One side perk of doing so is that most people will also max out their student loan interest deduction for that tax year regardless of whatever actual monthly payments you make on your loan.
That’s because several things are included as interest in addition to obvious actually paying interest on the loan with monthly payments. From IRS Pub 970:
Capitalized interest. This is unpaid interest on a student loan that is added by the lender to the outstanding principal balance of the loan. Capitalized interest is treated as interest for tax purposes and is deductible as payments of principal are made on the loan. No deduction for capitalized interest is allowed in a year in which no loan payments were made.
Interest on refinanced and consolidated student loans. This includes interest on a loan used solely to refinance a qualified student loan of the same borrower. It also includes a single consolidation loan used solely to refinance two or more qualified student loans of the same borrower.
So, for most medical students, consolidating after graduation will automatically max out the deduction for that tax year, even if you end up with $0 IDR payments under IBR/PAYE/REPAYE and pay no actual interest yourself.
The reason for this is that interest accumulates on all unsubsidized loans while in school, which normally capitalizes at the end of grace period. Consolidating creates a new loan that “pays” off all the interest on your former loans. It would be an extremely lucky student who borrows so little as to accrue less than $2,500 (the max deduction) in interest over multiple years of school.
Make sure to download your 1098-E form from your loan servicer if they don’t send you one in the mail, as this document demonstrates the amount of interest paid. Your tax software like Turbotax or accountant will need this.
Remember, however, that there is a phase-out for this deduction with rising income starting at $65k/yr single and $130k/yr married with no deduction for incomes above $80k/$160k. Your tax software will do this for you automatically.
Big hat tip to Sotirios and Dalton from Doctored Money for bringing this up the other day.