The majority of people in law school take out student loans to pay for their education. It can be a good investment depending on how a lawyer will be able to pay back the loans. Read on to learn how to pay for law school and how different types of loans affect repayment.
Step 1: Law school financial aid, grants, scholarships and other tactics to reduce student loans
Take out as few law school loans as possible. Simple as that.
The fewer loans you have to pay back, the better off you’ll be.
If you get accepted to a top-20 law school, then it might be worth going at just about any cost. These top schools offer not only the highest starting salaries (often in the $150,000 to $180,000 range), but they also have some of the highest rates of employment (in the 80% to 90% range) after graduating.
But if you’re going to a school outside of the top 20, then here are the best ways to keep your loan balance low.
Pick a low-cost, in-state law school and avoid out-of-state and private law schools.
If I’m being honest, it can be a total rip off to go to a private law school outside of the top 20. The cost is outrageous compared to the future prospects of a young attorney-to-be. When I talk with other lawyers, they tell me it’s better to go to a more affordable school. If they work their tail off and graduate near the top of the class, competitive offers will come their way. Go in-state, study hard and get the degree.
Apply for scholarships and grants galore!
If you think about how much money a young lawyer will have to make to pay back their loans, they’d be better off spending the time to get scholarships and other financial aid. Break that down to an hourly rate (scholarship dollars awarded per hour of work applying) and the hourly rate could rival a seasoned attorney.
Start with FAFSA (Free Application for Federal Student Aid) to find scholarships and grants, then move on to your CSS (College Scholarship Service) Profile. After that, there are plenty of private foundations and other organizations that offer scholarships. Google law school scholarships like it’s your job!
Just be careful: sometimes what looks like a scholarship or grant might actually end up being a loan. Do your homework before committing to anything on FAFSA.
Work part time
I know you might not think it’s possible, and you should definitely put school first, but if you can make an extra $1,000 per month not including your summer internship, that’s about $24,000 in loans you don’t have to take out. Some law schools do have restrictions around working during school, so check in with the school first.
Another option could be to save what you can over summer break going into law school or between each year of school (i.e., between 1L, 2L and 3L).
Taking these steps will insure you can take out the most flexible and least expensive student loans, starting with…
Step 2: Federal Student Loans
Federal student loans have the most flexible repayment options and various other ways to get loan forgiveness, so it’s a good place to start.
Here are the various types of federal student loans to go for:
Federal Direct Unsubsidized Loans
A law student can take out $20,500 per year. These are the easiest loans to get since there’s no credit check involved. Plus, these loans also give you ultimate repayment flexibility, including income-driven repayment (IDR) plans like Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), Income-Based Repayment (IBR) and Income-Contingent Repayment (ICR). You’ll also have access to Public Service Loan Forgiveness (PSLF). The fees on these loans are relatively low at just over 1%.
Federal Direct PLUS loans
These would be the next loans in line. A credit check is required, but as long as your credit isn’t totally trashed, you should be able to qualify. The fees are a monstrous 4.26%. However, these loans are still eligible for income-driven plans as well as PSLF, so they could still be a better option than private loans.
Avoid Parent PLUS loans
Don’t let your parents take out these loans. Those are the least flexible of all the federal loans. Repayment is based on their income, and loan forgiveness will take them 10 years on PSLF or 25 years on ICR, which is the worst income-driven plan. It sounds good on paper to have parents help out with loans, but when it comes to loan repayment, they place a heavy burden on the parents.
Step 3: Private loans for law school
Private loans should be a last resort. Avoid them if at all possible.
Think of private loans like a mortgage. The payments are based on the loan balance and have to be paid back in full over the specified term.
The interest rates can be fairly high and repayment is very inflexible. There’s no forgiveness, income-driven repayment and often no forbearance.
If you absolutely have no other choice, be sure to select a fixed rate and prioritize paying these loans off in short order upon graduating, five to 10 years tops.
Law school loan repayment options
We’ve worked one-on-one with nearly 150 lawyers, totaling more than $33,000,000 in student debt here at Student Loan Planner. We’ve found there are really only two optimal ways to pay back law school loans:
Taxable loan forgiveness using an income-driven repayment plan for federal loans
For households that owe more than two times their income in student loans (e.g., lawyers who owe $200,000 and earn $100,000 or less), selecting an IDR plan like PAYE or 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.
Aggressive repayment with refinancing to get a lower interest rate
For lawyers who owe 1.5 times their income in student loans or less (e.g., owe $225,000 or less and make $150,000), their best bet could be to throw everything including the kitchen sink into paying off the debt as quickly as possible.
The goal is to pay as little interest as possible and to eliminate the debt in 10 years or less — hopefully much less. This may also include refinancing to get a lower interest rate.
Be sure to take into account any private loan payments and loan forgiveness options for the federal loans before committing to refinancing. Once loans are refinanced and removed from the federal program, the only option is to pay off the loans. Affording the payment is a must.
PSLF for lawyers
Most lawyers end up taking a significant pay cut to work for a nonprofit or government employer, hoping the PSLF benefit is better than making more income in the long run. This may or may not be the case, though.
The PSLF benefit has a number attached to it, so it’s important to compare the savings in student loan repayment with PSLF versus paying back the loan using another repayment strategy to see if the numbers support the thought.
That being said, career choice and fulfillment is very important. So if a lawyer wants to work in the public sector or for a nonprofit, that’s awesome. PSLF would be a great side benefit. But if a lawyer is choosing that line of work for 10 years just to get PSLF, run the numbers first.
How to save the most money paying back law school loans
There’s a ton of money at stake when we’re talking about taking out and paying back six-figure student loan debt. It’s just like buying a house.
We kept hearing that our readers and clients wished they had known about all the student loan rules before they went to school in the first place. So we listened and created the pre-debt consult. This would be perfect before taking out law school loans.
A Student Loan Planner expert will review your specific situation and find the optimal strategy to take out law school loans.
If you already have law school loans, we’ve worked with many lawyers and would love to help you get on the right plan and feel confident about how you’re handling them to save as much money as possible with a student loan consult.
Please feel free to reach out to me directly with any questions about law school loans at firstname.lastname@example.org.