What are the best ways to repay law school loans as painlessly as possible?
Paul Watson* – Paying off the debt you’ve amassed in undergraduate and law school can take decades, and the cost of a law degree is only creeping higher each year. For example, U.S. Department of Education data showed law school debt was $82,400 in 2000 and grew to $145,500 by 2016.
A recent American Bar Association Journal survey found that law school graduates left school with a median cumulative debt of $160,000.
The cost of a law school education can comfortably exceed $150,000. Tuition costs alone can vary widely, ranging from a few thousand dollars to $50,000 a year or more.
There are a variety of costs that need to be considered when looking at the actual law school loan costs, including accommodation and books, transportation, food, personal expenses and others.
Law schools provide a ‘cost of attendance measure that includes both fixed tuition costs and allowances for living costs. This will provide the maximum financial assistance that you might obtain for the academic year.
Many law school students rely on loans as their main source of finance for law school, which need to be repaid from future income.
To help manage this cost, some lawyers might turn to student loan forgiveness programs, like Public Service Loan Forgiveness (PSLF). There are also loan repayment programs that are state-specific or based on the law school you attended.
For many law school graduates, however, loan forgiveness plans don’t apply. If you mainly have private loans or you work in the private sector, for example, federal loan forgiveness isn’t a realistic option. In these situations, a law school loan refinance can be a way to reduce law school debt.
Refinancing law school loans
In many situations, refinancing your law school loans might be the best financial decision as you work to pay off your law school debt. If you’re eligible to refinance your law school loans, you can generally lower the amount of your student loan repayments by scoring a lower interest rate on the loans.
Even if you’ve refinanced previously, you can do so again; just check current refinancing rates to make sure the rate you’re offered is an improvement over your current rate.
If you’re unsure whether it makes sense to refinance your student loans, here are a few indicators that might signal it’s a wise move.
1. You work for a private firm
One circumstance when refinancing your law school loans is a solid choice is if you work in the private sector and intend to continue doing so. Since you won’t be able to pursue forgiveness, refinancing is a logical step.
You can refinance your loans to shave a few percentage points off your interest rate, saving potentially tens of thousands of dollars or more over your loan term.
2. Your debt-to-income ratio
If planning to stay at your current job and you make a healthy salary there, that’s another opportunity to refinance. Attorneys earn a wide range of salaries depending on the type of firm where they’re employed, seniority and experience, and other factors that apply.
A good rule of thumb when deciding whether to refinance is that your total debt should be less than two times your annual income. If that ratio isn’t at all the case, you might struggle to make the payments under a refinancing plan.
3. You’re in a high-earning position
Similar to a promising debt-to-income ratio, a high salary is generally a good sign for lawyers wishing to refinance. You should also have a high level of motivation to pay off your full student loan balance as quickly as possible.
When you refinance, be prepared to pay off your student loans, aggressively. You’re giving up any possibility of future loan forgiveness through a federal program, so you need to map out your loan repayment in order to completely pay off your debt.
An important step to refinancing is to shop around — check with multiple lenders for any cash-back bonuses they might offer, and compare offers to find the best interest rate. You might want to take advantage of the Federal Reserve’s current low prime rate which leads many lenders to offer low rates as well).
When you shouldn’t refinance
Certainly, if you don’t fit the criteria mentioned previously, refinancing is probably not the ideal route for you. For some borrowers, refinancing your law school loans won’t be the best option.
If you have federal student loans instead of private loans, you’ll want to hold off on refinancing for now. The COVID-19 pandemic has led the U.S. government to pause all student loan payments and interest accrued during this time. After several extensions on the initial pause, the current plan is for student loan repayment and interest to resume after September 30, 2021.
This pause on loan payments enables borrowers to focus income toward savings or other obligations, temporarily. Wait at least until this forbearance period has ended, before refinancing.
Another reason to avoid refinancing federal loans is that you lose out on federal protections such as deferment or forbearance options in times of crisis. Plus, you would no longer be eligible for law school loan forgiveness in the event that the government passes new legislation on that issue.
The bottom line
You can extinguish crushing law school debt through refinancing your loans. Just be sure it’s the right move for your particular financial situation. Student loan refinancing is a helpful option for lawyers in the private sector and those who are earning a high income relative to debt.
Law school debt doesn’t have to feel overwhelming, and shouldn’t hold you back from pursuing key life goals around family and home. If you plan to pay off the loans in a focused manner, refinancing is an important tool to help you get debt-free faster.
Author: Paul Watson is a freelance writer dealing with personal financial affairs and related matters.