What Is Loan Consolidation?
Loan consolidation is combining all your loans into one big loan. You will have two types of medical school loans: government and private. If you consolidate, it must be by type. You can consolidate a government loan with another government loan, a private loan with another private loan. You cannot consolidate the government loans with the private loans.
You cannot consolidate loans until after you graduate. In fact, consolidating is optional. So why do some people do it?
Consolidation Reason #1 – Lower Interest Rates
Since medical student loan consolidation is optional, you would only do it if it benefits you. Getting a lower interest rate is one of the top reasons to consolidate. There is no interest benefit for consolidating a government loan — the rate stays the same. As for private loan consolidation, you may get lower rates (which are set by the lender). So if your credit score improved compared to when you first got the private loan, there is a good possibility the lender will give you a lower interest rate.
Consolidation Reason #2 – Simplify Life
If you have multiple loans, after consolidating, you will have only one or two loans. So instead of making multiple monthly loan payments, you will only have to make one or two payments.
Consolidation Reason #3 – Extend the Repayment Period
If you are tight on money and cannot make monthly payments, you can consider consolidating your loans. The repayment period of government medical school loans (Perkins and Stafford) is 10 years. The repayment period of a consolidated government loan is 30 years. Therefore, the monthly payments for the consolidated loan would be lower. Just keep in mind that you will pay more interest over the life of a loan with a consolidated loan.
Monthly Cost and Total Interest Over 10 Years
To give you an example, if you have $240,000 in loans with an interest rate of 6.8% that compounds monthly (but in reality, interest compounds daily so the situation is even worse), for you to finish paying the loan in 10 years, it will cost you more than $2,700 per month. The total interest you will pay over the life of the loan is $91,000. Scary, isn’t it?
Monthly Cost and Total Interest Over 30 Years
But for the same loan, if you pay it over a course of 30 years, it will cost you almost $1,500 per month. That is much less than the above figure of $2,700. But the total interest over the life of the loan is more than $330,000!!! The extra exclamation points are added for emphasis. That is more than a price of a house in some parts of the country.
Caution! Stay Away from the Following…
If you do decide to refinance, there are some things to watch out for:
- repayment fee (extra fee to pay off the loan)
- origination fee (extra fee to obtain the loan)
Stay away from repayment fees. And if you do have an origination fee, make sure you get a lower interest rate to offset it. A good rule of thumb is that 3% to 4% in fees is about the same as a 1% higher interest rate. So if you have to pay 3% to 4% in fees, make sure the interest rate is 1% lower than normal.
Check out some options for private student loan consolidation if you are interested in consolidating your loans.
And remember, you can only consolidate each of your loans once, so consolidate wisely.
If you are concerned about your ability to pay back the medical school loans, check out my section for tips on paying off medical school loans.
This article is part of the Medical School Loans series. Click on the link if you want more tips and hints about borrowing money smartly.