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 monthly debt service (based on current interest rates of 5.4% and/or 6.4%, depending on the loan) will be about $1,200. Your total payments over the ten years would be about $144,000.
Many grads seek to reschedule their debt over 20 or 25 years. This results in a lower monthly debt service, but a greater overall amount paid (i.e., you’ll be paying for significantly more interest). If you borrow $100,000 at current interest rates and spread it out over 25 years, you’ll be paying only a little over $700/month, but your total repayment will be along the lines of $216,000.
You can run these numbers yourself, plugging in your own debt amounts (including undergraduate loans) and repayment terms using any number of online mortgage calculators, or one of the more specific law school debt calculators like this one on the BU Law website.
Income-based repayment (IBR)
A relatively new federal program allows those with higher education debt (undergrad or grad/law school) to schedule their debt payments based on their income. Borrowers make payments based on their income and family size rather than based solely on the total debt and interest rates. 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 (IBR) for 25 years (20 years for some newer borrowers—see “Pay As You Earn” here) will earn another significant benefit: at that point, the balance of your loans will be forgiven by the federal government. The downsides are that you are still carrying that debt for 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. Since higher education debt is a very big political and economic issue right now, I would venture to guess that 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.
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 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. A good place to start is the Equal Justice Works’ comprehensive website of information about law school LRAPs.
State LRAP programs
Several states, including Massachusetts, Maine, New Hampshire, New York and Vermont, offer LRAPs to public interest lawyers in their state. For information about these programs, check out Equal Justice Works’ State-based LRAPs page.
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.