Veterinary school is so expensive that the vast majority of students (and their families) lack the financial means to pay cash for it. As a result, 83% of DVM students graduated with debt in 2023 and carried an average balance of $185,486, according to the American Veterinary Medical Association. That’s a significant liability to possess early in a veterinary career and one that borrowers should plan for carefully.

Given the prevalence of student loans, some of the most common questions we get on the topic are:

• How can I best navigate my student loans?
• Is consolidating my loans worth it?

As with everything related to money and personal finances, the answer always depends on your circumstances, but here are a few things to consider if you’re weighing the pros and cons of loan consolidation.

Consolidation Is Best When Simplicity Is the Goal

The most common reason for student loan consolidation is simplicity. Instead of having multiple loans, each with different interest rates and amounts owed, consolidating them into one can simplify the monthly payments. If interest rates are lower now than when you took out the loans or started paying them back, you can consider consolidating or refinancing them to save on interest charges.

What Types of Loans Do You Have?

Many veterinarians graduate with a mix of federal and private loans. Note that you cannot consolidate private and federal loans into one federal loan, but you can turn federal loans into a private bank loan. But is that tactic a good idea? Oftentimes not, primarily because the interest rate a bank charges is almost always higher than what the federal government levies.

Federal loans contain benefits that private loans don’t always provide, such as postponement options, various repayment programs and loan forgiveness. If you are permanently disabled, you may have your loans discharged. Also, if the worst happens and you die, the government will cancel your federal loans and not transfer them to another person. In contrast, private loans are not necessarily canceled or discharged in those situations, so the balances might become the responsibility of a spouse or co-signer.

If you have multiple federal and private loans, consolidating them into their own corners can be a great alternative. Why? You can simplify the loan payments and possibly lower your private loan interest rates by moving from one bank to another.

When consolidating federal loans, you might lower your monthly payments but at the expense of a longer repayment period. The government loaned you money to pursue an education but wants its money back with interest. When you consolidate multiple federal loans into one, the newly applied interest rate is the weighted average of all the loans you are consolidating.

Here’s a simple example. Let’s say you owe $100,000 from three federal student loans.

• Loan A: $25,000 at 5% interest
• Loan B: $40,000 at 6% interest
• Loan C: $35,000 at 7% interest

If you consolidate these loans, your new interest rate would be 6.1%, which is lower than the 7% loan and higher than the smaller 5% loan. So you win, right? Not exactly.

Now that you consolidated three loans into one, the repayment period went from 10 years to 20 years in this case. While your new monthly payment ended up being slightly lower than what the three loans charged collectively, the 10 extra years increased the total interest paid over the loan’s lifetime. Whenever possible, try not to add years to the repayment period.

Our example is illustrative and in no way guarantees that an extended payment period will happen if you consolidate student loans.

No More Consolidation Loophole

Before May 2024, loan consolidation was an excellent idea for veterinarians looking to qualify for public student loan forgiveness or income-driven repayment forgiveness. They could consolidate multiple loans with different payment histories, take advantage of the longest payment history and apply it to all the loans. Borrowers commonly used this strategy to reduce the total interest paid and have their loans forgiven more quickly.

The loophole is now closed. If you have loans on an income-driven repayment plan and are making payments, consolidation would reset the repayment period clock to zero. That could be incredibly costly in terms of time and dollars if you hope or plan for loan forgiveness.

Unpaid Interest Can Be a Gotcha

This one may come as a surprise. If you have unpaid interest charges and consolidate the student loan with another, the interest capitalizes, meaning it shifts from interest on the current loan to principal in the newly consolidated loan. That rule forces you now to pay interest on a higher principal balance than before.

Consolidation Doesn’t Fix the Problem

Student loan consolidation can make monthly payments more straightforward, but it’s not a magic button that makes the loans disappear. Many pitfalls can extend repayment periods, delay loan forgiveness or increase the cost of paying off the original loans. Please do your research before opting for consolidation. 

Debt consolidation alone doesn’t pay down loans any faster. And remember that student loan debt might not be your only financial obligation now or in the future.

We often see clients with student loans, vehicle loans, mortgage debt and more. You need a plan to attack all your debt systematically. A strategy called the debt snowball focuses on paying off the debt with the highest interest rate first, while making minimum payments on the rest. Focus any extra money in your monthly budget to pay down the one loan as soon as you can. Then, once you satisfy the loan, use the extra monthly cash flow to pay toward the next debt. Try to pay off everything as fast as you can.

Student loans can be complicated, stressful and frustrating. Contact a fiduciary adviser for help managing your student loan situation. You don’t have to navigate the journey alone

DID YOU KNOW?

Borrowers may consolidate federal student loans into a U.S. Department of Education Direct Consolidation Loan. Learn more about the program at bit.ly/3Fs3edD.