June 1999 Bulletin

Loan consolidation may ease burden

Benefits could be convenience, improved cash flow, additional deferments

By Lawrence B. Keller and Paul S. Garrard

Managing a student loan portfolio has become one of the most significant challenges facing physicians today.

The amount of medical school debt is often substantial and consists of numerous loans from various sources. They typically differ in interest rates, terms and deferment options. In addition, while the mean educational debt of medical school graduates continues to climb at approximately 6 percent each year1, the mean housestaff stipend has only increased by 2 percent2. At this rate, how are physicians expected to repay their loans as scheduled?

The recent passage of the Higher Education Act Amendments of 1998 (HEA98) resulted in some fairly significant changes to student loans, specifically regarding loan consolidation. A renewed interest in consolidation also can be attributed to the U.S. Department of Education which recently launched a campaign promoting lower interest rates in the Direct Loan Consolidation Program; the program is in competition with the more traditional consolidation programs offered through banks and other lending institutions.

Why consider consolidation? In general, there are three reasons why you might consolidate your student loans: One, for convenience, because it is often easier to keep track of one loan as opposed to multiple loans, especially if you have more than one loan servicer. Two, for improved cash flow by gaining access to extended repayment. Three, to possibly gain access to additional deferments.

Ask these questions before you consolidate.

What is the interest rate on my new consolidation loan? Is it fixed or variable? If the rate is variable, is there an interest rate cap?

On Oct. 1, 1998, amendments to the Higher Education Act of 1965 changed the interest rate for Direct Consolidation Loans. Consolidation Loan applications received on or after Feb. 1, 1999, will carry a federally mandated fixed interest rate. The interest rate is the average of the interest rates on the loans consolidated, rounded up to the nearest one-eighth of 1 percent, not to exceed 8.25 percent. This rate is not variable and applies for the life of the loan.

How long will it take to consolidate my student loans? What happens to the status of my student loans if they are in grace, deferment, or forbearance while I am applying for my new consolidation loan?

You should be sure to ask your loan servicer this question. In addition, you should continue to make any regularly scheduled payments until your current lender notifies you that your loan has been paid in full. Otherwise, you might be liable for interest charged by the previous lender.

What repayment options are available to me with my new consolidation loan? Do I have access to standard, graduated, income based and extended repayment options?

Most loan consolidation programs offer a wide range of repayment options.

Check with your new loan servicer to be sure which options are available.

What is both the monthly payment amount and the total repayment amount of my new consolidation loan?

You should always run the numbers before considering a repayment option. Remember, you don't necessarily want to choose the option with the lowest monthly payment. Although tempting, it may not be the best course of action. Your loan servicer should be able to help you decide which option might be best for your situation. Additionally, many loan servicers have loan calculators available on their web sites.

May I pay off my consolidation loan early without penalty? How are early payments applied?

You should be able to pay off your loan early without penalty. However, if you make a payment that exceeds the required monthly payment, the prepayment will be applied first to any charges or collection costs, then to outstanding interest and last to principal.

What happens to the grace, deferment, and forbearance provisions of my student loans when I consolidate? Do I lose or gain deferment options?

This is the most complicated piece of the loan consolidation puzzle. When loans are consolidated, all separate loan payments are grouped into one new amount to which a new interest rate and terms are applied. In some cases you may gain the benefit of renewed deferment and forbearance options.

Do I have access to repayment incentives with my new consolidation loan?

If your current loans have repayment incentives or "borrower benefits" attached to them, be careful if you plan to consolidate. These benefits will most likely be lost when your loans are consolidated. The new consolidating lender may offer similar benefits, but don't expect them. These benefits are not offered in the U.S. Department of Education's Direct Loan Consolidation Program.

Who is the servicer of my new consolidation loan? If the lender of my consolidation loan sells it to another lender, will the servicer remain the same?

Ask your lender and they will provide you with this information. Remember, the new consolidating lender may not be the actual loan servicer. Many lenders contract with student loan service organizations to manage their loans and handle billing during repayment. Sallie Mae, however, is an example of a lender who both makes and services consolidation loans.

Do I lose the interest subsidy on my subsidized loans when I consolidate?

With the passage of HEA98, new Federal Consolidation Loans will retain the interest subsidy if there are subsidized loans in the portfolio (except for Federal Perkins and Title VII loans). This has always been the case with the Direct Loan Program. However, remember that your consolidation loan has to be in a deferment period for the subsidy to take effect. There is no subsidy once you enter repayment.

I have a spouse with student loans. What are the implications if we decide to jointly consolidate our individual loans?

Married couples should carefully weigh the decision to combine their loans into one joint consolidation loan. If one spouse dies or becomes disabled, the other spouse is still responsible for payment of the entire loan. When a single borrower dies or becomes disabled, the consolidation loan is discharged. Additionally, the couple agrees to repay the consolidation loan amount regardless of any future change in marital status. Therefore, each spouse may want to consolidate his or her loans separately to minimize risk.

Which of my loans can be consolidated, and which cannot?

The following loans are eligible for consolidation: Guaranteed Student Loan (GSL), Federal Supplemental Loans for Students (SLS), Federal Stafford (Subsidized and Unsubsidized), Federal Perkins, Health Professions Student Loan (HPSL), and Health Education Assistance Loan (HEAL). Basically, all federal loans that do not have a primary care requirement.

Are there any fees or hidden costs when I consolidate?

The answer to this question should be no. However, loan consolidation often means extended repayment, which means additional costs in exchange for lower monthly payments. Therefore, the cash flow relief that you access through loan consolidation is costly in the long run. This is not a hidden cost, but something you should think about.

Loan consolidation is not for everyone. You should consider whether the immediate benefit of lower monthly payments justifies an extended repayment period. This article is not intended to influence you one way or the other. Rather, it is intended to help you make an informed decision and that your choice is the right one for your situation.

Medical student educational loan debt

All schools

Class of 1996 Class of 1997Pct. increase
mean (average)$75,103 $80,4627.1%
median$71,500 $80,00011.9

Public schools

mean (average)$64,275 $69,4038.0
median$65,000 $70,1207.9

Private schools

mean (average)$91,860 $97,6886.4
median$92,000 $100,0008.7

Source: 1996 and 1997 AAMC graduation questionnaires

Additional Resources

Association of American Medical Colleges (AAMC), (202) 828-0400 or www.aamc.org/

U.S. Department of Education Loan Consolidation Network, (800) 557-7392 or www.ed.gov/directloan.

Student Loan Marketing Association (SallieMae), (800) 522-1245 or www.salliemae.com.

MONEYMATTERS, the AAMC-sponsored debt management listserv for residents and GME staff. Contact Paul S. Garrard, AAMC, at pgarrard@aamc.org.

"The Layman's Guide to Educational Debt Management for Residents and GME Staff," available at laymansguide.

Debt Management Workshops available for residents and GME staff on the AAMC's web site. Contact Paul S. Garrard, AAMC, at pgarrard@aamc.org.


  1. 1998 AAMC Graduation Questionnaire.
  2. COTH Survey of Housestaff Stipends, Benefits and Funding 1998, AAMC Council of Teaching Hospitals and Health Systems.

Lawrence B. Keller is founder of Physician Financial Services, a New York City-based firm specializing in insurance, investments, and financial services for physicians. Paul S. Garrard is director of Student Financial Services for the Association of American Medical Colleges. He can be reached by e-mail at pgarrard@aamc.org.

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