Consolidation dilemma

[Rocher]

---

Members do not see this ad.

I just graduated med school and met with our financial aid office, and they seem pretty adamant about us consolidating our student loans. I have about 280k, all direct except for 10k. I have interest rates ranging from 5.41-7.9%, with a weighted average of around 6.25%. According to the .gov student loan site, my consolidated interest rate will be 6.375% (rounded up to the nearest 0.125%), so why would they urge me to consolidate?

i see the benefit of consolidating my 10k in stafford loans to make them PSLF and IBR eligible, but what benefit would there be to consolidating the rest of them? That rounded up consolidated interest rate adds up to quite a bit of money in the long run, and consolidating would prevent me from paying off my higher interest rate loans first.

I just want to make sure I'm not missing something.

 

[RangerBob]

The only benefits that I'm aware of when consolidating federal loans with a federal consolidation loans are:

1) All your loans will now be with the same servicer, so you have only one monthly payment (all my loans were with the same servicer anyway, so I only had one payment...)
2) Simplicity--you just have one big loan now instead of lots of small ones. (Though a big loan is quite scary, and studies show people pay off their student debt quicker by paying off small loans first. The smarter thing to do is pay off higher-interest rate loans first, but most people aren't disciplined enough and in the end benefit from the "snowball effect" of paying of the smaller loans, feeling like they're making progress, etc.
3) You can bring non-direct loans into the direct loan program, so that they can be eligible for PSLF, PAYE (non-direct loans will already be eligible for IBR)

The drawbacks are:
1) Your interest rate actually goes up (gets rounded up as you mention). Unlike private consolidation loans, the federal consolidation loan doesn't let you consolidate at today's rates--it just takes a weighted average, rounded up
2) You have a new loan, so any prior payments towards PAYE/IBR/PSLF are not tossed away and you start over
3) Your interest will basically capitalize since all that accrued interest will now be part of the principle of the consolidation loan (note: your interest capitalizes at the end of your grace period anyway, so this is really a moot point if you're a recent grad, and could technically help you if you consolidate right when you graduate since it'll save you from those extra six month's worth of interest accrual before capitalization)
4) You lose the ability to selectively pay off higher interest rate loans first. Why pay off your 5.5% loan first when you could pay off that one near 8%?

I took out a consolidation loan, which unfortunately included consolidating a non-direct GradPlus loan (8.5%) with my stafford loans (sub/unsub). I did this because my MS1 loans were not direct loans, and I wanted to bring them into the direct loan program so they could be eligible for PSLF, if it sticks around. I figured it was worth it. I only consolidated those loans--my MS2-4 loans were all direct loans so I didn't include them.

I personally would not have consolidated my loans for any other reason. I have no idea why your financial aid office is telling you to consolidate--my financial aid director was very adamant about NOT consolidating with the exception of bringing your non-direct loans into the direct loan program, for the sole purposes of benefiting from PSLF or the revised IBR program (PAYE).

Now, if you're talking about private consolidation loans (DRB has a new program for residents), you could actually benefit from a much lower interest rate, but then you also lose all federal loan benefits (IBR, PSLF, etc.), so that isn't a program worth looking into until you know if you will be aiming for PSLF.

 

[Rocher]

The only benefits that I'm aware of when consolidating federal loans with a federal consolidation loans are:

1) All your loans will now be with the same servicer, so you have only one monthly payment (all my loans were with the same servicer anyway, so I only had one payment...)
2) Simplicity--you just have one big loan now instead of lots of small ones. (Though a big loan is quite scary, and studies show people pay off their student debt quicker by paying off small loans first. The smarter thing to do is pay off higher-interest rate loans first, but most people aren't disciplined enough and in the end benefit from the "snowball effect" of paying of the smaller loans, feeling like they're making progress, etc.
3) You can bring non-direct loans into the direct loan program, so that they can be eligible for PSLF, PAYE (non-direct loans will already be eligible for IBR)

The drawbacks are:
1) Your interest rate actually goes up (gets rounded up as you mention). Unlike private consolidation loans, the federal consolidation loan doesn't let you consolidate at today's rates--it just takes a weighted average, rounded up
2) You have a new loan, so any prior payments towards PAYE/IBR/PSLF are not tossed away and you start over
3) Your interest will basically capitalize since all that accrued interest will now be part of the principle of the consolidation loan (note: your interest capitalizes at the end of your grace period anyway, so this is really a moot point if you're a recent grad, and could technically help you if you consolidate right when you graduate since it'll save you from those extra six month's worth of interest accrual before capitalization)
4) You lose the ability to selectively pay off higher interest rate loans first. Why pay off your 5.5% loan first when you could pay off that one near 8%?

I took out a consolidation loan, which unfortunately included consolidating a non-direct GradPlus loan (8.5%) with my stafford loans (sub/unsub). I did this because my MS1 loans were not direct loans, and I wanted to bring them into the direct loan program so they could be eligible for PSLF, if it sticks around. I figured it was worth it. I only consolidated those loans--my MS2-4 loans were all direct loans so I didn't include them.

I personally would not have consolidated my loans for any other reason. I have no idea why your financial aid office is telling you to consolidate--my financial aid director was very adamant about NOT consolidating with the exception of bringing your non-direct loans into the direct loan program, for the sole purposes of benefiting from PSLF or the revised IBR program (PAYE).

Now, if you're talking about private consolidation loans (DRB has a new program for residents), you could actually benefit from a much lower interest rate, but then you also lose all federal loan benefits (IBR, PSLF, etc.), so that isn't a program worth looking into until you know if you will be aiming for PSLF.

Thanks, that's what I was thinking. Unfortunately our financial aid office has been feeding many of us misinformation, claiming that consolidation will allow those with pre-2007 loans to be eligible for PAYE. I'm going to bring this up to the school.

 

[RangerBob]

Thanks, that's what I was thinking. Unfortunately our financial aid office has been feeding many of us misinformation, claiming that consolidation will allow those with pre-2007 loans to be eligible for PAYE. I'm going to bring this up to the school.

I looked into that myself--I think they (your financial aid office) are thinking it'll wipe out those pre-2007 loans, but the problem is if you still had those pre-2007 as of Oct 1, 2007, then it doesn't matter if you pay them off/consolidate them now. I consolidated my only pre-2007 loan (a whopping $6,500 loan) with my MS1 loans so they'd all be direct loans, and I'm still not eligible for PAYE.

The loan is gone, but regardless of that, I still had it as of that arbitrary date. So I'm stuck with IBR (which isn't that bad--but PAYE would certainly be nicer) all because I had that one small loan.

Honestly, unless something has changed, the financial aid staff should really know all of this... It's right there in the eligibility criteria.

If I'm not mistaken, Obama did extend/revise PAYE, which will take effect this December (at the earliest). My understanding is the details of eligibility are still being worked on, but that it would extend the program to most borrowers that weren't previously eligible for PAYE. But it's a revised PAYE, not an expansion of the original PAYE, so while I think the payment is 10% (good), for larger borrowers (ie., any medical student), the loan forgiveness period is 25 years (like IBR).

 

[Rocher]

I looked into that myself--I think they (your financial aid office) are thinking it'll wipe out those pre-2007 loans, but the problem is if you still had those pre-2007 as of Oct 1, 2007, then it doesn't matter if you pay them off/consolidate them now. I consolidated my only pre-2007 loan (a whopping $6,500 loan) with my MS1 loans so they'd all be direct loans, and I'm still not eligible for PAYE.

The loan is gone, but regardless of that, I still had it as of that arbitrary date. So I'm stuck with IBR (which isn't that bad--but PAYE would certainly be nicer) all because I had that one small loan.

Honestly, unless something has changed, the financial aid staff should really know all of this... It's right there in the eligibility criteria.

If I'm not mistaken, Obama did extend/revise PAYE, which will take effect this December (at the earliest). My understanding is the details of eligibility are still being worked on, but that it would extend the program to most borrowers that weren't previously eligible for PAYE. But it's a revised PAYE, not an expansion of the original PAYE, so while I think the payment is 10% (good), for larger borrowers (ie., any medical student), the loan forgiveness period is 25 years (like IBR).

Another thing about the REPAYE is that the department of ed has apparently said that those students that enroll in it will be subject to the $57500 cap on PSLF, whereas those already on the old PAYE or IBR will be grandfathered. While I know that could be changed in a heartbeat I think sticking with IBR may be the best idea.

http://educatedrisk.org/analysis/ed...oposals-combined-incomes-pslf-caps-paye-terms