

Jane Doe, MD, a first-year internal medicine resident, graduated from medical school in May. She has 16 subsidized Stafford Loans of $8,000 each. When the six-month grace period on her loans runs out in December, she will owe $1,300 per month for 10 years. She should apply for deferment in November, before the grace period ends.

If she consolidates before July 1, 2003, while the interest rate is still 4.06%, her monthly payments will be $572 for 30 years. She can apply for deferment and delay making payments for three years.

However, Dr. Doe wants to enter a subspecialty fellowship after her residency, which will require five years of training. She decides she wants to get more deferment, despite the risk of the interest rate going up.

Dr. Doe then checks to make sure her lender refreshes deferment after consolidation. Dr. Doe defers her loans for two years, then consolidates. She can apply for another three years of deferment and won't begin repaying her loan until she starts working.

If she waits to consolidate and the rates go up to 6%, for example, Dr. Doe's total payments will rise. Once her deferment ends, her payments will be $719 for 30 years, or $52,861 more than if she had consolidated sooner.


Online resources

To calculate monthly payments for a variety of loan repayment scenarios, go to

For more details on consolidation from the Association of American Medical Colleges, go to "You Want to Do What?" A Primer on Loan Consolidation—Specific Questions.


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