New lawyers begin to experience the joys of student loan repayment shortly after surviving the bar exam and while trying to make a splash at their first job as a new attorney. Managing your student loan debt does not have to be soul-crushing or result in paralysis. Too often, young lawyers make assumptions about their student loans or throw money at debt without understanding their options. This can lead to costly mistakes in the long run.
Not all student loans are created equally. Federal student loans generally have far more repayment options than private loans. Even within the federal student loan system, there are critical differences. Some of the newer and more popular federal programs (e.g., Pay As You Earn, and Public Service Loan Forgiveness (PSLF) program) are limited to Direct loans only (a type of federal loan issued directly by the federal government). Other types of federal loans may not be eligible for the same programs.
Different loans have different interest rates. Generally, graduate federal loans have higher rates than undergraduate federal loans. PLUS loans tend to have higher rates than Stafford loans. Perkins loans always have the same fixed rate.
The bottom line: student loans are different. Misunderstanding this can get you into trouble later. Visit the National Student Loan Data System (NSLDS) to obtain information about your federal loans, including what type of loans you have, your interest rate, and your current servicer.
There are about a dozen different repayment plan options for federal student loans. Figuring out the best option can be a nightmare. Getting on the wrong repayment plan can be a costly mistake. There are two primary categories of repayment for federal student loans: balance-based repayment and income-driven repayment.
A balance-based plan is a repayment program that results in the full payoff of the loans over time. Depending on which plan you select, the payments can be: (1) level (Standard): you will pay the same amount each month until the loan is paid in full; or, (2) Graduated: payments start off low, then gradually increase, ideally commensurate with salary growth. Depending on the size of your loan balance, you could be repaying your loans for 10, 25, or 30 years. Generally, borrowers will pay a lot more in interest on a Graduated plan versus a Standard plan. Longer repayment terms result in smaller and more manageable monthly payments, but they are far more expensive in the long run.
Unlike balance-based plans, income-driven repayment plans use a formula applied to your income and family size, resulting in a uniquely tailored monthly payment. That payment amount is recalculated every 12 months and can be adjusted if your income changes. After 20 or 25 years, depending on the plan, any remaining balance is forgiven. The amount that is forgiven may be treated as taxable income and may have significant consequences for some borrowers. There are several income-driven plans, each with different formulas, eligibility criteria, repayment terms, and treatment of married borrowers. For some programs (e.g., PSLF), being in an income-driven repayment plan is mandatory.
Explore these programs and calculate your potential payments via the Dept. of Education’s student loan portal.
Various relatively new programs allow borrowers to refinance their student loans at lower interest rates. These programs appeal to law grads because graduate school loans often have high-interest rates. Refinancing providers often partner with bar associations to advertise directly to lawyers because lawyers are excellent candidates given their typical high earnings, good credit, and high student loan debt burdens.
What’s the catch? These refinancing programs are private loan programs. Once you refinance your federal loans into a private loan, you permanently lock yourself out of critical loan programs and consumer protections, including: income-driven repayment and Public Service Loan Forgiveness, generous deferment and forbearance during times of hardship, a tax-free death, disability discharge if something terrible happens to you, and default resolution options if things fall through the cracks. Think twice about refinancing. Take steps to mitigate giving up protections or losing access to loan programs.
The 2021 ABA YLD Law School Student Loan Debt Survey Report examines the issues at the heart of the student loan crisis and offers recommendations. Read the report.
