Medical School Loan Consolidation: Should You Consolidate Your Loans?

Consolidation of federal loans is one of the most misunderstood tools for managing loans for medical students. Some advisors recommend it automatically while others warn against it. Truth is that consolidation is neither good nor bad; it depends entirely on situation and your loans and goals.

Here's what consolidation actually does, when it makes sense for physicians, and when it doesn't.

What Is Federal Direct Consolidation?

Direct Consolidation combines multiple Federal Direct Loans into a single new loan with a new rate which is weighted average of the original rates. This new rate is rounded up to nearest eighths. For example, you have $150,000 at 6. 54 percent and $100,000 at 7. 05 percent. The weighted average rate turns out as follows: (150, 000 × 6. 54% + 100, 000 × 7. 05%) ÷ 250, 000 = (9810 + 7050) ÷ 250000 = 16860 ÷ 250000 = 0. 06744. Rounding this up to nearest eighth results in 0. 0675 or 6. 75 percent. In fact the consolidation itself does not reduce the interest rate either; you end up with one blended rate and do not get any savings on interest this way. Benefits lie elsewhere.

Why Would a Physician Consolidate?

A physician might consolidate for three legitimate reasons:

1. To Make FFEL Loans Eligible for PSLF

The most important reason is specific to a group of borrowers. Loans from Federal Family Education Loan (FFEL) issued before 2010 do not qualify for Pay As You Earn (PAYE) forgiveness program. If you have FFEL loans (visit studentaid.gov) you should consolidate them to Direct Loans first so that you meet eligibility requirements. If you borrowed for graduate or undergraduate study prior to 2010, you have loans from both Direct and FFEL mixed together. Check details at studentaid.gov and check loan type. Loans with "FFEL" need consolidation if you want to plan to use PAYE.

The problem: The problem is that consolidation starts your qualifying payments at 0 for newly consolidated loans. After two years of IDR payments and 24 qualifying payments you must start again at 0.

So consolidate as soon as possible possible. You can consolidate now if residency just started. You will lose no benefit since you have no qualifying payment count yet. If you have been into residency for three years and find out you have FFEL loans, you will have to calculate whether to reset to 0 to include these FFEL loans in PAYE or to keep only Direct Loans.

Limited PSLF Waiver note: There was a limited waiver for PAYE in 2022 under certain conditions but this expired and since then FFEL loans need consolidation to be eligible for PAYE.

2. To Simplify Repayment (Multiple Servicers)

If you have loans from different servicers such as MOHELA, Nelnet and Aidvantage and so on, you keep them separate with different user names and different automatic payments and recertifications each year. Consolidation puts everything under one servicer and one monthly payment.

This is an improvement in convenience rather than saving money. It reduces administrative friction. For new doctors who are extremely busy and who do not want to manage five different loan accounts this is a real improvement in quality of life.

3. To Get Access to IDR Plans You Currently Can't Use

Consolidating old loan types into Direct Consolidation Loans makes you eligible for programs such as SAVE, PAYE and IBR. If you want to sign up for Income Driven Repayment (IDR), consolidation is an important initial step if your individual loans are not eligible.

When You Should NOT Consolidate

When You Have Existing PSLF Qualifying Payments

If you have already made qualifying payments towards PSLF consolidate loans to reset the count. Do not consolidate if you are consolidating FFEL loans that were never PSLF eligible as you lose nothing. If you have only Direct Loans and follow PSLF there is no reason to consolidate as you would be hurting yourself.

When You're Pursuing Perkins Loan Cancellation

Perkins Loans offer special cancellation programs for teachers, nurses and other public service workers. If you consolidate Perkins Loans into Direct Consolidation Loans you lose eligibility for these cancellation programs. Most physicians do not have cancellation programs that apply to them directly but if you have Perkins loans from undergrad and have worked in an approved role, check eligibility first before consolidating.

When You're Trying to Lower Your Interest Rate

Consolidation does not reduce your interest rate. If you want to have a lower rate you should refinance into a private loan. This is a big important decision with very important consequences mainly because you lose access to IDR and PSLF permanently. Often people mix up consolidation and refinancing: they are very different.

Consolidation: This is a federal program, combined rates, benefits from the government do not change and you retain access to IDR and PSLF.
Refinancing: Rates can be lower and benefits from government are completely lost in private sector.

When You Only Have Direct Loans and You're Not Pursuing PSLF

If you have consolidated all your loans into Direct Loans and plan to pay them off quickly after training there is no point in further consolidation because there is no benefit and a new consolidation would restart repayment terms and lengthen the period during which interest accrues.

How to Consolidate

Consolidation makes sense for your situation and the process is quite simple:

Go to studentaid.gov and log in with FSA ID.
Go to "Manage Loans" and find the consolidation application.
Pick which loans to consolidate. You can consolidate some like FFEL loans and keep Direct loans together if you want to keep history for Paycheck Protection Student Loan Program (PSLF).
Select repayment plan for consolidated loan (choose IDR plan if you are aiming for PSLF).
Choose a servicer for consolidation. Select MOHELA if you are consolidating for PSLF.
Submit and wait. Processing usually takes 30 to 90 days.

While consolidation is pending, loans may go into administrative forbearance. Monitor status carefully to avoid any disruptions of scheduled automatic payments.

Consolidation and the Grace Period Trick (No Longer Available)

Historically, advisors recommended consolidation immediately after graduation during the six month grace period so that IDR payments began right away and PSLF qualifying payments started before starting residency. This was sometimes called "grace period trick."

Recent regulatory changes have generally closed this window. Guidance from the Department of Education should now be reviewed carefully since rules changed since this advice was written.

The Bottom Line for Physicians

Consolidation is a tool rather than a strategy. Here are scenarios where consolidation is sensible:

If you have FFEL loans and plan to use PSLF plan, consolidate quickly ideally before any qualifying payments accrue.
If you have Perkins loans and intend to use IDR (Income Driven Repayment), consolidate but first compare this to cancellation of Perkins loans being more valuable.
If you want to reduce having servicers that differ consolidate if convenience is worth the cost and note there are no financial benefits.

In other situations let loans alone. Consolidating Direct Loans doesn't improve fine performing loans. There are no upside to consolidating loans that work for you well already.

Not sure if consolidation is the right move for your loan portfolio? Use MedDebt's loan calculator here and model repayment strategies for actual loan types and balances. This will show which of PSLF, IDR or aggressive payoff is best given how much you owe.

Data sources: Data comes from Direct Consolidation Loan Program at studentaid.gov, eligibility criteria for FFEL loans and PSLF, cancellation guidelines for Perkins loans and Department of Education regulations on consolidation and qualifying payments.