How did you end up with owing so much money? You’re finally out of school but it will be years before you’re out of debt. Should you consolidate your student loans?

When you’re an undergrad, student loan payments seem a lifetime away. By the time you finish your degree, the loans are a necessary evil. Six months later, evil comes calling.

Federal or Private Student Loans

The U.S. Department of Education issues federal student loans. There is no credit check required. (There are some exceptions for post grad or loans to parents.)

Federal Loans

Federal loans can be Direct Subsidized or Direct Unsubsidized. Both loans accrue interest while you are in school. The government pays that interest for Direct Subsidized loans. For Direct Unsubsidized loans, you pay the interest.

Payments aren’t required until 6 months after graduation.

Private Loans

Private student loans come from a bank or credit union. The loan is based on credit history. There is no grace period for repayment like a federal loan. Payments begin immediately.

Private loans have a fixed or variable interest rate. With a fixed interest rate, your monthly payments remain the same. Your payments fluctuate with a variable rate. It is usually in your best interest to get a fixed rate.

Schools Out!

Six months after graduation, the bills for your student loans come due. If you’re married, the same is likely true for your spouse.

When you’re studying medicine, that’s many more years of living on borrowed money. Even longer if you plan to subspecialize. The average student loan debt for MDs is over $198,000, and the payments begin when you start your residency.

Every medical student knows that residency isn’t exactly when you start making big bucks. But it is the time when your loans come due.

You worked hard to prepare for a career that would provide a comfortable life. Instead you’re swimming in debt before you start making any money.

What’s the most important thing to know about student loans?

It may feel like free money, but this is a loan. You have to pay back every nickel plus interest. It’s not a spring break vacation fund. The goal is to borrow as little as possible to meet your tuition, books and living expenses.

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Student Loan Consolidation FAQ

We get a lot questions about how to consolidate student loans. Here are the answers to some of the most common. Student loans are either government funded or loans from private banks. Some options will vary based on your lender.

Q. How does student loan consolidation work?

If you have government loans, you can consolidate them into a new single loan. The new loan does not reduce your interest rate.

You can extend the term of the loan, which reduces your payments. But the longer the term, the more interest you pay.

Private banks refinance student loans. You can combine multiple loans into a single loan, possibly with a better interest rate. They rely on your credit history but also your income potential.

You can include federal and private loans in the refinancing.

Q. Should I consolidate my student loans?

There are pros and cons.

On the positive side, all those loan payments get rolled into one. If you have a federal loan, consolidating won’t cost you anything.

On the negative side, consolidation can extend the term of your loan. This increases the interest you will pay. You can only consolidate your loans once, so do your homework.

If you refinance your loans, always get a fixed interest rate. Don’t refinance unless you can reduce your current interest rate.

If you are in a federal repayment plan with hopes of having a portion forgiven this goes away with private loan consolidation.

There is no guarantee that loan forgiveness will be available. There have been several attempts to discontinue this federal program. But there is little harm in leaving your loans with government entities if you are on this repayment track.

Q. Is there a student loan calculator?

Yes. There are several.

Q. How long does it take to pay off student loans?

The lenders say 10 years. One study in Wisconsin said 21 years. We say it depends – there are too many unique variables in each loan.

Here’s one more calculator to see how long it takes for you.

If you consolidate with a private company there will be strict repayment terms. If you leave your loans with the federal government there are several repayment options that are mostly based on income. There is also the chance for loan forgiveness if your employer meets certain non-profit exception criteria.

Q. Will consolidating my loans impact my credit?

No, it doesn’t have to. A federal loan consolidation doesn’t pull your credit, so there’s no impact. With only one payment to make, you’re less likely to miss payments.

Refinancing your loans to get a better interest rate doesn’t hurt your credit either. If you include a government loan, you lose access to any federal benefits.

The overall amount of debt you owe can impact your credit. So you should pay it off as soon as feasible.

Q. How much do doctors pay in student loans each month

The average medical student loan debt is $198,000. With an annual interest rate of 6.25%, your monthly payment would be $2,223 over a 10 year term.

Frequently resident doctors pay much less based on their lower income. Repayment options are more flexible while still completing training.

Q. Should I defer payments until I’m making a good income?

Only as a last resort. When you pause your payments, the interest on the principle keeps growing. Consider this based on a three year residency. If you deferred payments on a $200,000 student loan, at 5.7% interest, it would cost you an extra $34,000.

Establishing control of your finances from the start of residency is important. The majority of residents should be able to start repayment. If you are supporting a family in the San Francisco Bay area then it may be tough. Deferment is always an option.

Q. What is the Public Service Loan Forgiveness program?

This program rewards qualified applicants by forgiving student loan debt. The program sounds like a perfect fit for doctors, but the criteria can be challenging. It’s only for federal loans. You must make 120 payments. Your employer needs to meet criteria too.

The basis of this program is the type of organization you work for – not the work that you do. If you have a federal loan, try this calculator to see what it takes.

Q. Should I refinance my student loans?

It’s an excellent option for physicians. The goal of refinancing is to reduce your interest rate. Most lenders consider doctors a good credit risk, no matter your current income. Some doctors refinance during residency and again when its complete.

Some residents with government loans prefer to use a repayment plan during residency. They refinance once it’s complete.

Refinancing with a private company would make you ineligible for loan forgiveness. If you work for a private practice or for profit entity loan forgiveness is not an option anyway.

How can I pay off my student loans faster?

The best way is to add more to your monthly payment. Once you’re an attending physician, decide how much extra you’ll pay on your loan.

Your loan payment is divided in two sections – the principle you borrowed and the interest you pay on it. In the beginning of your term, you pay more on the interest than you do the principle. When you add on to your regular payment, tell your lender that money goes to the principle.

The faster you reduce the principle, the less interest you pay overall. Try to make 13 payments per year to knock off substantial interest on your loan.

Student Loan Debt Crisis

The cost of college continues to rise, along with an alarming amount of student loan debt.

According to the Federal Reserve, monthly student loan debt in 2009 Q4 is $7,717,000,000. Ten years later in 2019, it’s risen to $1,641,974,000,000.

Many economists express concern. They compare the soaring debt to the housing bubble in 2009. The coronavirus has created the perfect environment for a massive default.

As jobless claims rise into the millions, what happens when if you can’t make your payment?

Federal loans

The government has taken action to help student loan borrowers during the pandemic. If you have a federal loan, payments are suspended from March 13th thru September 30th. There will be no interest applied to your principle during that term. Read here for more details.

Private Loans

There is less protection for students who have private loans. But lenders aren’t living in a bubble. It’s in their own best interest to help you. But there is no one policy. Each lender can address it as they see fit.

Most lenders are encouraging customers to reach out. Some are offering periods of payment forbearance (no payment required.) Some are waiving late fees or reducing interest rates. Others are halting debt collection proceedings.

The key is to contact your lender. Find out what they can do to help.

Student Loan Consolidation Summary

It’s easy to get swallowed up in student loan debt. It’s even easier for doctors, dentists and other high income professionals. The longer you’re in school, the more loans you have.  And the more debt you owe.

When you consider how to consolidate your student loans, be thoughtful. You can only do this once.

Federal Student Loans

If you have federal loans, you can look into consolidation through the Dept. of Education. There’s no pull on your credit. If you’re enrolled in a post grad or parents program, your credit history does come into play.

There are also re-payment plans structured by income for federal loan applicants. You may be able to defer some or all of your payments. But remember, the payments are not gone, just pushed off. The interest is still applied. The short term gain comes with a long term price.

Private Student Loans

Private lenders offer refinancing as opposed to consolidation. The goal is to reduce your interest rate. if you refinance any loan or loans, get a fixed interest rate.

You can consolidate your student loans by applying for a new loan. The amount should pay off everything you owe, leaving you with one monthly payment.  Again, get the lowest fixed interest rate possible.

Private lenders check your credit, but also consider earning potential. Students in medicine and other high earning fields are considered a good risk.

You will not be eligible for loan forgiveness with a private consolidation.

In Closing

Learning how to consolidate your student loans will help you maintain your credit score and your lifestyle. Make your payments on time and whenever you can, pay a little extra on the principle.

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