Know Where You’re Starting
The best time to start learning about the loans you have and your repayment options isn’t the moment you’re being asked to choose which plan you want. This is the equivalent of ordering at a restaurant without looking at the menu—it might work out, but why risk it?
No, the best time to establish your footing is before you go into repayment while you’re still a student or during your six-month grace period for your federal loans. This gives you the space to understand the differences in types of loans, the repayment plans, and some of their nuances.
Not all student loans are created equal. Before graduation, take a few minutes to inventory the types of student loans you have; this impacts the options you have for repayment.
Student loans come in two primary flavors based on whether you borrowed federal loans or private loans.
If you have private loans, know what you owe by setting up your online account with your lender and pulling your credit report from annualcreditreport.com. If you have federal loans, log in to NSLDS.ed.gov to scope out which types of federal loans you’ve taken from the US Department of Education. These include federal Direct Unsubsidized and Grad PLUS loans for law students, but you may also have Unsubsidized loans, Perkins loans, or Federal Family Education Loans—called FFEL loans—from your undergraduate education.
Why this matters: Federal Direct loans, whether they’re Unsubsidized or Grad PLUS, are eligible for the full menu of repayment options. Perkins and FFEL loans are more limited in their repayment options. Private loan repayment options are determined by the specific lender from whom you took them, so they can vary wildly.
Tread carefully: While you can consolidate your Perkins and FFEL loans into a Direct Consolidated loan to make them eligible for income-driven repayment, refinancing your federal loans with a private loan is a different story. While refinancing may yield a lower interest rate if you have a great credit score, it also means losing access to the full array of income-driven repayment options available to federal Direct loans.
While logged into NSLDS, you’ll also be able to view your loan servicer for each loan. This is the company that handles the billing and other services on your federal student loan, and most borrowers nowadays have the same servicer for all their loans. Set up your account with your servicer online; it will be the main portal for you to make student loan payments going forward.
Choose Your Route
Once you know where you’re starting, evaluate the possible routes to determine which plan fits your needs. Depending on how you count them, there are about seven plans and variations on them to choose from. To cut down on the complexity, it’s useful to evaluate your potential monthly payments under these plans with a few key inputs in mind, such as your monthly take-home pay, your long-term goal for servicing your debt, and which approach helps you sleep best at night.
The Default Plan
If you do nothing during the six-month grace period for your federal loans, your servicer will put you in the standard 10-year repayment plan.
Based on the amount of debt you have, this payment can end up being a high (to very high) percentage of your monthly income.
Extended or Graduated Plans
You could alternatively choose a plan with a longer term, such as the extended plan, or a plan that starts with lower payments and increases over time, such as the graduated plan.
But be aware that the payments on these three plans are based on the amount of debt you have, not the income you make.
That’s where income-driven plans come in. These plans set your monthly payments based on the amount of money you actually make, filtered through a formula to get to your discretionary income. They include the Income-Contingent Plan, Income-Based Repayment, Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE). You must apply for these plans and recertify your income each year through your servicer by using the application at studentloans.gov.
Tread carefully: Believe it or not, many borrowers on income-driven repayment plans fail to recertify their income by the deadline their servicer sets each year. This can bump your manageable monthly payment back up to the higher standard payment amount until it’s addressed. Ouch!
Questions to Ask Yourself If You Think the Income-Driven Route Is Right for You
What plans do I qualify for based on when I borrowed my oldest loan?
Why it matters: Some income-driven plans, such as PAYE and the new version of Income-Based Repayment, have dates by which you have to be considered a “new borrower.” You can rule these plans out if you borrowed your first loan before these dates.
How do I file my taxes? Will that be changing anytime soon?
Why it matters: If you’re using income-driven repayment, your payments are set as a percentage of your discretionary income, calculated by a formula that uses the adjusted gross income from your most recent tax return.
As a single filer, your payments are based on your income alone. If you’re married and file jointly, they’re based on your household joint income, which presumably means they will be higher. This isn’t necessarily a bad thing if your goal is to pay off your debt faster; it’s just something to be aware of.
Tread carefully: The REPAYE plan will take your household income into consideration regardless of whether you’re married and filing separately or jointly. Other plans, such as PAYE and Income-Based Repayment, will recognize married filing separately to keep payments based on your income alone. Just keep in mind that if you’re married but filing separately, it can affect your overall financial plan; talk to a CPA if you’re thinking of using this strategy.
Is my ultimate goal to pay off my loans as fast as possible or to minimize what I pay and take advantage of forgiveness programs, such as public service loan forgiveness?
Why it matters: You can always make extra payments on your student loans without penalty. If you can afford to make the minimum payment on a standard 10-year plan, you’re assured to be rid of your student loans in 10 years; if you pay extra, it’ll be even faster.
If, on the other hand, your goal is to minimize the amount you pay out of pocket toward your loans and qualify for a program like public service loan forgiveness after 120 monthly payments, then income-driven repayment makes more sense.
Correct Course, If Needed
The trails may be smooth for your first few years of repayment, but there will inevitably be bumps along the way that will have you stopped in your tracks, reassessing the next best steps. The good news is that you can pivot and change federal repayment plans if needed. Here are a few key life moments when you’ll want to revisit the map:
Getting married: Wedding bells are often accompanied by a change in household income (how romantic). Stop to evaluate whether your income-driven plan is still the right plan given any change in your tax-filing status. But feel free to wait until after the honeymoon to discuss.
Growing your family: More kids often translates into more expenses. If your monthly obligations go up, your ability to pay a standard or extended payment may go down. Explore income-driven repayment for monthly cash-flow flexibility.
Losing a job: When your income goes down, your student loan payment can adjust to that change if you recertify with your student loan servicer using the income-driven repayment application at studentloans.gov. Payments are set in 12-month increments, but accelerating recertification is an option if you find yourself in this situation.
Changing your career trajectory: If you change gears in your career (such as moving from public service to a private firm or vice versa), revisit your strategy to determine if your debt elimination game plan should change, too. A plan that works well for one career trajectory may not be the best strategy for another, given your income and long-term goals.
One Step at a Time
Now that you know where to tread carefully, take time today to inventory your current position, choose a route, and course correct when necessary. While you can’t plan for everything, a well-built student loan strategy will get you past the most perilous pitfalls on your journey and give you the peace of mind and fortitude you need as you make your way toward higher elevations—life after law school.
NOTE: AccessLex Institute has established a $5 million law student emergency relief fund. They plan to distribute $25,000 each to ABA-accredited, nonprofit schools.