The Student Loan Plan: Jane and Law School Debt

Michael Lux Blog, Mailbag, Student Loan Plan, Student Loans 2 Comments

In this edition of the Student Loan Plan, we will take a look at the situation of a soon to be law school graduate trying to put together a plan for dealing with federal and private student loans.  If you want tips for dealing with your student loans, contact us.


I am about to graduate from Law School. I attended in the evenings and worked full-time all the way through. Although most jobs were not particularly high paying, I only took out law school loans for tuition, not personal expenses…. however…… unfortunately I had a large amount of private, undergraduate loans. During my last 2 years of law school I took out more in federal loans to get get rid of my high interest rate Sallie Mae loans. I still have a 30k (25K principle) private loan (don’t ask why it is so much- I went to a private undergrad for a year before deciding it was too expensive. My parents had no problems paying off their loans so they didn’t advise me not to take out this much) with a 5% interest rate, which I have been paying on for a while, and plan to continue to do so via auto payments. *If it would be smart to refinance this, let me know.

I purchased a house and have about 53K of equity in it. I have a low interest rate and don’t know if I should re-finance due to my immense student loan balance.

My Federal Loan total: 131K principle, about 150K now. I want to start paying on that, but I am unsure where to start. I make 55K a year right now. I will graduate in May and will take the bar Feb 2017.

Everyone is talking about IBR, but I do not want my student loans hanging over my head for 25 years… I was considering the Graduated Payment Plan, because I would like to stay at my current company and can anticipate raises every few years.

Bottom line: I would like to be pro-active about this and surprise, surprise, school administrators are not helpful. I just need some general advice or more resources to get me started.

Thank you!

– Jane

Putting together a plan

There is a lot to like in Jane’s email.  For starters, we applaud the decision to work during the day while attending school at night.  This is obviously a very hard route to go, but it saves a bunch of money, so congratulations on that accomplishment.

The desire not to have student loans lingering for decades is also commendable.  With this in mind, some of the ideas mentioned will focus on eliminating the debt as soon as possible.

Why Is everyone talking about IBR?

The biggest hurdle is clearly the 150k in federal student debt.  The 30k in private loans is nothing to ignore, but it represents less than 20% of Jane’s total debt.

The reason that IBR, short for the Income-Based Repayment plan, is so popular is because it is such a good option.  IBR is especially valuable to borrowers with very high balances relative to their income.  IBR ensures that only 15% of your discretionary income is required to be paid towards student loans.  IBR also qualifies for forgiveness after 25 years of payments, or in the case of those working in public service, it comes after 10 years.

Based upon Jane’s question, it appears she has no plans on working public service or paying 15% of her income for the next 25 years.  While the graduated repayment plan may sound good in theory, it is likely to be a bad option.  Even if Jane doesn’t think she will ever need student loan forgiveness, if her payments are made under the IBR plan, they count towards forgiveness should she ever end up in public service or with a huge drop in income.

Most importantly, the thing to remember about the Income Driven Repayment plans is that they set the minimum payment each month, not the maximum.  Because there are no pre-payment penalties, and because interest rates are the same regardless of the payment plan selected, choosing a plan with a higher required minimum makes little sense.  It just takes away flexibility.  Whether your monthly payment is $50 or $200, if you have even more to pay towards the loan, you want to be able to do it.

What everyone should be talking about

Even though everyone at Jane’s school is talking about IBR, and even though it is probably a better choice than the graduated repayment plan, it is probably not the best option.  For students who took out their first loans after October of 2007, the PAYE (Pay As You Earn) Plan is a better choice.  Forgiveness can come sooner and the minimum payment is even lowered to 10% of discretionary income.  If PAYE is not an option, the newly created Revised Pay As You Earn (REPAYE) is a great option for many borrowers who only qualify for IBR.  It isn’t quite as good as PAYE, but it does come with the lower payments of PAYE.

Those Pesky Private Loans

The 5% interest rate on the private loans is actually pretty good.  There are better rates available through refinancing, but 5% is a great place to be starting from.

The way this loan is handled depends largely on how the federal loans are handled.  If there is any chance that you may be seeking forgiveness, it is probably smartest to aggressively pay off the private loan while just paying the minimum on the federal loans.  Once the private loan is paid off, you can revisit the forgiveness possibilities and adjust your plan accordingly.

If you are certain that there is a 0.0% chance of seeking forgiveness (meaning you have no doubt of your future earnings and nature of employment) paying off the highest interest loan first is the smart move.  If you are in the situation where seeking forgiveness has little value, it might also be worth considering consolidating your federal loans on the private market.  This route might not make sense for Jane right now, but if her salary dramatically increases, it could be a great option.

Taking Advantage of Home Equity

For Jane or anyone considering using home equity to pay off student loans, it is a dangerous move.  While it can work in limited circumstances, there are huge risks.  If you fail to pay off your student loans, your credit plummets and the debt collection begins.  The process can be painful and expensive, but having your house foreclosed could be even worse.  If you shift the debt, think about the changing risks before doing so.

Final Thoughts

Interest rates, income, total debt, and payment plans are all important considerations when paying off your student loans.  One that gets little consideration is how aggressive you want to be.  Because of things like aversion to debt and aggressiveness vary from person to person, there isn’t an absolute best plan for most circumstances.  In most cases, there are a number of options with pros and cons.  Today we have tried to share some of the pros and cons that go into planning repayment.  No matter what you decide to do on this day, it is important to remember that this plan needs to be fluid.  If your circumstances change, you might want to adjust your student loan plan with it.

  • Tara

    This is an awesome blog! You made a great point about the “payments” are minimums, not maximums. People often get into loans that are more aggressive than they can handle long term because they don’t want the debt burden. Well, I’d like to lose 10 lbs by next week, but things could go differently and I need to be prepared for that. Better to go for a lower “required” payment and pay it off early. This does take discipline though.

    Don’t look at what I HAVE to pay, look at how much CAN I pay right now. Hopefully that’s more than the required amount. And also, just paying your bill weekly instead of the end of the month can get rid of the debt faster and may be an easier way to pay, cash flow wise, especially if you’re paid weekly.

    Thanks for taking the time to pull this all together in one place!

    • I appreciate the kind words Tara.

      You are absolutely right about getting into the right mindset. It isn’t easy, but if you get there, it is half the battle.