The Best Way to Deal with Law School Debt

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The burden of six-figure debt is the new norm for law school graduates. According to the American Bar Association, the average public law school graduate carries $88,000 in debt, and private law school graduates carry a crushing $127,000 in debt. If you’re a JD struggling to figure out how to start whittling down your debt, here’s what to do:

Step One: Take a Look at the Big Picture

You can’t develop your debt payoff strategy until you understand your financial big picture. Gaining a clear financial picture doesn’t have to be difficult. You can start by reading the free e-book, Richer in 7 Hours, which walks you through how to calculate your net worth, how to eliminate debt, and more. The key is finding out how much you spend and how much money you are bringing in. From there, you can figure out how much you can afford to put toward your loans over time. The book will help you understand your finances so you can create a strategy to eliminate your law school debt.

Step Two: Know Your Options

Once you’ve created a clear picture of your finances, you’ll need to understand the things you can do to manage and eliminate your debt.

For Federal Student Loan Debt

The federal government offers a variety of programs that help you manage your federal student loan debt. These options don’t apply to any of your private loans. If you have federal loans, you may qualify for income-driven repayment plans, loan consolidation, interest-free loan deferment, loan forbearance, repayment assistance, or Public Service Loan Forgiveness. These programs won’t lead you to rapid debt freedom, but they may alleviate some of the burden.

Income-Driven Repayment Plans

The federal government offers four income-based repayment programs:

  • Pay As You Earn (PAYE)
  • Revised Pay As You Earn (REPAYE)
  • Income-Based Repayment (IBR)
  • Income-Contingent Repayment (ICR)

We’ve outlined the major differences between the programs below.

 

Plan Definition of Discretionary Income Repayment Amount Maximum Repayment Period
PAYE Discretionary Income=

Your Income -1.5* (Poverty Guideline* for your family size and state)

10% of discretionary income up to the amount required by the standard 10-year repayment plan 20 years
REPAYE Discretionary Income=

Your Income -1.5* (Poverty Guideline* for your family size and state)

10% of discretionary income 25 years
IBR Discretionary Income=

Your Income -1.5* (Poverty Guideline* for your family size and state)

10% of discretionary income (15% if you borrowed prior to July 1, 2014) up to the amount required by the standard 10-year repayment plan 20 years (25 years if you borrowed prior to July 1, 2014)
ICR Discretionary Income= Your Income- (Poverty Guideline* for your family size and state) 20% of discretionary income up to the amount you pay for fixed payments on a 12-year plan 25 years

*You can look up the U.S. Department of Health and Human Services Poverty Guidelines on their website.

 

Under income-driven repayment plans, you will need to “recertify” your income and family size every year to determine your payments. That just means picking up the phone to call your lender and asking to re-enroll in the program. These programs can be helpful as you grow your income, or if you’re seeking Public Service Loan Forgiveness.

Loan Consolidation

If income-driven repayment programs won’t save you any money based on your salary, but you have a high level of debt relative to your income, consider federal loan consolidation. Federal loan consolidations group your loans into a single loan with a single interest rate, and they extend the amount of time you have to pay. Consolidated loans over $60,000 have 30-year payment periods.

If you choose to consolidate your federal loans, you will still be eligible for income-driven repayment programs if you qualify in the future. Direct consolidation loans are eligible for Public Service Loan Forgiveness as well.

Your new interest rate will be determined by taking the weighted average of the interest rates on all the loans you wish to consolidate. In some cases, a consolidation will result in a longer payoff period, and dragging out the length of the loan could result in your paying more in interest.

Public Service Loan Forgiveness

Public Service Loan Forgiveness (PSLF) offers relief to those working for the government or eligible nonprofits. In order to be eligible, you will need your loans to be on an income-driven repayment plan or 10-year standard payment plan and make 120 payments (10 years’ worth of service) before the remaining amount is forgiven. The 120 student loan payments do not have to be consecutive.

If your loans are in a grace period, deferment, forbearance, or default, or you are currently in school, you cannot make a payment toward the 120-payment limit. Only federal loans qualify for PSLF, so do not refinance through a private lender if you’re pursuing loan forgiveness.

If you qualify for PSLF, you will not owe taxes on the amount forgiven after 120 payments.

Deferment

During loan deferment, you do not have to make payments on your loans, but you must apply and qualify for loan deferment before you can cease payments. Qualifying situations include being in school (including an approved fellowship), up to three years of unemployment, up to three years of economic hardship, and during active military duty (and the 13 months following active military duty).

If you have subsidized loans including Direct Subsidized Loans, Federal Perkins Loans, or Subsidized Federal Stafford Loans, the government will usually pay interest during deferment.

But if you have other federal loans, interest accrues during deferment, but you do not have to pay interest on the loans during deferment. Instead, the interest will be “capitalized” or added onto your principal loan balance when you resume repayment.

Forbearance

If you do not qualify for loan deferment, you may qualify for loan forbearance. You can request forbearance for illness or financial hardship, but your lender doesn’t have to grant it. On the other hand, your lender must grant forbearance under certain qualifying circumstances. Qualifying situations include when you work in a service position where you’ve received a national service award, work in a low-income school, or are activated as a member of the National Guard, among many situations.

During forbearance, you do not have to make loan payments, but interest continues to accrue. You can either make interest-only payments, or you can allow the interest to be added to your loan balance when the forbearance period ends.

For Private Student Loan Debt

Private student loans don’t come with all the same programs as federal loans, so there are no forgiveness or income-driven repayment options available. Instead, try implementing some of the following strategies. Your best option may be to refinance your private loans at a lower interest rate. But before you go that route, consider these tips:

Loan Repayment Assistance Programs

Many schools want to encourage their alumni to work in public service, and they offer modest assistance to some qualifying individuals. Loan repayment assistance programs can differ from school to school, but you may find valuable help if you choose to go into public service.

Seek Out a Signing Bonus

Some firms will offer to assist you with student loans if you commit to a multiyear contract with them. If you have multiple offers, consider negotiating for a student loan repayment bonus. New lawyers reported repayment bonuses of $2,500-$75,000 when they signed multiyear contracts.

Become a Technical Expert

Lawyers with a science, medical, or engineering background may receive offers to pay off all their student loans if they choose to become patent attorneys or work in the U.S. Patent Office. Lawyers with technical expertise remain rare, so firms and the government compete over these types of lawyers.

Implement an Aggressive Payment Plan

You could take the scrappy way out by just getting aggressive with your payments. You can do this by attacking one loan at a time with the maximum amount you can afford and paying the minimum on your other loans. You can calculate the interest you’ll save and how quickly you can pay off your debt using the Snowball vs. Avalanche Calculator.

Before you start paying down your debts, be sure that you’ve got an emergency fund in place, and that you’re taking advantage of any employer matching on your 401(k) plan.

Do Not Pay Off Private Loans with Credit Cards

Purposely putting your debt on credit cards for the purpose of bankruptcy is fraud, and it could lead to jail time. If you’re facing default on your private loans, do not pay them with credit cards that you think can be bankruptible. Additionally, law school loans that have been transferred to your credit cards cannot be discharged in bankruptcy court.

For Federal and/or Private Loans

Refinance at a Lower Rate

If you’re interested in saving money on interest, the best thing you can do is refinance your student loans at a lower rate. But don’t refinance unless you feel confident that you will not need to use the flexible repayment options for federal loans as outlined above. Once a federal loan is refinanced through a private lender, it will no longer be eligible for programs like forgiveness, income-driven repayment, forbearance, or deferment. Private loans do not qualify for any of the loan repayment help outlined above.

Refinance your loans with a company that can offer you the lowest rates or the most flexible terms. You can use the Compare & Save tool to help you learn about your refinancing options.

Step Three: Implement Your Strategy

Now that you understand your financial picture, and you know your options, you can implement a plan that will help you manage or eliminate your law school debt. Taking the right actions will help you deal with your law school debt.

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