Congratulations! You made it.
You worked your tail off, crushed it in your summer internships and graduated from law school near the top of your class. You got that highly coveted offer from a BigLaw firm and are about to make an awesome income. Sure, you have a grueling work schedule ahead of you, but you’re being compensated nicely for it with tremendous upside on your income during your career.
Oh, I forgot to mention: You took out multiple six figures of student loans to make it happen.
This could be totally worth it. But how do you take that awesome income to pay back your student loans while also practicing self-care to recharge and deal with the long workweeks?
Let’s look at this from a higher level first and examine the best ways we’ve found to attack student loans. This comes from our one-on-one work with over 200 lawyers totaling nearly $50,000,000 in student debt.
Law school loan repayment working for BigLaw
There are essentially two ways to attack student loans in general:
1. Taxable loan forgiveness using an income-driven repayment plan for federal loans
For those who owe more than two times their income in student loans (e.g., owe $200,000 and earn $100,000 or less), selecting an income-driven repayment (IDR) plan — like Pay As You Earn (PAYE) or Revised Pay As You Earn (REPAYE) — for 20 to 25 years could be the best option. In the end, the remaining loan balance is forgiven, though taxes will be owed on the forgiven amount.
The idea is to keep student loan payments as low as possible, save up for the tax bomb and work toward other financial goals along the way.
2. Aggressive repayment with refinancing to get a lower interest rate
This usually applies to lawyers in BigLaw. If a lawyer owes 1.5 times their income in student loans or less (e.g., owes $225,000 and makes $150,000 or more), their best bet could be to pay off the debt as quickly as they can.
The goal is to pay as little interest as possible and to eliminate the debt in 10 years or less — hopefully much less so you can move on with your life without student loans. This may also include refinancing to get a lower interest rate.
Most BigLaw attorneys would want to pick option two, but there are ways to optimize it while starting their career.
BigLaw attorneys won’t benefit from income-driven repayment
Let me show you why BigLaw attorneys will end up spending a ton more paying back their loans if they choose income-driven repayment for the long run.
First, let’s assume that a BigLaw attorney is compensated according to The BigLaw Investor’s salary scale (as of July 2018):
Source: The BigLaw Investor
That’s an amazing income trajectory! And here’s why income-driven repayment won’t work on a BigLaw salary scale.
The goal of using these income driven plans — which include PAYE, REPAYE, Income-Based Repayment (IBR) and Income-Contingent Repayment (ICR) — is to keep payments low for 20 to 25 years, have a bunch forgiven and then pay taxes on the forgiven balance.
For example, let’s say Monique has $225,000 in student loans at 6.8% interest. She was just hired by a BigLaw firm and is projected to make the BigLaw salary shown above.
Let’s see how some of the better IDR plans — IBR, REPAYE and PAYE — would work for her:
As you can see from the table, Monique’s income would be so high compared to the loan balance that she would end up paying off her loans in full well before any taxable loan forgiveness would be reached — within 12 to 15 years. This would be highly inefficient because she’d end up paying a 6.8% loan (high interest rate) over too long a time (more than 10 years).
Monique would be best served with aggressive repayment in combination with refinancing to get her interest rate down from 6.8%. What would repayment look like if she refinanced the loan to 4.5% and paid off the loan in 10 years?
Wow! She’d save upwards of $100,000! That savings is entirely made up of interest. Wouldn’t you rather keep $100,000 than pay it in interest?
How BigLaw attorneys can save money with a repayment strategy
Refinancing might be the best long-term strategy. But how can you do it if you haven’t started working and don’t have the income history to refinance without needing a cosigner?
Let’s talk about REPAYE for a moment. This payment plan could help bridge the gap and save some money.
REPAYE is an IDR plan with payments of up to 10% of your discretionary income. These payments would go for up to 25 years. Whatever loans are remaining after 25 years would be forgiven, and the person with the student loans would pay taxes on the forgiven balance.
How the REPAYE interest subsidy works
Now, for an attorney on the BigLaw salary scale who has law school loans, they’d end up paying off the loans in full before reaching the 25 years. So why am I talking about REPAYE?
The sizable benefit to a BigLaw attorney is that REPAYE provides an interest subsidy. Let’s go back to Monique to see how it works.
She has a job lined up that will pay her $190,000, but she doesn’t start work for another month. If you remember, she has $225,000 in loans at 6.8%. That means that $15,300 in interest will be charged on her loan each year: $225,000 x 6.8% = $15,300
The REPAYE interest subsidy will wipe away half of any interest not covered by Monique’s payments. Let’s say her payments for the year are $6,300. If she were on PAYE, the interest that would accrue would be $15,300 – $6,300 = $9,000.
The REPAYE subsidy cuts that in half. So, if $9,000 were to accrue on the loan with PAYE, then the government would wipe away $4,500 of that on REPAYE. That makes the interest on her loan go down from $15,300 to $10,800.
Sounds good right?
Getting a $0 payment on REPAYE
OK, here’s an advanced REPAYE trick: Monique hasn’t started working yet, and her loans are in the grace period. If she consolidates her loans in order to waive the grace period and start on REPAYE before working, her payments would be $0 because her income is $0.
Since there are no payments to offset interest, the interest subsidy would be half of the entire $15,300 (or $7,650). That effectively cuts her interest rate for the year down from 6.8% to 3.4%.
This would defeat the purpose of refinancing for this first year; however, Monique would still want to be aggressive in paying down her loans.
Let’s say she pays $3,000 per month toward her loans, even though her required payment is $0. That’s $36,000 in payments for the year.
The benefit is that those extra payments won’t affect the interest subsidy. Using the interest subsidy, she’d pay down $28,350 of principal. Without the REPAYE subsidy, she’d only pay down $20,700 in principal — a huge difference.
This will only work for one year, though. That’s because when she recertifies her income, her payments could be high enough that the interest subsidy virtually goes away since her recalculated income-driven payments would be high enough to cover the interest and pay down some principal.
So, after that first year, refinancing could make a lot of sense. She’d have less than $200,000 in student debt and a full year on $190,000 salary. The chances of refinancing to get a great rate are even better.
Paying student loans on the BigLaw salary scale after year one
Let’s say Monique was able to refinance $200,000 of student loans from 6.8% down to 4.5% after her first year. She’ll save more money the faster she pays off these loans. If she sticks with the $3,000 per month, it will take her another five years to pay off the loans in addition to the first year. But she could do even better by taking advantage of her raises and bonuses.
I personally use a 50-50 rule. This helps split any increase in income between increased spending and setting aside more money to reach financial goals. So Monique would take at least half of any increase in salary and bonuses and throw it at her loans in addition to her current payment. And she can live it up with whatever is left over.
Let’s compare three strategies: 1) paying $2,000 per month, 2) paying $3,000 per month and 3) paying $3,000 while using the 50-50 rule.
You can see how getting aggressive with the loans will save a bunch of time and money. Jumping from $2,000 to $3,000 per month shaves off five years and $28,000 in cost. And using the $3,000 payments with the 50-50 rule cuts that time in half. What sounds better? Being debt-free in 12 years — or four years?
As you can see, BigLaw attorneys would be best served to take care of the debt as quickly as possible. They can use their salary increases and bonus structures to make it happen.
The goal should be student-debt freedom in five years or less. The 50-50 rule will allow you have the money to decompress after the grueling workweeks while ridding yourself of the student loan burden in the most efficient and fastest way possible.
Next steps for BigLaw attorneys with law school loans
We’ve worked individually with more than 2,500 student loan borrowers with over $600 million in combined debt.
Some are married; some are single. Some are planning to stay in BigLaw; some are thinking of exiting at some point. The student loan plan would be different depending on your personal circumstances.
If you’d like to have a plan for your specific situation, learn more about getting a customized plan for your student loans. And if you know you want to refinance and attack these loans, see if you can lower your interest rate and get a cash-back bonus on our refi page.
Feel free to email me if you have any questions at email@example.com.