Law School Loans: How to Refinance and Consolidate
Student loans never bothered him because he was going to graduate, School Loans start a law practice, and make a lot of money.
“When you start law school, everyone thinks they’re going to be rich,” Thomas said. “Until your friends start graduating, and you hear them having trouble finding jobs and paying off loans, it becomes a little scary.”
It started to get really scary when he discovered something called a bimodal distribution curve for lawyers’ salaries.
A bimodal distribution curve means that the bulk of new hires fall into two categories. School Loans About 50% of law school graduates start their careers earning $40k-$65k per year. Starting at $160k-$180k in just one-fifth.
For that reason, the average salary, School Loans rather than the median salary, gives us a better idea of what law grads are likely to earn. The median entry-level salary for law school graduates in 2016 was $66,499.
That won’t make you rich when you consider that the average law grad has $140,616 in combined undergraduate and law school debt. Under the standard repayment plan that is about $1,611/month for 10 years.
The US Department of Education recommends that graduates limit loan payments to 8-10% of their gross monthly income. To afford a $1,611 monthly payment on $140,616 of student loan debt, you’d need to make between $193,320 and $241,644 per year.
Standard repayment plans are too expensive for anyone with debt, so there are three viable options:
- Private refinancing
- Federal income-driven repayment plans
- Public Service Loan Waivers (PSLF)
How to Refinance Your Student Loans with a Private Lender
Step 1: Start your search online
There are a number of online lenders that specialize in refinancing student loans. The ultimate goal is to find a lower interest rate and monthly payment, but look for other perks as well. Some companies pair up with law firms to offer incentives like a referral bonus or student loan contributions as an employee benefit.
Here are some of the more popular companies that refinance student loans:
Step 2: Get a quote
Each of these companies will have you fill out a form to get a quote. School Loans Most of them will do a soft pull on your credit report to help determine the interest rate.
Step 3: Negotiate a deal
Take your lowest quote and see if the other companies will beat the rate. School Loans Check for origination fees and factor that into the cost.
Step 4: Compare with Federal Repayment Plans
The federal plans have benefits not offered by private companies such as income-driven repayment options as well as forbearance and deferment. School Loans The refinanced rate needs to be lower than your original loans. You would need to have a secure job with a high income to give up federal repayment benefits
When a federal repayment plan is the best option
Federal repayment plans are best for borrowers with high amounts of student loan debt and therefore need options such as income-driven repayment, forbearance, forbearance and loan forgiveness.
Federal plans particularly favor people with below-average incomes. School Loans Income-driven repayment plans will allow them to afford the monthly payments, and for cases with large amounts of debt, loan forgiveness can save a lot of money. Forbearance and deferment will suspend payments in the event of unemployment, financial hardship, return to school, military deployment, or serving in the Peace Corps.
Let’s take a look at the payment options available to the average law school grad.
He or she probably graduated from a public law school where the average loan debt was $96,054 and landed a job with a $65k salary, which is about average.
The Department of Education estimates that student loan payments for someone with that salary should be in the range of $433-$542 per month. There are many options available, including standard plans, private refinancing, pay as you earn (PAYE) or income-based repayment such as public service loan forgiveness.
*Income was adjusted to reflect average public defender salary
The first thing you should notice is that the standard plan is more than double the recommended monthly payment. School Loans A private refinance with a generous 4.6% interest rate doesn’t reduce monthly payments. Doubling the refinance loan term to 20 years can get you closer, but still, you’re outside the recommended amount and paying a lot more for it.
Then we come to Pay As You Earn, one of four types of federal income-based repayment plans. Under PAYE, monthly payments are limited to 10% of your discretionary income, and the remaining loan balance is forgiven after 20 years. That means the first year of payments is only $391/month. But you have to factor in a 3.5% annual increase in income, so by the end of 20 years you’ll be paying around $807, and your income should be around $115k per year. At that point, the remaining $83,141 balance is forgiven.
PAYE makes a lot of sense for the average law school grad, School Loans but there is another option — Public Service Loan Forgiveness (PSLF) — which was still available in the summer of 2018. School Loans There has been talk of the Trump administration ending the PSLF program, but as of July 2018, it still exists.
The PSLF program forgives all outstanding loan debt after 10 years of timely payments and employment in qualified public service jobs. More than half a million law school graduates have enrolled, including Jason Thomas.
It is not fair to say that Thomas chose the PSLF option. The fate of lawyers is determined by their position on the bimodal distribution curve and how much debt they have.
Thomas, like many lawyers, spent more than six figures on his degree and didn’t get much back when he graduated. The only job he got was a $40k salary as a public defender in a small town in Florida’s panhandle.
It was slated for public service loan waiver.
With $170k in student loans, a standard repayment plan was out of the question, and a private refinance wouldn’t do enough to lower the monthly payments. His only option was an income-based repayment scheme and since he worked in the public sector, he was also eligible for PSLF.
“It wasn’t bad until I was hired in my public position and I realized I could never pay that money back,” Thomas said. “There are a lot of ways to make $40k a year without that kind of debt. School Loans But I don’t regret it because I met my wife in law school and I started my beautiful family here.”
Income-driven payments did exactly what they were designed to do and allowed them to keep most of the salary. Thomas has used it to pay off a home mortgage and save for retirement.
When refinancing is the best option
Student loan refinancing is best for law school graduates who have a stable job and high income. School Loans They must not need or qualify for federal repayment benefits.
A lawyer in this category may have graduated from a top-ranked private law school — where the average loan debt was $134,497 — and joined the group of 20% of new hires who earn at least $160k a year.
The recommended monthly payment for a lawyer with that amount of debt School Loans and a $160k salary is between $1,066-$1,333.
Standard Plan Refinanced Refinanced
Monthly payment $1,540 $1,400 $1,036
Interest Rate 6.6% 4.6% 4.6%
Loan tenure 10 years 10 years 15 years
Total payment $183,784 $168,048 $186,440
The standard plan comes at a hefty price – $1,540/month – but if you want to refinance that loan at a lower interest rate, School Loans you’ll save $140/month and $15k overall. However, the monthly payment is beyond the recommended 10% of your income. Choosing to extend the loan term to 15 years will help you reach target payments, but will cost about $20k more to do so.
The decision comes down to whether or not there are better things to do with the extra $364/month. To earn this kind of salary, you’re probably working in a large metropolitan area with a high cost of living. The extra money could be the difference you need to get a mortgage or invest in retirement.
Refinancing was a no-brainer for Dustin Fitzpatrick, School Loans who racked up $159k in student loans to get his diploma from Yale Law School. This earned him a salary of $160k per year from a law firm in Miami.
“When you first see the debt after graduation, School Loans it was like a punch in the gut,” Fitzpatrick said. “I expected it to go in, but it still shocks me.”
Fortunately, his law firm partnered with SoFi that offered a $500 signing bonus, but the more important number, School Loans the interest rate, wasn’t competitive enough. Fitzpatrick got a few quotes from other online refinance companies and took the lowest one back to SoFi. After some haggling, he got a lower rate and a signing bonus.
“It was a little difficult,” Fitzpatrick said. “But after getting a quote from CommonBond I got SoFi down from 5.1% to 4.6%.”
That 0.5% difference puts an extra $50 in his pocket every month and saves him about $5k in interest.
Federal Consolidation Pros and Cons
- Low monthly payment
- Flexible payment options School Loans
- Renewal eligibility for delay and forbearance
- Longer repayment period
- Pay more in the long run
- Grace period ends
- Private loans cannot be consolidated into a federal consolidated loan
Private refinancing pros and cons
- Potentially lower interest rates
- Potentially lower monthly payments
- Lose tolerance and delay options
- Lose eligibility for loan forgiveness
- Potential application and origination fees
How to get the lowest interest rate on your law school loan?
- Have a high credit score
- Good employment history and strong income
- Use a co-signer with good credit and income
- Low debt-to-income ratio
- Agree to a shorter term – the longer the term, the more interest you pay
- Shop around!