Navigating Student Loan Debt: Take Stock of Your Options and Be a Savvy Borrower

Vol. 39 No. 3

By

Donna Gerson speaks at law schools and writes on legal career issues, including small firm hiring strategies, networking skills, and business etiquette. She is the author of numerous books, including Choosing Small, Choosing Smart.

When Greg Zbylut, a 2005 graduate of Loyola University of Chicago School of Law, decided to become a lawyer, he never imagined that he would owe more than $150,000 in student loans and be scrambling for work as a solo practitioner in Los Angeles. With 15 years’ experience as a certified public accountant, Zbylut now finds himself questioning his decision to earn a law degree.

Zbylut is not alone. Not taking into account undergraduate loans, the average student loan debt for law graduates is $100,000. “Law students represent a very particular set of students,” says Justin Draeger, president and CEO of the National Association of Student Financial Aid Administrators (NASFAA). “By definition, they do not have access to the federal grants that undergraduates do. As a result, they are faced with a disproportionate amount of student loan debt.”

With a stagnant economy, skyrocketing law school tuition, and uncertainty in all sectors of the legal market, the burden of student loan debt is crippling a generation of law school graduates.

The Great Recession has proven to be a game-changer for both lawyers and law students, particularly those who have incurred large amounts of debt in the process of earning their JD degrees. Those who have undertaken debt burdens that are far out of proportion to their actual income are adrift and struggling. What can law students do to stem the tide?

The Great Recession’s Impact on Hiring

Job prospects are shakier than ever for new graduates. The findings accompanying the class of 2009 employment data compiled by NALP, a national association for legal professionals, report that “the
employment rate for new law school graduates has fallen nearly four percentage points in two years, marking the impact of the recession on the legal employment market.”

Many large law firms deferred incoming first-year associates and that decision is having ripple effects. At nearly every law school, the number of on-campus employers has either dropped significantly or stagnated. Government agencies are hiring fewer entry-level lawyers and the competition is tough. Small and mid-sized firms, not immune to the recession, are struggling.

David Crosson illustrates today’s growing trend of deeply indebted lawyers. Crosson, a 2007 graduate of Ohio Northern University College of Law, grew up in Palmyra, Pennsylvania, in a family with limited means. His combined student loan debt from both college and law school is $180,000.

In November 2007, Crosson began working for a Philadelphia law firm earning $50,000 as an associate. He found the position using alumni connections he made through his career services office. As his student loans became due, Crosson began paying $1,000 per month. With the economy in a freefall, Crosson was let go from his associate position in October 2008 and couldn’t find a job. While he was on unemployment for 16 months, Crosson started deferring federal loans and requesting forbearance on his private loans.

In February 2010, Crosson started his own practice focusing on family law along with some criminal defense and trusts and estates work. He is still struggling to bring in enough money to repay his loans, as well as to pay for his living expenses. “The debt makes everything difficult,” he explains. “Everything I do is a risk––do I go out for lunch? Can I have a beer? I recently got engaged and had to figure out how to buy an engagement ring for my fiancée. I am trying to be extremely frugal with my money since I’ve had to start paying the debt back. Loans basically take over your life, no matter what you try to tell yourself. The thought of ‘how am I going to make this month’s payment?’ is always in the back of your mind.”

Rising Tuition Costs

While job prospects remain bleak, the cost of a law degree has continued to skyrocket. During the past 25 years, the cost of a law school education has increased well beyond the rate of inflation. In 1988, the median tuition for a state resident to attend a state school was $2,267. If you adjust that figure for inflation, in the year 2008 the in-state tuition cost would be $4,126. In reality, the actual 2008 tuition figure for in-state tuition was $15,621. In 1988, private school tuition was $9,577. If you adjust that figure for inflation, in 2008 the figure would be $17,430. In actuality, the median private school tuition in 2008 was $33,985.

What is driving the staggering increase in law school tuition? There are several reasons, including the increasing cost to maintain and expand school facilities, the costs related to hiring and retaining professors, and the cost of providing financial aid to the neediest students. State law schools have seen financial support cut by both state legislatures and parent universities and must raise tuition to cover the funding gap. Regardless of rationale, the fact remains that law school tuition has outpaced inflation.

Twenty years ago, it was possible to save for law school tuition, earn money between semesters to help pay tuition, defray day-to-day expenses, and look to full-time employment as a way to repay loans quickly. Night school offered the option of paying tuition by working full time during the day. Today, high tuition costs all but necessitate debt financing to earn a law degree. As a result, the debt load is creating a generation of wage slaves with fewer job prospects than ever before.

Employment Data

Jeffrey Taylor, a 2008 graduate of Oklahoma City University School of Law, runs his own solo practice, Absolute Legal Services, LLC. Taylor graduated with $140,000 in student loan debt and is currently deferring repayment until his practice turns a profit that will enable him to repay his debts. Married with three small children, Taylor grossed about $50,000 last year and brought home between $25,000 and $30,000. He cannot afford the monthly loan repayment bills that would run between $800 and $900 a month.

“I like what I’m doing,” says Taylor. “I like being an attorney and helping the people that I do. I wish there were more opportunities to hear about what life was like after law school. You hear about people making a lot of money, but the reality is that most of my classmates are working in small or mid-size firms and making much less money than we thought we’d make.”

The impact of student loan debt is being felt not only by law students and graduates, but also by law school faculty. Professor Brian Tamanaha of Washington University School of Law in St. Louis recently published a blog entry entitled “Wake Up, Fellow Law Professors, to the Casualties of Our Enterprise” (http://balkin.blogspot.com/2010/06/wake-up-fellow-law-professors-to.html). In that blog entry, Tamanaha describes the litany of complaints from law students and recent graduates and observes that “something is deeply wrong with law schools.” The crux of law students’ grievances is “that non-elite law schools are selling a fraudulent bill of goods. Law schools advertise deceptively high rates of employment and misleading income figures.”

Are law schools advertising false or misleading information? Some law students and recent graduates claim that they would not have attended law school had they known all the facts regarding salaries and hiring. Law School Transparency (www.lawschooltransparency.com), a newly incorporated Tennessee nonprofit corporation started by two Vanderbilt University Law School students, recently issued a request to all ABA-approved law schools to submit detailed statistics regarding hiring data. Whether or not law schools comply with Law School Transparency’s request is uncertain and to what end that data might be helpful to potential or current law students remains unclear.

In truth, aggregate employment data has been readily available for years through both individual law schools and NALP. Whether or not law school applicants read and understand the data as it relates to their investment in law school is a matter for speculation. Can law schools ever provide perfect employment data? And would that data be understood by the consumers of legal education or, instead, be viewed with rosy optimism as it was by generations of law students before them? The employment statistics list high, low, and median salaries. According to NALP, salary ranges for the class of 2009 range from a low of $40,000–65,000 to a high of $160,000.

Some students see these numbers and assume that they will be at the high end of the salary curve, not at the middle, and certainly not at the low end. “I thought I would work for a big law firm,” admits Zbylut. “You see what they are making compared to what I earned as an accountant, and I thought I’d be making somewhere between $100,000 and $125,000 at graduation.”

Crosson, the Ohio Northern law graduate, was similarly optimistic about his earning capacity as a new lawyer. “I thought I was going to make a lot of money. Seeing all the big firms paying big salaries, I thought, ‘hey, I can get in on this. I’m smart enough, I’m talented enough. . . .’”       

Public Interest Lawyers Feel the Pinch

Law students pursuing careers in public interest law, including careers in federal, state, and local government, feel the pinch of student loan debt most acutely. The 2010 Public Sector and Public Interest Attorney Salary Report published by NALP reports that the national median starting salary for civil legal services lawyers is $42,000. The national median starting salary for public defenders is $45,700. The national median starting salary for local prosecutors is $50,000.

“If you really want to be a public interest lawyer, then you must ‘take ownership’ of your borrowing and spending,” notes Steve Grumm, director of Public Service Initiatives at NALP. Grumm focuses on recruitment, retention, and professional development issues affecting public interest and public sector attorneys, as well as on aiding law students who pursue public interest careers. Before joining NALP, Grumm worked as a lawyer with the Philadelphia LawWorks project, a community economic development initiative sponsored by the Philadelphia Bar Association.

As a former public interest lawyer, Grumm sees the value of student loans as a means to pursue a legal career but cautions students to understand the risks and rewards. “Borrowing money to earn a law degree is a significant investment. For those pursuing public interest careers, the return on investment is not primarily monetary since salaries are generally lower relative to law firm salaries. However, the rewards in terms of carving out a pathway to pursue social justice or to serve in government are tremendous and, based on my personal experience, worth the investment.”

Take Control of Debt

Law students can take an active role in lessening the burden of student loan debt through education and careful financial planning. “First-year students need to make a specific calculation about cost and opportunity in ways that might not have been necessary before, when tuition was not prohibitively expensive, but are now smart and essential,” explains Tamanaha of Washington University School
of Law.

Think strategically about the long-term implications of those student loan notes on your future choices. Grumm shares his personal experience: “I vividly remember sitting in my apartment before my 1L year and just signing off on my promissory note thinking, ‘I’m going to law school and that’s that.’ I didn’t read the fine print. My advice to law students is, first, to borrow as little as possible. More importantly, it’s never too late to become financially literate. Talk to your financial aid office, talk to your career services office, and if there’s a dedicated public interest advisor there, then reach out and talk to them. There’s overlap, but each staff professional has information to help you. . . . Students will find solutions only when they identify potential hurdles in their career paths. Take it from me: Ignoring debt is a luxury that disappears quite quickly.”

Learn to live frugally during law school. Stephen Brown, assistant dean of enrollment services at Fordham University School of Law and an expert in law school financial aid matters, advises law students to “live like a student while you’re in law school or you’ll live like a law student when you’re a lawyer.”

Careful budgeting now can make a big difference later. “Keep track of your spending,” suggests Brown. “The daily coffee and bagel breakfast is an expensive habit. Learn to cook. Get a roommate. These things reduce some amount of debt, but the biggest cost will be tuition.” Fill out the budget worksheet on page 16 to gain a better understanding of what you can and can’t afford.

Loan calculators can help determine monthly costs and enable you to plan for life after law school. Try www.edfed.com/resources/calculators.php as an example of the many loan calculators on the Internet. In addition, seek your school’s financial aid administrator’s guidance. NASFAA’s Draeger  advises a pragmatic approach: “There’s an assumption that all lawyers earn six-figure salaries. Law students need to be honest with themselves about what their earning potential will be. In addition, law schools need to be transparent about statistics. The job of aid administrators is to give law students the information they need to make informed choices and help counsel them through the process.” (See the sidebar for a checklist of actions you can take to control your debt.)

Loan Repayment Options

Today there are more options than ever to make student loan debt more affordable. In July 2009, the College Cost Reduction and Access Act established income-based repayment (IBR). IBR enables law school graduates to repay their student loan obligations based upon income and family size (see www.ibrinfo.org or www.studentloans.gov).

Using a formula and taking into account whether you work in the private or the public sector, IBR enables law graduates to repay their loans without undue hardship. For example, a graduate earning $40,000 per year would repay $300 a month; as income rises over time, the monthly payments would track the increase in salary. For public interest lawyers, including lawyers working for government agencies, most loan obligations are forgiven after 10 years of full-time employment. For other borrowers, if you repay under the IBR plan for 25 years and meet certain other requirements, any remaining balance will be cancelled.

Heather Jarvis, senior program manager for Equal Justice Works in Washington, D.C., observes that, “IBR is a very good option for a lot of law students. It keeps payments affordable and encourages borrowers to pay more when they’re financially able.”

Equal Justice Works (http://www.equaljusticeworks.org), a nonprofit organization, helps law students break down financial barriers to public service careers. Jarvis identifies other resources beyond IBR, including the Civil Legal Assistance Attorney Student Loan Repayment Program (CLAAP), which offers repayment assistance for civil legal aid lawyers. In addition, the John R. Justice Student Loan Repayment Program (JRJ) provides loan assistance for state and federal public defenders and state prosecutors who agree to remain employed as public defenders and prosecutors for at least three years.

According to Equal Justice Works, more than 100 law schools now offer loan repayment assistance programs (LRAPs). LRAPs provide loan repayment or forgiveness, lower interest rates on loans, or postponed payment of law school loans to graduates entering specific types of employment––usually public interest jobs or government work. Keep in mind, however, that not all law school LRAPs are created equal and thus they vary in funding and terms. Still, “law school based LRAPs are a very important part of the student debt relief picture, but students ought not expect that their law school LRAP is all they need,” remarks Jarvis of Equal Justice Works. “LRAPs do help, but law students cannot expect to rely wholly on them.”

According to Grumm of NALP, other LRAP sources beyond law school programs include federal and state government agencies and some public interest employers as well. For example, the U.S. Department of Justice offers its own LRAP option for employees. 

Advice for the Future

Law school is an investment with risky returns, particularly in light of today’s legal market. Anyone attending law school should know that both legal hiring and the economy are in a prolonged slump. As a result, that JD degree may have much less earning potential than previously expected, and the temptation to finance your legal education with thousands of dollars in student loans may not offer a high return on investment.

Should student loan debt discourage you from becoming a lawyer? If you choose law school for the right reasons and understand the bargain you are striking, then law school can enable you to have a fulfilling
career. Certainly, the need for public advocates, particularly for the poorest citizens, has not abated. However, if law school was a default choice that is driving you into debt, then think hard about your long-term professional goals.

Should you drop out of law school after the first-year? Taking into account the strain of accumulated debt, the uncertain job market, and the prospect of years of repayment, one option that is rarely discussed but ought to be raised is this: Should you simply cut your losses and leave law school altogether? According to Professor Tamanaha, it’s not an irrational move. “Students who do poorly in the first year must recognize that their chances to land their dream job have diminished significantly; indeed, they might be faced with the real prospect of getting no legal employment, going solo, or ending up as a legal temp earning $20 an hour with no benefits. Students in this situation must decide whether paying two additional years of tuition for these uncertain returns is worth it.”

“These days, it’s important to be educated about your financial obligations and have realistic expectations about the job market,” observes Brown of Fordham University. “If you’re contemplating law school, make sure law school is the right decision for you. Twenty-five years ago, law school was a great option for recent graduates who didn’t know what they wanted to do. . . . However, these days law school tuition is high and the legal market has changed. Make sure you’re committed to this on both the financial and emotional side. The belief is that all lawyers are rich and famous––that’s not true.”

Crosson, the struggling solo practitioner, advises law students to be pragmatic about the realities of the job market and to borrow money carefully. “Don’t sell yourself short, but be realistic about things,” says Crosson. “Don’t take out those extra loans if you don’t need them. Get a job during second and third year to offset costs that you’ll be facing especially right after graduation and the bar exam. Be smart about your money, smarter than I was.”

Law students can become smart borrowers through careful budgeting and education. It’s never too late, particularly with new loan repayment options. Be realistic about your job prospects and learn what most law students earn following graduation. Plan ahead and live as frugally as possible during law school. By taking control now, you can look forward to focusing on your clients, not your student loans.

A Checklist for Graduating Law Students with Student Loans

  • Make a complete list of all the loans you have. Not doing it won’t make them go away. Start with www.nslds.ed.gov to find all your federal loans, then check with your financial aid office or review your credit report www.annualcreditreport.com to track down your private loans. Update your contact information with all these lenders.
  • Accept the fact that no one cares about your student loans as much as you do. No one will hand you a personalized repayment plan or a neat package of organized information about your loans. Read everything you get in the mail and ask questions until it makes sense.
  • Decide whether it makes sense to consolidate your federal student loans. Direct Consolidation Loans are available from the Department of Education, and it might be easier to have all your loans in one place. Learn about the pros and cons of consolidation at www.studentloanborrowerassistance.org.
  • Understand which repayment plan is best for you and ask for it. You’re going to have to take action to get into the right repayment plan. The faster you repay the less interest you’ll pay. But if your income is low compared to your debt load, consider the benefits of income-based repayment (IBR). IBR is a great option while you’re looking for work. Visit www.ibrinfo.org.
  • If you end up working for the government or a nonprofit, take action to qualify for public service loan forgiveness. You can earn loan forgiveness by making the right kind of payments on the right kind of loans while working in the right kind of job. But there is nothing automatic about it.

Checklist compiled by Heather Jarvis, senior program manager for Equal Justice Works. Equal Justice Works provides free, online resources and information about student loans and debt-relief programs, including downloadable checklists, podcasts, and an interactive forum.

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