Getting a Grip on Your Student Debt

Vol. 41 No. 3

By

Heather Jarvis is an attorney providing educational resources and training for student loan borrowers and is the founder of askheatherjarvis.com.

A legal education represents a major investment of time and money. Increasing costs and declining salaries mean the “return on investment” of a law degree is not what it was. You can’t change the fact that law school is expensive, but the steps that follow will help you lessen your student loan burden and effectively manage the cost.

Consider the Complete Costs of Earning a Law Degree
American Bar Association (ABA) data indicate that law school tuition increased 317 percent from 1989 to 2009 and continues to rise. In 2011, in-state tuition at public law schools averaged $22,116 per year. Private law school tuition averaged $39,184 per year. Indirect costs include additional university fees, room and board, health insurance, and books. The stated “cost of attendance” at the most expensive law schools is nearing $80,000 per year.

While some students do find ways to spend less than the official “cost of attendance,” according to ABA data a typical law student borrows a total of $75,728 to attend a public law school, or $124,950 to attend a private one. Two-thirds of undergraduates graduate with debt, owing an average of $24,500 in loans for their education. It’s also not uncommon for law students to have additional debt from credit cards or consumer loans.

Realistically Estimate Your Future Earnings
Data from NALP (the Association for Legal Career Professionals) indicate a shift away from large law firm employment is reflected in lower average salaries, with starting salaries in private practice falling 20 percent. With the exception of large law firm salaries around $145,000 to $160,000, attorney starting salaries tend to cluster around the $40,000 to $65,000 range. Government and public interest job median starting salaries remain stagnant—$52,000 for government jobs and $42,900 for public interest jobs.

Decide For Yourself How Much You Will Borrow
Experts say your total debt should be less than your expected starting salary, but typical law students borrow significantly more. To minimize how much you borrow, develop a detailed budget that accounts for all the costs of earning a law degree. Think about which expenses you can control. Remember that every dollar you spend while you’re in school will be repaid with your future income. Look for used books, live with roommates, buy only what you need.

Choose Federal Student Loans over Private Student Loans
Law students borrowing to finance education should look first to federal student loans: Stafford Loans, GradPLUS loans, and Perkins Loans (if available). Federal student loans have fixed interest rates—6.8 percent for Stafford Loans and 7.9 percent for GradPLUS loans. These federal student loans come with important borrower protections and flexible repayment provisions.

Private student loans present significant risks to student borrowers and are typically more expensive than federal loans. Private student loan interest rates are usually variable and will almost certainly go up over time. Private loans lack the flexible repayment options, discharge, and forgiveness provisions of federal student loans. Note that federal guidelines do not allow students to borrow federal student loans for post-graduate bar review courses.  For this reason, many law students borrow a private student loan to pay for a bar review course and to cover living expenses during bar study. Minimize your borrowing of that bar study loan; it isn’t just more debt, it’s likely more expensive debt.

Remember That it Costs Money to Borrow Money
Graduate and professional students are no longer eligible to receive subsidized loans so you’ll be responsible for all the interest on your student loans. Interest starts accruing on most student loans as soon as you get them, and interest keeps accruing until you have finished paying off the loan. If you don’t pay the interest while you are in school, it will be capitalized, or added to the principal of the loan. That gets expensive fast. Unpaid interest can increase your loan balance by 15 to 20 percent by the time you graduate, and then you end up paying interest on interest. You can significantly lower the cost of your loans if you are able to pay the interest while you are in school. The longer it takes you to repay your loans, the more you will pay over time.

Know When You Must Start Making Payments on Your Loans
The US Department of Education contracts with several different loan “servicers” to handle billing. When you graduate, your loan servicer will send you information about repayment, and you’ll be told when you must start making payments.

Student loans have grace periods—a period after leaving school before you have to start making payments—of usually six months. GradPLUS loans technically have no grace period but are routinely deferred for six months after graduation. But remember, interest is accruing during your grace period.

Understand Your Repayment Options
You have choices to make about how you will repay your loans. Your monthly payment and your total cost over time will depend not only on how much money you borrowed and the interest rate of your loan, but also on the repayment plan you choose.

Repayment Plans
There are lots of “repayment plans” for you to choose from, some better than others. In general, you should repay your loans as quickly as you can afford to. You’ll need to tell your loan servicer which repayment plan you’d like to choose. Unfortunately, choosing a repayment plan can be confusing, so take some time to fully understand the trade-offs between the different options.

The Department of Education provides information and calculators regarding the various repayment options online at studentaid.ed.gov/repay-loans.

Standard Repayment. If you don’t choose a repayment plan within 45 days of being notified, your loan servicer will automatically put you into a “standard” repayment plan. Standard repayment (for a loan that isn’t consolidated) means that you’ll pay equal monthly payments over a10-year period. Monthly payments will be high, but because you’ll pay off your loan quickly, you will pay less interest. If you consolidate your loans, the standard repayment term can be as long as 30 years. A 30-year repayment term will result in lower monthly payments but much higher interest charges over time. If you need low monthly payments, consider the income-driven repayment options before choosing a long-term repayment plan.

Income-Driven Repayment Options. If your debt is relatively high as compared to your income (which is the case for many recent law graduates), the income-driven repayment plans provide significant advantages. Monthly payments are established as a percentage of income so that when you don’t earn a lot, your payments are low. Direct Loans will offer three income-driven repayment options, but not every option will be available for every borrower.

The federal “Pay As You Earn” (PAYE) program (also known as ICR-A) will be available for those who (1) got their first student loan on or after October 1, 2007, and (2) got a student loan on or after October 1, 2011 (one loan can count for both requirements). Under PAYE, annual payments are capped at 10 percent of “discretionary income” and any remaining loan balance is forgiven after 20 years of qualifying payments.

Income-Based Repayment (IBR) is available for those who got their first student loan before October 1, 2007. Under IBR, annual payments are capped at 15 percent of “discretionary income” and any remaining loan balance is forgiven after 25 years of qualifying payments.

Borrowers with subsidized loans in IBR or PAYE benefit—because unpaid accrued interest is subsidized for the first three years in repayment.

Also, the original Income-Contingent Repayment plan (also known as ICR-B), is also available and should be considered, although it will not be as beneficial as IBR or PAYE for most borrowers. The formula used to calculate monthly payment amounts under ICR-B tends to result in higher monthly payments.

Consider also that the income-driven options have the disadvantage of requiring annual income verification and other paperwork, and because monthly payments are low, interest charges will be correspondingly high.

You’ll need to determine which income-driven options are available to you, and evaluate which of the available options provide the most benefits. The income-driven options share many similar characteristics, but there are significant differences as well.

More Repayment Options. Under a Graduated Repayment Plan, payments start out low and increase during the repayment period, typically every two years. Graduated repayment can work if you have relatively quick increases in earnings, but compare the benefits of income-driven repayment options before choosing graduated repayment.

Extended repayment plans are also available if you owe more than $30,000, but you will pay more interest because the repayment period is longer. Again, if what you need is a low monthly payment, compare the benefits of the income-driven options before choosing extended repayment.

Public Service Loan Forgiveness
The public service loan forgiveness program is designed to encourage individuals to enter and continue full-time public service employment.

To qualify for Public Service Loan Forgiveness, a borrower must:

  • make the right kind of payments,
  • on the right kind of loans,
  • while working in the right kind of job,
  • for 10 years.

The Right Kind of Job. Qualifying public service employment under Public Service Loan Forgiveness is full-time paid work in the government, a 501(c)(3) nonprofit, and a few additional nonprofit positions that provide specified public services. Examples include law enforcement services, public health services, public interest law services, or early childhood education. “Full-time” for most lawyers is an annual average of at least 30 hours per week, unless the employer requires a greater number of hours for full-time status.

The Right Kind of Loans. Only Federal Direct Loans are eligible for Public Service Loan Forgiveness. Note that if you started borrowing student loans (like Stafford Loans and GradPLUS loans) before July 2010, you might have borrowed federal student loans from a bank or private lender through the FFEL program (Federal Family Education Loans). If so, you must consolidate FFEL loans into Federal Direct Loans for those loans to be eligible for Public Service Loan Forgiveness. Private student loans are never eligible for Public Service Loan Forgiveness.

The Right Kind of Payments. Qualifying monthly payments include only those made under an income-driven repayment plan or a payment of at least the amount due under a standard ten-year repayment schedule. Qualifying payments do not need to be consecutive, but be careful to get the payments in on time because late payments don’t count toward forgiveness.

Although most law students need to borrow a lot, and large starting salaries are not the norm, reducing the costs that are within your control and understanding the terms of your student loans will go a long way toward successfully managing your debt.

KEY TAKEAWAYS

  • To minimize how much you borrow, develop a detailed budget that accounts for all the costs of earning a law degree.
  • Private student loans present significant risks to borrowers and are typically more expensive than federal loans.
  • You can significantly lower the cost of your loans if you are able to pay the interest while you are in school.
  • Student loans have grace periods. But remember, interest is accruing during your grace period.
  • You will need to tell your loan servicer which repayment plan you’d like to choose. If you don’t choose a repayment plan within 45 days of being notified, your loan servicer will automatically put you into a “standard” repayment plan.

For More Information about Repayment Plans


Work-A-Day Project

Visit the Division’s website for more information about the 2012–13 Work-A-Day project, “Attacking America’s Debt: Take Control of Student Loans.”

Resources

Law School Tuition and Graduating Debt Data
American Bar Association Legal Education Statistics

Attorney Salary Data
NALP (the Association for Legal Career Professionals)

National Student Loan Data system

Repayment Calculators for Federal Student Loans

 

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