You graduated law school and even completed the arduous task of passing the bar (congrats!). Now you get to practice the work you love…there’s just those pesky loans, which let’s face it, are probably a lot. According to a recent report by Gallup and AccessLex Institute, a nonprofit education group, 60 percent of law graduates borrow more than $100,000 to get their degree.
If you have law school loan debt, you might’ve considered student loan refinancing as a way to cut your interest rates and save money on your student loans. Refinancing is a useful money-saving move, but is it right for you?
In this guide, we’ll share what refinancing is, how to know if refinancing federal student loans makes sense for you, other options that are available for student loan repayment like law school loan consolidation and how to refinance law school loans.
The skinny on student loan refinancing
Student loan refinancing is all about getting a better interest rate on your student loans. Federal student loans have fixed interest rates, meaning you’re stuck with that rate for the course of your repayment period.
By applying for private student loan refinancing, you can get approved for a lower interest rate. Once approved, the refinanced loan is used to pay off your current student loans.
In this way, student loan refinancing can make repaying loans more manageable. After your old loans are paid off, you have only one loan to deal with which means also only one payment — and a better interest rate to boot.
A lower interest rate has major advantages, potentially saving you thousands of dollars in interest. Instead of chipping away at your interest and feeling like you can’t move an inch on your repayment, you can throw that money toward the principal balance.
On top of that, you may even have better repayment terms to work with your situation. There are so many student loan refinancing companies now, that you’re bound to find a student loan refinancing option that works for your needs.
Looking at the numbers
Whether you should refinance as a law school grad depends a lot on your salary, how much you owe and what you’ll end up paying on various repayment plans.
Let’s take a look at a few examples:
Let’s say a new graduate scores a job at Cravath, Swaine & Moore, one of the nation’s top law firms, with a starting salary at $190k which will be increasing to $200k by the second year of employment.
With $250,000 in student loans, refinancing to a 5% interest rate on a 10-year repayment plan results in a $2,651 monthly payment. Let’s say this borrower makes a bunch of prepayments and then has the opportunity to refinance yet again (yes, in most cases you can refinance more than once) at 3.75% with a five-year term. Refinancing again at the $175,000 mark would mean making payments of $3,203.
It would be tough to make those payments, but living like you’re still a college student could mean paying off your loans within three to four years.
Here’s another example. Take a Navy JAG, leaving the military to work with a small to mid-sized firm with $70,000 in student loans that weren’t covered.
This borrower is not eligible for PSLF so they refinance to a five-year term. They make extra payments and save about $20,600 in interest by having a five-year term at 3.5%, instead of a 10-year term at 7%.
Lastly, Big Law Associates are often eligible for the best rates in refinancing. The key is to have 15 percent of the loan amount in assets. You could use REPAYE under income-driven repayment, get the federal subsidy help and then consolidate your loans. After that, you can refinance through First Republic and get $200 cash back through Student Loan Planner in the process.
To refinance law school loans or not?
As a JD, you likely went to law school with a vision in mind of who you want to serve and what kind of employment you want to have. Where you work, the salary you have and the amount you owe and more should all be considered before you jump into refinancing.
Public vs. private sector
If you’re currently working in the public sector or are committed to this type of work, pursuing Public Service Loan Forgiveness (PSLF) while making payments under the REPAYE plan could be a better fit over refinancing.
You’ll get your loans forgiven after 10 years of service and 120 payments — without the burden of a hefty tax bill. By repaying under REPAYE you can take advantage of federal subsidies to help offset some of the interest costs on your loans.
Whether public or private, you can opt for student loan forgiveness through an income-driven plan after making payments for 20 to 25 years. While this may seem like a godsend, it could easily turn into a nightmare in some circumstances.
First of all, the interest that accrues on your loans during that time is substantial. Secondly, when your loan debt is forgiven — after they’ve ballooned like crazy because of the interest — you’ll pay taxes on that amount! Talk about painful.
Under the PSLF program, your forgiven loans won’t be taxed, which is one more point for working in the public sector instead of refinancing law school loans.
Looking at your debt-to-income ratio is important when deciding if refinancing is right for you. Not only that but it can sway your approval odds from the refinancing companies, too. If your debt is sky-high but your law income isn’t too hot, you may not be a desirable candidate for refinancing.
Student loan refinancing companies want to ensure that you can make the appropriate payments on your new loan.
On the other hand, if you have a great income but you don’t owe that much, calculate how much you can save through refinancing. If you can pay off your student loans relatively quickly, you might not want to give up federal protections on your student loans.
If you have private student loans, there is less risk with refinancing as private lenders don’t offer forgiveness options or income-driven plans.
State-sponsored repayment programs
Depending on where you live and the type of employment you have, you may be eligible for State Loan Repayment Assistance Programs (LRAPs). According to the American Bar Association, there are 24 LRAPs in 23 states:
1. District of Columbia
13. Nebraska (two programs)
14. New Hampshire
15. New Mexico
16. New York
17. North Carolina
To find out more information about eligibility requirements and funding, find your state’s LRAP information.
Employer loan repayment assistance
If you work in legal aid or the public sector, your employer may offer repayment assistance. This can vary depending on the job and employer, so it’s key to ask when discussing benefits with a prospective employer.
Choosing to refinance law school loans
If you’ve considered the factors above, and there’s nothing precluding you from refinancing, you might be ready to take your research on refinancing law school loans to the next level.
Do an assessment of your financial health by checking-in with your debt-to-income ratio, job stability, and credit. If your income exceeds your law school student loan debt, your credit is in good shape (think around 700 or above) and your job is stable, then making moves to refinance law school loans could be worthwhile.
Weighing all of these items is important because refinancing gives up attractive repayment benefits like student loan forgiveness and income-driven plans provided by the government. If you hit hard times, like unemployment or get ill for example, you suddenly won’t have federal protections to fall back on.
If you still choose to refinance law school loans, you’ll want to:
- Check your prospective interest rate at various lenders
- See if Student Loan Planner offers any cash back bonuses on those lenders
- Look at eligibility requirements
- Understand your new repayment term
- Calculate your monthly payment under your repayment term
- Get your documents in order like pay stubs, etc. to verify income
- Apply (and keep making payments until everything is finalized!)
You might encounter more questions as you dive deeper into each step; if you do, a Student Loan Planner consultant can help you navigate through the student loan refinancing process. Choosing to refinance law school loans can get you a lower interest rate so you can make even faster progress toward paying off your loans entirely.