Solve the Current Consolidation Debate

Physician's Money Digest, November15 2003, Volume 10, Issue 21

According to the AMA, the average debt for medical school graduates in 2002 was almost $104,000. Most residents and young physicians ponder whether it's a good idea to consolidate their student loan debt. Before you decide loan consolidation is right for you, it's a good idea to review the basics.

Consolidating Basics

When you consolidate your student loans, a consolidating lender issues a new loan, which combines all of your individual loans into 1 loan. The primary reason most people consolidate their student loans is to lower their monthly payments.

When loan consolidation occurs, a new interest rate is issued with the new loan. The new fixed rate is determined by taking the weighted average of the loans you're consolidating and then rounding upward to the nearest 1/8 of a percent. The new rate on the loan is a fixed rate, not a flexible rate.

When it comes to the length of the repayment period, the consolidating lender must take into account your entire education debt, not just loans eligible for consolidation. You and the lender have no choice in choosing the length of your new loan. The chart lists the length formula. Of course, you can always pay off the loan early.

The loan consolidation process is regulated, which means all consolidation companies must follow the same rules. Some companies will offer small incentives from time to time. For the most part, however, loan consolidation companies are all the same.

Relevant Considerations

So, how do you decide whether or not to consolidate your student loans? You need to ask yourself 2 questions when making this important decision: Are you committed to being debt-free in 5 years and are you financially disciplined to make the extra payments each month to be debt-free in 5 years?

If you answered "yes" to both of these questions, then you should probably consider consolidating your loans and paying substantially more each month toward the principal. Paying off a student loan in 5 years is hard, but the sooner you pay it off, the sooner you can start building wealth and stop paying interest (on a 30-year loan you can pay as much as $98,000 in interest).

On the other hand, if you answered "no" to either of the 2 questions, then you should probably postpone consolidating your loans at this time. If you don't consolidate your loans, at least you will be debt-free in 10 years. Better to not consolidate and be debt-free in 10 years than to consolidate and pay minimums for 30 years.

Of course, before you make any concrete decisions, you should seek the advice of a financial planner or a consolidation expert. They will be able to examine your options and help you decide what is best for you. Loan consolidation can be a great help to some people, but it is not for everyone. Make sure you have the facts relevant to your finances before you consolidate.

Brock Barnes, CFP®, founder of Strategic Wealth Management, provides fee-based financial and investment advice to young physicians across the United States. He welcomes questions or comments at 806-793-2584.