Law school applications: Loan repayment options
There are several repayment options to consider both before you take out loans to finance your legal education, and once you’ve graduated. As you think about these options, think too about how much you’re likely to be earning and what it will cost you to live in the city in which you settle. Your realistic repayment options at $40,000 a year are very different from those at $140,000; Des Moines is not nearly the expensive city that Boston is. (Michigan Law has come up with a fairly sophisticated “Debt Wizard” that takes salary and location into account, and is well worth checking out.)
The standard repayment schedule begins six months after graduation and comprises a ten year repayment period. This will be the default option for most of your loans. If you borrow $100,000, your debt at graduation will be around $115,000, depending on how you borrowed each year (remember that interest accrues while you’re in school, and is capitalized, i.e., added to the principal, after you graduate). Your monthly debt service (based on current interest rates of 6.08% and/or 7.087%, depending on the loan) will be about $1,300. Your total payments over the ten years would be about $157,000.
Graduated and extended repayment
There are other options for scheduling your debt repayment. “Graduated” means that your debt service starts out lower (when you’re earning less), and increases over the course of your loan (when you’re presumably earning more). “Extended” means you’re stretching out the repayment period to 20 or more years. These can also be combined. While these can be helpful for managing your debt, remember that you’ll ultimately be paying much more in interest, and carrying the debt for a longer period of time.
You can (and should) run these numbers yourself, plugging in your own debt amounts (including undergraduate loans) and repayment terms using the federal government’s student debt “Repayment Estimator” here.
Income-based repayment options
There are a number of different repayment options that are based on your income and family size, rather than the total amount of your loans. These are variously called “Income-based repayment,” “income-contingent repayment,” “Pay As You Earn,” etc. and have varying eligibility requirements and terms.
The great advantage of this is that it allows you to keep up with your debt payments when a low salary or even unemployment prevent you from paying the standard amount. On the downside, your debt will accrue even more interest (because you’ll be paying down your debt more slowly), and you may even find yourself in what’s called “negative amortization”—when the interest that accrues each month is greater than your payments, such that your debt is actually increasing rather than decreasing. It’s important to remember that you don’t have to stay in the income-based repayment program for the life of your loans—you can go in and out, depending on your circumstances (and, in fact, many financial planners recommend using IBR, if possible, only for the short-term).
You can find out much more about income-based repayment on the government’s website here and from Equal Justice Works (the experts in student debt relief) here.
Borrowers who use the federal income-based repayment plans for 20-25 years are currently eligible for another significant benefit: at that point, the balance of your loans may be forgiven by the federal government. The downsides are that you are still carrying that debt for 20-25 years, and that the amount forgiven is considered income in the year you receive the forgiveness.
To put some real numbers to this plan, let’s look at our hypothetical borrower above with $100,000 in loans. Let’s say she’s single and making $40,000—her debt service under IBR will be about $285, substantially less than the $1200 she’d otherwise pay. After 25 years of paying roughly $300 (I’m assuming here that her income does not go up, which is a somewhat unrealistic but worst case scenario assumption), she’ll have paid about $90,000 on a debt that will now be over $200,000. The amount that will be forgiven is $110,000—all of which will be considered taxable income to her in that year, a substantial hit to her $40,000 income.
This all assumes that the program does not change over the next 25 years. Higher education debt continues to be a very big political and economic issue—it’s a safe bet that I the program’s specific terms will in fact change. If you have or plan to have significant educational debt, you should make it a priority to keep abreast of the national political and legislative debates around these issues.
Public Interest Loan Forgiveness
Borrowers who work in public interest—meaning for a non-profit or for any branch or level of government—are eligible for loan forgiveness after just 10 years, and the forgiveness amount is NOT taxable. Accordingly, IBR plus Public Interest Loan Forgiveness is a much more attractive program for lawyers in the public interest. That said, the same caveat as above applies: this forgiveness program could be eliminated by Congress at any time.
School-based Loan Repayment Assistance Plans/Programs (LRAP)
For a couple of decades before the federal government got involved in loan repayment assistance, individual law schools came up with their own post-grad grant programs to make it possible for their alums to pursue careers in public interest law. LRAPs still exist at a great number of schools, although they range from very generous (repaying substantially all of a student’s loans) to minimal. Most schools have restructured their programs over the last few years to enable students to take the fullest advantage of the combination of LRAPs and the federal repayment and forgiveness programs. Different schools also have different eligibility requirements, based in part on different definitions of “public interest law” as well as different income caps. You’ll need to research each school’s program carefully, especially if you are committed to public interest.
Several states, including Massachusetts, Maine, New Hampshire, New York and Vermont, offer LRAPs to public interest lawyers in their state. Some federal offices and private employers also offer LRAP benefits. You’ll want to research these options thoroughly as you near repayment (law school graduation) and consider various job opportunities. PSJD maintains a list of these programs here.
Okay, no, I don’t really mean this as a repayment strategy. But it is important that you consider how your debt repayment options might be affected by marriage, should you be in a position to contemplate nuptials during your repayment period. Eligibility for income-based programs takes household size and income into account. As not just a pre-law advisor, but as a former family law attorney, I recommend strongly that financial planning be part of your wedding planning.