The decision to refinance student loans is particularly dangerous for many young lawyers. The added risk for lawyers applies whether you were on the Harvard Law Review or graduated at the bottom of your class.
Those who choose to refinance their federal student loans into a private loan may save a bundle on interest, but they sacrifice significant federal perks and valuable flexibility.
Because there is no way to “undo” a student loan refinance, attorneys carefully consider the following red flags.
BigLaw Salaries Are Not Guaranteed
If you are working for a large law firm right out of law school earning a market salary, you already have a track record of defying the odds and exceeding expectations.
However, it is no secret that the vast majority of first-year associates don’t make it to partner. BigLaw burnout is real, and the attrition rate is high.
Don’t assume you will be at the same firm several years from now. Don’t assume that you will always pull in a large salary.
The Appeal of Government Work Makes Refinance a Risk
Working for the government has significant advantages for many lawyers. The hours can be better, and the work may be more fulfilling.
The added job satisfaction often means reduced salary.
However, there is a substantial financial advantage to government work: Public Service Loan Forgiveness (PLSF). Those who qualify for PSLF can have their entire federal student loan balance forgiven after ten years. PLSF can make taking a government job more feasible.
If there is a chance that you may become a government lawyer, you should not refinance your federal loans unless you have a small federal balance.
Massive Debts and Forgiveness
The stakes of the refinance decision are incredibly high for many law school graduates. Federal debts of 200k or more are common.
Lowering the interest rate on such a large amount of debt can save a fortune. Dropping from Graduate PLUS interest rates to the low rates offered by some refi lenders may be worth more than $10,000 in interest savings per year.
However, this means passing up many forgiveness options. In addition to the previously discussed PSLF program, there are many other forms of federal student loan forgiveness.
I know many lawyers hate math, but a quick calculation can be really insightful. Think of the forgiveness programs as an insurance policy. Now calculate how much you would save on interest each year if you refinance with a private lender. The higher yearly interest cost on federal loans is the cost of the insurance policy. If the interest policy is cheap, or you might need the coverage, don’t refinance.
Lawyer Fatigue and Less Lucrative Work
This article is written by a former homicide prosecutor who now blogs about student loans for a living.
Being a badass trial lawyer was a dream of mine. I loved my job. Early in my career, I thought for sure that I would be a practicing attorney for life.
I’ll skip over the personal story and jump to the bottom line: many lawyers do not stay in the profession long-term. The work is stressful. The hours are long. Life happens, and priorities change.
When planning your finances, don’t assume that what is working now will continue to work indefinitely. Have a backup plan or three. Know that new and exciting opportunities may come along. Sometimes these jobs don’t pay as well.
If refinancing only makes sense at your current high salary, it could be a huge mistake.
The Need for Income-Driven Repayment
One of the biggest advantages of federal student loans is Income-Driven Repayment (IDR). Put simply, lawyers should not refinance their student loans if they need access to IDR plans.
In addition to qualifying for forgiveness programs, IDR also ensures that monthly payments are manageable. Rather than making payments based upon what you owe, IDR payments are based upon what you can afford.
The value of IDR may appeal to attorneys in several different ways:
- An extended job hunt – If you are out of work, IDR payments can be lowered to $0 per month. This protection is especially valuable if the job market gets ugly.
- Starting a new firm – If you decide to go out on your own, the first few years may be lean. If you are investing most of your revenue back into your firm, money will be tight. Having IDR payments ensures student loans won’t get in the way of starting your own practice.
- Inconsistent income – If you work on contingency or have considerable fluctuations in income, IDR is excellent. IDR payments are usually calculated based upon your most recent tax return. If you are in a down period, you can have your payments immediately recalculated.
Private Student Loan Refinance Risks
The danger is refinancing private student loans is significantly reduced. Many lawyers who should not refinance their federal student loans may still benefit from refinancing their private loans.
The biggest concern with private refinance may be the possibility of higher monthly payments. For example, the lowest refinance rates currently available are in the 5-year variable-rate category. If you have a loan that is currently on a longer repayment plan, lowering repayment length to five years will result in higher monthly payments, even if you lower the interest rate considerably.
However, this issue can be mitigated by refinancing on a longer loan at a slightly higher interest rate. At present, the spread between short-term loans and long-term loans is minimal.
These lenders currently offer the lowest 5-year loans:
|Rank||Lender||Lowest Rate||Sherpa Review|
|T-1||2.50%||Splash Financial Review|
|T-1||2.50%||Laurel Road Review|
By stretching repayment out over 20 years, borrowers can secure a fixed-rate loan at these rates.
|Rank||Lender||Lowest Rate||Sherpa Review|
|3||5.64%||Splash Financial Review|
Finally, it is worth noting that borrowers can always pay extra to eliminate their loans faster. A borrower may choose to refinance on a 20-year loan but pay extra to eliminate the debt in 10 years. This borrower would have a slightly higher interest rate, but they would also have much more flexibility if their finances worsen.