How/Why to Consolidate Federal Student Loans When You Graduate Medical School

When you get federal student loans from the government for medical school, you don’t just get one loan: you get at least one per year. Back in the day when graduate students still received subsidized loans, many borrowers would receive three: one subsidized, one unsubsidized, and often a small “low-interest” (5%) Perkins loan. Now, in practice, holding on to multiple loans doesn’t really affect your daily life much. Your federal loan servicer (the company that takes your payments) will apply your payments automatically across all of your DIRECT loans for you (your Perkins loans, if you have any, will be due separately from the rest).

Consolidating your federal loans into a DIRECT Consolidation from the federal government (as opposed to private refinancing, discussed here) does make things look nice and tidy in that you’ll now have a single loan with a weighted-average interest rate based on the rates of the individual loans it replaced, but this paperwork trick isn’t particularly meaningful in and of itself. Unlike private refinance options, you’re guaranteed to not save a single dime on the interest rate. In fact, a slight rounding change could give you a trivially higher rate (it’s rounded up to the nearest one-eighth of 1%).

But there are definitely a few reasons to consider consolidating your loans, particularly as early as you can, in large part due to government’s newest income-driven repayment plan: REPAYE. (Sidebar: please read this for more info about REPAYE and why it’s generally a good idea of residents if you’re not already familiar with the program). And there’s a double reason if you’re considering PSLF.

In short, starting a consolidation when you finish medical school will do four things to save you money:

  1. Reduce the amount of capitalized interest on your loan, which reduces the rate at which it will grow for a long time
  2. Temporarily increase the amount of your REPAYE unpaid-interest subsidy
  3. Help you achieve loan forgiveness a few months faster
  4. Automatically max out the student loan interest deduction on your taxes for the year

We’ll discuss each of these in detail followed by brief step by step instructions. Stay with me.

Consolidating to Make Your Loans IDR & PSLF Eligible

The first benefit of DIRECT consolidation is that it can make more of your debt eligible for income-driven repayment (IDR) and public service loan forgiveness (PSLF). Not all loans you can get for financial aid are eligible for PSLF, only DIRECT loans are: DIRECT loans are those provided “directly” by the federal government: Stafford (for older borrowers), DIRECT Subsidized (for undergrads only), DIRECT Unsubsidized (the most common med school loan), PLUS (higher interest rate for big borrowers), and DIRECT Consolidation.

So if you want to try to have your Perkins loans forgiven, then consolidation is the only way. Consolidation is also the only way to have Perkins loans included within an income-driven repayment plan, which would reduce the amount you pay monthly if you’re worried about cash flow problems (Perkins are normally put on their own separate 10-year repayment.). Most medical students won’t get a ton in Perkins a year, so we’re not talking about huge amounts of money. That being said, having my $4,500 in Perkins forgiven would be another $4,500+ that I didn’t have to pay and $50/month less in payments.

Important caveat: If you’ve already been repaying your loans and are wondering if you should consolidate in order to add your Perkins: Achieving loan forgiveness through the PSLF program is based on making 120 qualifying monthly payments on a given loan. When you consolidate, the feds pay off your old loans and create a new consolidation loan in their place. Because the consolidation is a new loan, the monthly payment count resets to zero. Any payments you’ve made towards your loans prior to this do not count toward the PSLF required 120.

Consolidating at the End of School Saves You Money

The key facet to saving money with federal consolidation is that consolidation loans have no grace period. Normally, you have a 6-month grace period starting at the end of graduation before you begin paying back any money. So if you graduate at the beginning of May, you normally won’t be paying anything until November. During this grace period, interest continues to accrue and is then capitalized (added to the principal) at the end when you enter repayment. Of course, you also won’t start making any payments toward PSLF until 6 months after graduation either.

For the following example, let’s assume you file for consolidation at the end of school in May, which is then processed in June. So you’ll probably lose one month out of the 6-month grace to the consolidation process.  Another 4 weeks later to set up repayment, and your first payment will probably start in July, which coincidentally is when you start working. The example numbers here are based on a $200,000 loan at 6.8% with an intern salary of $50k and a household size of 1 (some reasonable numbers for purely illustrative purposes; do your own math).

1. Less capitalized interest. The interest accrued during school will capitalize when you consolidate instead of after an additional five or so more months of accrued interest. With $200k @ 6.8%, that’s $5666 of interest that won’t be part of the principal accruing its own interest. That change in capitalization would result in around $385/year less interest accruing at the above rate.1 Note: If your loans are eventually forgiven as part of PSLF, this part would be irrelevant.

2. The REPAYE interest subsidy kicks in earlier. This assumes, of course, that you don’t have a low-debt/high-income mismatch and will be receiving one in the first place. In our above example with a solo $50k intern salary, the projected monthly payment is ~$270/month. $1133 of interest accrues per month on the $200,000 loan. $863 of that is unpaid, and thus $431 is forgiven. Every month. So an extra four months in REPAYE could save you $1,724 (again, I’m assuming you’ll lose a couple of months in the consolidation/repayment process).

But it’s actually better that: you typically certify your application for income-driven repayment plans using last year’s tax filings. The tax year prior was half of your MS3 and MS4 years, when you probably had little to no taxable income, which would result in a $0 monthly payment: $566 would be forgiven each month ($2264 over 4 months) while making $3,240 ($270*12) less in payments during your intern year.2

A few years ago, some of the servicers wised up to the $0/month trick that people were commonly using when they filed for IDR at the end of grace period, and they began asking for pay stubs from your intern year (the application also now asks if your income has “changed significantly” since your prior tax return), which means that people who wanted a $0 qualifying IDR payment had to start fibbing and hope no one asked for proof.

But by consolidating early and applying for your repayment plan before you start your intern year, you actually don’t have any income to report, your circumstances haven’t changed since last year, and a $0 should be totally kosher again. By the federal government’s own rules (see #46), you don’t have to update the servicers with new income numbers if your income changes before the annual income recertification, so once you have $0/month payments for the year, you’re safe until the following year.

2019 update: the income certification form has changed and now only asks if your income has decreased (not changed) from the previous year. Very reassuring! This should make the timing a little more forgiving as well.

3. Earlier qualifying PSLF payments. Waiving the six-month grace period means a few more months of making payments as a low-income resident and not a high-earning attending. As an example, the standard 10-year repayment on that $200k loan is $2302/month. If you were able to start repayment in July instead of November, those 4 months at $0 instead of $2302 could save you $9,208 when it comes time to file for PSLF.

Note: The government specifically states that $0/month payments count toward PSLF when that is the calculated payment under a qualifying repayment plan (see #24 on this FAQ).

4. Max out the student loan interest deduction. If you have $0 payments, you’d think that you would pay no interest and thus get no deduction on your taxes. However, long story short, the consolidation loan “pays” off all of the interest on your loans that accrued while you were in school, to the tune of likely far more than the $2,500 maximum deduction.

To do it

  • File taxes on time in April of your 4th year (or at least before you graduate). You can do this for free in multiple ways, probably easiest using the free 1040-EZ TurboTax edition. File even if you didn’t make money; it’ll make things easier, as it will document your (lack of) income. You won’t have paystubs yet, so your taxes are all you got.3
  • Your loans must be in grace period status to file for consolidation. So once you graduate, immediately file for a federal loan consolidation by visiting studentloans.gov. Note: do not fill in the box with your “grace period end date” as this will delay the consolidation from taking place until the end of your grace period (i.e. item 17 on the paper application), which is exactly what we’re trying to avoid. More information about which loans are federal consolidation-eligible is available here in case you have some rare ones. Note that you can see all of your loans listed, their total amounts (principal and interest), and your “enrollment status” (to confirm that the feds know you’ve graduated) at NSLDS.
  • You get to pick your servicer as part of your application. If you’re considering PSLF at all, you may as well pick FedLoan, as you’ll be transferred to them whenever you submit your first PSLF employment verification form anyway.
  • At the same time as your consolidation, you’ll also be applying for the IDR plan you want to use to pay off said consolidation loan, which will likely be REPAYE. When they ask if your income has significantly changed, the answer will hopefully be no. If it’s April, May, or June, you probably haven’t earned a cent, so of course it hasn’t. Wait again for approximately 30 business days.
  • Ideally, after two or so months you’ll be the proud owner of a lot of debt in one place and a payment plan to start taking care of it. Once your servicer lets you know that you’ve entered repayment, try to sign up for their auto-debit program to make payments automatically through your checking account. If your payments are $0, they may not give you an option, but if you can, definitely do it: auto-debit usually gets you an additional 0.25% interest rate reduction.
  • Things may go wrong, so follow up if things don’t start moving after 6 weeks. If you have multiple loans from multiple schools with multiple servicers, you may run into more problems. Note that it’s possible your school and servicers won’t update your loan status from “in-school” (not consolidation eligible) to graduated or grace period (consolidation eligible), so check on NSLDS and call your school and servicers if things don’t progress.
  • If you have undergrad loans, you could consolidate those prior to graduation and then file a “Direct Consolidation Loan Request to Add Loans” for the med school loans. I’m honestly not sure how much if any time that will save you but it could potentially help prevent some of the difficulties associated with your servicer finding and paying off a bunch of different loans in a timely manner. I’d personally just go with the one-step method after graduation.

Parting thoughts

  • None of this deal-breaking stuff. If you’re already in repayment and haven’t done this, don’t kick yourself. You’ll note that getting PSLF negates some of the extra plusses while not doing PSLF nullifies others. Early consolidation is a great return on a small investment of time, but the fact that you’re thinking about your debt and seriously want to take care of it is more important than the money you’ll save.
  • So, in the end, the take-home points: Most of the loans that can be forgiven are automatically PSLF eligible. Perkins loans are the exception, which if you have them are typically a small fraction of your total debt. Consolidating your loans immediately after graduating medical school can allow you to enter repayment immediately at the start of residency by foregoing/erasing the traditional six-month grace period, which can save your money by reducing interest capitalization, likely increasing your REPAYE subsidy, likely allowing $0/month payments, and helping you reach loan forgiveness (if applicable) with a few fewer attending-sized payments.
  • If you won’t be eligible for a significant REPAYE subsidy and thus a low effective interest rate and aren’t PSLF bound, you can consider looking into private refinance to reduce your interest rate when appropriate (but don’t pull the trigger unless you are absolutely sure; it’s a one-way street).

24 Comments

  1. Incredibly helpful advice for med students. I wish more of the people I work with in my student loan consulting practice would read your stuff Ben. To be honest, this detail shows the most knowledge of anyone not in the student loan industry, so awesome job. Hopefully SEO will rank this one really really high

    Reply
  2. Incredibly well written and detailed article, you answered every question that came to mind.

    Thank you for all that you do!

    Reply
  3. Im on repayment ($0 IBR) because graduated last year. I will be able to start PSLF this July (new intern) and my loans are all direct loans. I will switch to repaye just in case my mind changes about PSLF.
    Any point in consolidating now?
    That student loan interest deduction seems enticing.

    Reply
    • You can get that $2500 deduction by consolidating via the student loan interest deduction. Otherwise won’t make much difference financially since you don’t need to target payments to individual loans when going for PSLF. Easier to look at and keep track of as one loan though.

      Reply
      • Thanks for your reply!
        If one starts PSLF but decides against it in the future, would consolidating now have any effect on future repayments?
        For instance, would one still be able to refinance and such?

      • No changes like that, no. It’s one loan with a weighted average interest rate instead of several. The only meaningful difference in terms of repayment is that you can target excess payments toward the highest interest loan. This would be irrelevant if you refinance anyway.

  4. Got you!
    Now with the CARES act, i understand there is zero interest on federal loans till September but, if one consolidates now, will that void the CARES act no-interest aspect?
    Thanks in advance!
    Your website is such a gem!

    Reply
    • The CARES Act applies to all federal student loans including those in grace period as well as those in income-driven repayment, so it should not matter. I would not be surprised however if the consolidation itself takes longer than usual at this time given how badly the servicers are scrambling to implement the new law.

      Reply
  5. I had to mail in my tax return due to the $0 income noted, and it hasn’t been filed online yet and suggests to wait 2-3 weeks after my graduation date to check again. Should I choose the “self-certify income” option when applying to consolidate immediately post-graduation or should I wait a few weeks until the application can use the data retrieval tool through the IRS?

    Thanks in advance!

    Reply
    • For other folks reading, H&R block still allows you to submit electronically with $0 income. So that’s the best option.

      As for you, it sometimes takes schools a few weeks for your loan status to change in NSLDS anyway, so it may be a moot point by the time you’re actually able to consolidate.

      Technically you can self-certify. It asks if you earn any income, and the answer will truthfully be no. That said, in years past there have been issues with some servicers asking for paystubs. I think that’s no longer common, but given the lag between application submission and processing completion, that’d be my concern is that it would stretch into July and someone would make a fuss. I think I’d personally wait, but I also don’t think anything bad would realistically come from it.

      Reply
  6. Hi Dr. White! Thanks for this. So incredibly helpful.

    If we file for consolidation early, what happens? Using myself as an example: We graduate on May 15th, but I’m itching to just start the process now. Will it work at all? Will the consolidation automatically not take place until the 15th? Or until my school changes my status or whatever?
    Thanks!

    Reply
    • That’s actually a good question as to in what way it doesn’t work. I think in the online version that it simply will not include any loans that are still in school status (but would include loans from undergrad for example). I would just wait until status changes, that is when you can do it all at once.

      Reply
  7. Thank you so much for the advice, I wish I saw this much much earlier. I graduated in Nov 2019 as my school is off-cycle. I am about 450k in loans from a private med school school – all unsubsidized fed loans and 25k from undergrad mostly subsidized fed loans.

    I am an incoming intern in Emergency Medicine (3 year program). I would like to go into academics at some point, but would like the option to not be tied down to a nonprofit if possible. For this reason, I’m thinking that I will probably not try to do PLSF, refinance as soon as I get out residency and try to be debt free in 5 years after that. (Although I’m going to keep that option open in residency.

    Now, I should have consolidated my loans and done REPAYE right after I graduated, but unfortunately, at this point I was not very informed in finances. This made me accrue about 10k in interest until the CARES act kicked in.

    I’m going to be out of my 6 month grace period in a few days. Is there a point in consolidating my loans at this moment? I think I could just apply for REPAYE directly and start making 0 dollar payments that count toward PLSF? Am I missing something here?

    Thanks!

    Reply
    • Consolidation won’t really do anything for you at this point, so no need now (assuming all your loans are Direct and you don’t have any Perkins for example).

      At 450k, I would definitely consider PSLF if you end up in a qualifying position, so keeping the option alive is the smart choice for now. That benefit would likely be equivalent to two full years of working full-time.

      Reply
  8. Hello Dr. White,

    Thanks so much for your awesome Medical Student Loans book, I read all of it and it was extremely engaging and thorough! I have a few questions regarding your consolidation/REPAYE subsidy trick outlined in the post above. A quick a recap of my situation:

    I’m an MS4 with four years of direct unsubsidized loans, graduating in May 2021, with no interest in going PSLF. Based on your book and posts, I plan on applying for a federal direct consolidation loan immediately after graduation and putting myself on REPAYE. Right before I consolidate, I plan to use some portfolio line of credit money (borrowed against my taxable investment account at 2% APR) to drag my consolidation interest rate from the current 5.76% weighted rate to 5.74%, to make sure the round up to the nearest 1/8th of a percent only goes to 5.75% rather than jumping all the way up to 5.875%. I plan on initially certifying income for REPAYE with my 2020 taxes filed in April 2021. Since I have minimal income as full-time student in 2020, this should hopefully give me a $0 monthly repayment and nice 50% cut on my effective interest rate with the REPAYE subsidy (as a side note, I believe the point at which you have a non-zero monthly payment on PAYE and REPAYE is an AGI of $19,140 based on the 150% of the 2020 poverty lines for the continental US, but maybe you can confirm!).

    I should start residency in July 2021, which would then require an IDR recertification before May 2022. I will earn half of my PGY1 salary from July 1, 2021-December 31, 2021. If I recertify “early”, say in March 2022, before my 2021 taxes are due, would that recertification be based on my 2020 tax return filed April 2021? Based on what I read on the actual recertification form, if your income has not “decreased” according to the new language, they will pull your latest IRS tax forms (for a March 2022 recertification, my 2020 taxes filed in April 2021), rather than asking for pay stubs. Could this guarantee that both my PGY1 and PGY2 monthly payments are $0, with the full 50% interest subsidy (and halved interest rate)? Is the income recertification officially due 1 year after you apply for a consolidation loan, one year after the consolidation loan is finalized and you are put into REPAYE, or one year after your first REPAYE payment is due? Would it raise some eyebrows if I tried to recertify ~9 months after my initial certification and attempted to use the same 2020 tax return two years in a row? After at least 1 year of the $0 payments and halved interest rate with the REPAYE subsidy, I plan to refinance, as the private refinance rates are very attractive now in the world of COVID-19.

    If I’m not able to use the same 2020 tax return for two years of recertification and I don’t use pay stubs to estimate AGI, would they take my 2021 taxes (filed April 2022) and double my earnings from July-December 2021 from the first half of PGY1 to determine my income and estimate a full year AGI, rather than just the half year?

    Finally, a few programs that I’m looking at mention mandatory contributions to a 401(a) account, rather than a 403(b). From what I’ve seen, 401(a) accounts are designated for government employees. Do you know anything about these accounts for medical residents? From your book, you highlight the importance of maximizing pre-tax retirement contributions to lower your AGI for PSLF, but if I’m planning to jump from REPAYE to private loans as soon as the rates are more attractive than the subsidized rate, do you think residents should consider a Roth 401(k)/403(b)/401(a) over the pretax version of those respective accounts? Or does this depend on their expected income in retirement and physician income bracket (aka the same as the decision between traditional and Roth IRAs)? If I already have a Roth IRA and my future residency doesn’t offer an income match on the 401(k)/403(b)/401(a), does it make any sense to contribute there vs. my Roth IRA first? Thanks so much for the help!

    Reply
    • A lot to unpack there. A few things:
      – You are correct about the nonzero monthly payment
      – The annual IDR certification is based on when they process your IDR application, not based on taxes. While you can certify early for an income decrease, most services now will not allow you to push up your annual date the way you’re suggesting. They’ll just tell you to resubmit later. They typically just use your tax return, which is what results in low PGY2 monthly payments.
      – Note that with COVID, who knows if you’ll even have payments at first anyway. The next 1-2 years are in limbo from a federal student loan perspective, even more so if democrats retake the senate and presidency.
      – A 401(a) is analogous for this purpose, and while they can be after-tax, they’re usually pre-tax. 401(a) accounts have a set mandatory employee contribution, which is what makes them different.
      – Regarding Roth vs Pretax: https://www.benwhite.com/finance/resident-retirement-contributions-and-pslf-pretax-or-roth/ – there is no benefit to a residency Roth 401k contribution over a Roth IRA in the absence of a match.

      Reply
      • Thanks so much for the response! I agree that a lot of this situation is in limbo with the current 0% interest, which could get extended beyond 12/31/20. In that case, I would stay on federal loans as long as possible before consolidating and going to REPAYE.

        To clarify what you said about the recertification, from what you have heard people, the only real reason they would let you recertify early is to report a decrease in income (with pay stubs), you can’t actually do it as early as you want just to try to base it on your tax return, as I tried to describe? And when you say that low PGY2 monthly payments are based off your tax return, you mean they use your tax return that covers the first half of intern year salary (July-December 2021, in the 2021 tax return) and then approximately double that to estimate a full-year AGI? Or have residents you’ve spoken with reported that they actually base your AGI on the half-year of income on those first 6 months of intern year, without any doubling? I heard that if you use pay stubs, they will do a calculation to estimate your full-year AGI, so I would be surprised if they didn’t also do that with a tax return showing only half of your intern year salary. Knowing how they calculate an AGI from your tax return could make the difference for PGY2 having a low effective REPAYE rate (if they only base your AGI on the actual tax return showing 6 months of intern salary) or a somewhat higher effective REPAYE rate that is unfavorable compared to private loans (if they double up your 6 months of intern salary to estimate AGI). Thanks again for your help!

        Finally, I appreciate the info about 401(a) accounts, I’ll look into them more depending where I end up for residency and which retirement accounts they offer. Ultimately, if contribution to a 401(a) is mandatory, I have to put whatever money is required into there first, but if I prefer my own Roth IRA portfolio over what the residency offers and there is no match offered, I’ll load that up as much as I can before filling any extra money into the 401(a), 403(b), etc. If I don’t plan on needing the pretax adjustment to my AGI for the purposes of lowering my REPAYE monthly payment, then I may ask to start it up as a Roth, rather than pretax, since I am in your camp of believing that rates in the future are only going to go up.

      • – Correct, attempts to push up the recert date to take advantage of the April tax deadline generally no longer work.
        – No, they usually use your actual tax return, meaning that it’s based on a half-year’s income and usually results in a trivially small monthly payment. It’s very uncommon for a resident to want to use paystubs. The most common reason would be someone who did a lot of moonlighting the prior year.

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