June 06, 2016 Articles

Don't Let Law School Debt Overshadow Your Future

Simple suggestions for reducing and repaying your law school debt.

By Lakisha Davis

A law school education comes with a hefty price tag, and although no law student wants to take out loans, in most cases it’s a necessary evil. Indeed, about 80 percent of law students rely on loans to finance their education and, consequently, graduate with a substantial amount of debt. According to the American Bar Association, law students incur an average debt of $84,000 by the time they graduate from a public school and $122,158 by the time they graduate from a private school.

A large issue with the cost of law school is that many students are forced to borrow from private lenders with unflattering repayment options. In addition, while the competition for entry-level attorney positions is high, the average starting salary is low. In fact, in 2012, the starting salary for about half of law school graduates fell between $40,000 and $65,000. Nat’l Ass’n of Law Placement, Inc., Salary Distribution Curves (2008–2014). Therefore, no matter how you slice it, law school is expensive. But how expensive is entirely up to you.

Reduce Your Law School Debt

Don’t live like a lawyer in law school, or you’ll live like a law student when you become a lawyer.
—Author unknown

While the hope is that every law student will heed this maxim, most do not. As a result, many students graduate from law school and suffer crippling debt that overshadows their future. This article recommends a few methods to effectively reduce and repay law school debt.

Non-repayable financial aid funds (NFAFs). Financial aid generally falls into two categories—repayable aid and non-repayable aid. No student should ever use repayable aid without first applying for NFAFs such as scholarships, grants, or fellowships. You can find many NFAFs by simply conducting an online search. In addition, it’s never a bad idea to visit your law school’s financial aid office to speak with the financial advisor.

Obtaining NFAFs will likely require a substantial amount of work and, in some cases, commitment to your NFAF benefactor. For instance, you may be required to write an essay, provide letters of recommendation, or agree to work for your benefactor for a specific period of time. These sometimes unpleasant hurdles may tempt you to just take out a loan; however, it’s best to apply for several NFAFs before resorting to loans. Even a modest NFAF can help reduce the amount you owe once you graduate.

Savings. Save as much money as you can prior to enrolling in law school. The best ways to do this are by working for a few years or by accepting gifts from friends and family, or both. Make it a goal to set aside at least $200 per month.

Applying to an affordable law school. Generally speaking, attending a public university is cheaper than attending a private university, and in-state tuition is cheaper than out-of-state tuition. The prestige of the school is also very important, as most ivy leagues and top-tier law schools offer unparalleled recognition and job prospects. However, there is no guarantee that you will land a high-paying job after attending an “elite” law school. Therefore, you should make it a priority to strike a balance between several factors—especially cost—when selecting a law school.

Slice Your Budget

The amount that you are willing to cut from your budget is really only limited by your imagination. However, here are a few tips:

Roommate. Find a roommate, or two, or three. The more the merrier. Sure, not many people prefer to have a roommate, but it’s only for three years (four if you’re a part-time student).

Over the course of just a few years, you will have the opportunity to drastically reduce the amount of money you borrow. For instance, if you live alone for your entire law school education and pay a total of $1,200 dollars per month for rent and utilities, you can expect to rack up at least $43,000 in loans for rent and utilities alone. Conversely, if you have at least one roommate to split the bills, you will save at least $21,000. You can always use your lawyerly skills to negotiate for a better deal with your roommate, the landlord, or both. Moreover, if you find another law student to room with, you will potentially have the added benefit of studying and carpooling together.

Rent and utilities. Whether or not you decide to room with someone, find an inexpensive place to live. Try to locate housing with utilities included. In addition, avoid paying for cable, especially in the age of Netflix, Hulu, and Amazon Prime.

Part-time job. If permitted by your law school, find a part-time or seasonal job. You can also make extra money by becoming an entrepreneur. Look into gigs as an Uber driver, Airbnb host, Udemy instructor, etc.

Buying used. You can save lots of money by purchasing used furniture, electronics, casebooks, etc. Never buy new if it’s feasible to buy used.

Miscellaneous expenses. Avoid gym memberships, routine cosmetic expenses, frequent dining out, and recurring travel. Opt for free entertainment when possible.

Once you’ve determined how to reduce the amount of debt you incur, use a student loan calculator, such as the student loan calculator on the Washington Post’s website, to put it all into perspective.

Let’s say that you originally anticipated borrowing a total of $100,000 at an interest rate of 6.8 percent to attend law school, but after applying a few cost-reduction tips, you to decide to borrow only $80,000. Based on results of the loan calculator, you would need to pay about $921 per month for 10 years to pay your entire loan. This will cost you $110,477, which is about $27,649 less than you would have owed had you borrowed $100,000. As a result, you afford yourself the opportunity to contribute several thousand dollars toward your future, rather than the pockets of your lender.

Selecting Your Loan

Critically examine your spending habits and fully commit to borrowing only what you need. Necessities essentially fall into three categories: (1) the out-of-pocket expenses you need to for law school (including books and supplies), (2) the amount of money you need to subsist, and (3) the minimum amount of money you need in the case of an emergency. Taking your financial needs into account with realistic expectations can result in good budgeting, less debt, and a better financial start when you finish law school.

Once you’ve determined how much money you will borrow, select the appropriate and most affordable loan.

Federal loans. Always use federal loans first, as they typically have the most favorable fixed interest rates and qualify for loan forgiveness. See U.S. Dep’t of Educ., Federal Student Aid.

Private loans. Do not take out a private loan unless it is absolutely necessary. Private loans are not nearly as flexible as government loans. Moreover, many private lenders offer loans with variable interest rates, which could easily double, or triple, before you pay your entire balance.

Interest rate. Ensure that your loan carries a low and fixed interest rate. Avoid variable interest rates like the plague. Also, be aware that the federal government no longer offers subsidized loans to law students. This means that the government will no longer pay accruing interest on your loan while you are attending law school. Instead, the government will allow the interest to accrue and tack it to the principal amount owed. For obvious reasons, you may want to consider paying the interest on your loans while attending law school.

Grace period. After you graduate from law school, your lender will probably give you a limited amount of time before requiring you to pay on your loans. This is known as a “grace period.” Always know the length of your grace period. This is a great time to develop a plan to repay your debt. If you’ve already developed a plan, then begin repaying your debt (if you have the resources).

As an attorney, your goal is to repay your debt quickly, avoid exorbitant interest, and obtain the biggest return on your investment. The Internet contains endless resources on how to quickly repay your debt. To start, here are a few suggestions.

Set a Goal for Repayment

Once you graduate from law school, use a student loan calculator to set a goal for repaying your loans. The loan calculator will allow you to adjust certain figures based on your intended payoff date. For example, let’s say you that you are eager to repay your $80,000 loan within six years, but you can only afford to pay up to $1,500 per month. Simply type in the total amount of your loan ($80,000), your interest rate (6.8 percent), and the maximum number of years that you want to pay on your loan (six years).

Based on these figures, you will need to pay at least $1,356 per month to meet your goal. After six years, you will have paid a total of $97,650 ($80,000 for the amount of money you borrowed, plus $17,650 in interest). That is a substantial amount of money; however, by repaying your loan within 6 years rather than 10, you will attain a savings of at least $12,000.

Making budget cuts. If you are really in a hurry to pay your law school debt, continue living like a student after graduation. In other words, apply the same budget-cutting tips suggested at the beginning of this article. This may seem like a very restrictive way to live as an attorney; however, once you repay your student loans, you’ll be grateful you made all of the necessary sacrifices.

Loan discounts. Ask your lender if it offers any loan discounts. See FinAid, Student Loan Discounts. Most lenders offer a .15 percent to .25 percent interest-rate reduction to borrowers who sign up for auto-debit loan payment. This may not seem like a large reduction, but every little bit helps.

Paying multiple loans. If you have multiple loans, you generally want to pay the loan with the highest interest rate first. However, if you have a small loan that you can fully repay in one or two paychecks, then just pay that loan first. This will give you a sense of accomplishment and motivate you to pay your remaining balances.

Principal. Tell your lender that you would like to apply any amount over the minimum payment directly to the principal. Do not assume that the lender will automatically apply extra payments in this manner.

Loan forgiveness. If you meet the eligibility requirements for federal loan forgiveness, make sure you apply. See U.S. Dep’t of Educ., Public Service Loan Forgiveness. Loan repayment programs are less prevalent in the private sector, but they do exist. Always do your research.

Payments. Double up on your payments if possible. For instance, if you get paid weekly or biweekly, apply a predetermined amount toward your loans every time you receive a paycheck. This strategy not only keeps you on track, it also gives you multiple opportunities to pay down the principal.

Financial hardship. At the very least, always make the minimum monthly payment on your loans. This is especially important if you intend to apply for federal loan forgiveness.

If you ever suffer financial hardship and cannot make your loan payments, do not abandon your loan obligations. You may be able to temporarily postpone or reduce your federal loan payments through deferment, forbearance, or income-based repayment. Talk to your lender, especially if you’re in danger of default. Always conduct your own research and determine your best option. There are many available resources online.

Lakisha Davis – June 6, 2016