Recent law school graduates are in a financial pinch as tuition is rising but the opportunities to earn 6-figures are shrinking.
Most attorneys thought they’d graduate with an average law school debt level of $90,000 to $120,000 and be able to earn at least $100,000. That seems like a sound financial decision. But the reality is that lawyers graduate with more school debt than anticipated and higher student loan payments factored in with less take-home pay is stretching their wallets to the brink.
Law School Tuition Rising Fast, High Paying Legal Jobs Drying Up
Attending law school used to almost guarantee a solid career path and bright income prospects, but that is no longer the case. The cost of getting a JD has risen astronomically according to law school debt statistics. In fact, getting a law degree is now 3 to 5 times more expensive than it was 30 years ago even after adjusting for inflation. Most of the lawyers I’ve helped have around $200,000 in student debt.
The second major reason why law school grads are feeling the pinch is that the high-paying jobs from larger law firms have dried up considerably. Sure, the starting salary for an associate has gone up over the last 10 years but the numbers are skewed. The most dramatic increases have come from the few who graduated at the top of their class from the top private law schools who took a job in a major city at firms with 700+ employees.
Lastly, there are just fewer jobs available and it looks like that trend could continue. Summer associate jobs at the big law firms are going to be down this year. Newly minted JDs who were able to secure full-time legal jobs is the lowest in over 30 years.
How on Earth do lawyers pay back their student loans owing more than they anticipated having and being underemployed?
Common Student Loan Mistakes Made by Lawyers
If you’re a law school grad, you may be wondering will you ever be able to pay off your law school debt. Loan repayment options are confusing and poor guidance from advisors and some loan servicers can cost lawyers a lot of money paying back their student loans.
I’ve heard too many law school debt horror stories and want to help people avoid making common mistakes that can lead to financial disaster.
Here are the most common mistakes we’ve seen here at Student Loan Planner:
Mistake #1: JDs who choose IBR may end up spending 50% more paying back their loans.
Let’s say Monica has $197,000 in student loans at 6.8%. She’s a new graduate making $80,000 per year. Her salary will grow at 3% a year, and she just started paying back her loans on the IBR (income based repayment) plan.
On the IBR path, Monica will pay 15% of her discretionary income for 25 years. Her payments will change as her salary does. Whatever loan amount is remaining at the end of the 25 years will be forgiven but she’ll have to pay taxes on that balance. Let’s use a 40% tax rate.
With these projections, Monica will end up paying $416,793 to pay back her loans over the next 25 years. That includes $340,056 in total monthly payments plus the $76,738 in taxes from her loans being forgiven.
What if Monica were eligible for PAYE (Paye As You Earn)?
PAYE payments are 10% of her “discretionary income” for 20 years. That means the monthly payments would be 33% less than her payments on IBR. Plus, she’d end up paying off her loans 5 years sooner (20 years instead of 25).
With these projections, Monica will end up paying $286,216 to pay back her loans over the next 20 years. That includes $167,080 in total monthly payments plus the $119,136 in taxes from her loans being forgiven.
Switching to PAYE could save her 5 years and $130,577! How could that extra money impact Monica’s life if it didn’t have to go toward paying back her student loans?
Mistake #2: Choosing the Extended or Graduated Plan costs thousands more in interest.
Let’s take a look at John. John has been practicing law for 5 years and started on the extended plan after deferment. He still owes $150,000 at 6.5% and is making $120,000 a year. His loans will be paid off in 20 more years on the current path.
If he stays on the Extended Plan, he’d have $275,905 in payments left over the next 20 years.
Since his income is decent compared to his loan balance, John could qualify for a 5% loan with a 10-year term at a private company. His total loan payments over the next 10 years would be $195,118. If he were to refinance his student loan, John could pay $80,000 less over the life of his loans and he’d be student debt free 10 years earlier.
That entire $80,000 savings is interest. Instead of paying back a 6.5% loan over 20 more years, he would pay a 5% loan over 10 years. What could John do with that extra $80,000 in his pocket and without debt payments for those 10 extra years?
Mistake #3: Carrying credit card debt while paying back student loans and making low payments on both.
Some of the lawyers we consult with who are deep in law school debt have $10,000+ of credit card debt. The circumstances vary from being unemployed for a while, having an unexpected medical bill, and overspending at times.
The biggest mistake we see is that they pick the student loan repayment plan that will give them the lowest payments (often it’s the Graduated Plan) and then they put the bare minimum toward paying off the credit card.
These are doubly bad moves which will cost tens of thousands of dollars more. (Remember common mistake #2?)
If I were in that situation, I would focus my energy on tackling the credit card debt.
I may even consider putting my student loans into forbearance so I could take that monthly payment and add it to the credit card debt until it’s paid off. Dollar for dollar, paying back 20% credit card debt will help me save money compared to a 7% student loan.
After paying off the credit card debt in less than 12 months, I’d take my loans out of forbearance and examine my budget to make sure it doesn’t happen again.
Should I Take a Public Sector or Non-Profit Job Instead of a Private Job?
This is a common question we get. If it’s a lifestyle or career choice, then go with your heart. If you’re trying to make it a financial decision, then here’s how we think about it:
Let’s take a look at Andrea’s situation. She has $230,000 in student loans at 6.5% and is considering a government job making $70,000 a year with 3% wage increases each year. She decides that PAYE is a good repayment plan.
Andrea would apply for Public Service Loan Forgiveness (PSLF) and make 120 monthly qualifying payments totaling $59,819. At the end of the 10 years, she’d have $319,681 forgiven tax-free. That’s a pretty good deal to pay $60k on $230k of loans 🙂
Side note: The reason Andrea’s forgiven loan balance is higher than her original loan is because her loan payments don’t cover the interest. Believe it or not, this actually works out to her benefit because the loans are wiped clean tax-free.
So What is the PSLF Benefit Worth For Law School Loans?
To compare these options, we’d want to see how much it would cost to pay off her student loans in 10 years. So let’s assume that she works for a private company and refinances over 10 years at 5% interest.
She would end up paying $299,180 to pay off her loans compared to $59,819 with PSLF. PSLF is nearly a $240,000 benefit compared to 10-year refinancing!
If we take that $240,000 and divide it by the 10 years it would take to be student loan free, that makes PSLF a $24,000 after-tax benefit. That means she’d have to make about $40,000 more in salary to cover the benefit.
In other words, if Andrea took a private sector job, she’d have to make at least $110,000 vs $70,000 to make it financially worthwhile to give up the PSLF benefit.
How to Pay Off Law School Debt
If Monica, John, or Andrea and I worked together, here are the questions I’d ask to help them pay back their student loans:
#1 – What are your career goals?
We would talk through why they decided to go to law school. Was it to work at a major law firm, become a solo practitioner, become a public defender, or to earn a good living?
Depending on the career path and earning potential, we would figure out which would be the better path to becoming student loan free, aggressively paying them off in 10 years or less or maximizing loan forgiveness.
#2 – Is PSLF on the table?
We would discuss the prospects and reasoning for taking a government or non-profit job to make sure it was a fit for at least 10 years. Would giving up the private sector salary and the partnership track be worth it?
#3 – What are your family plans?
After loan amount and income, marriage is a major factor that could influence their loan repayment strategy. If marriage is imminent, then we need to discuss their future spouse’s income and student loan situation. If not, then we’d want to build some flexibility into the student loan strategy and discuss how marriage could impact the plan.
Lawyers Have Plenty of Great Options to Pay Back Student Loans
There is a clear path to becoming student debt free after law school. A path that could save tens of thousands of dollars when lawyers graduate with more school debt while allowing them to take the career path that motivated them to apply to law school in the first place.
Student Loan Planner has done 1,000+ student loan consults for clients with $275,000,000+ of combined student debt, and we can help you figure out the best path to paying back your student loans in just 1 hour.
Rob (the author of this post) works with borrowers who owe less than $300,000. He’s usually the point person for our lawyer student loan consults. Feel free to email him at firstname.lastname@example.org.