Repayment of student loans can be complicated for attorneys in private practice.
Many face six-figure mountains of debt. Some may find high-paying jobs, while others struggle. As time passes, the attorneys who experienced early success may find hardships and the ones who faced initial difficulties may find lucrative work.
Unlike the medical field, where many doctors see steady income growth, young lawyer salaries can vary significantly from one year to the next. In the face of this uncertainty, formulating a student loan plan that is flexible is critical to adapt to the changes of the future.
Big Law and Corporate Attorneys
The lawyers who find high-paying jobs right out of law school face some serious financial temptation.
Unfortunately, not all first-year associates work their way to becoming partners. Some find the work unbearable and take less lucrative but more personally satisfying work.
There are three paths that well paid young attorneys typically follow:
#1: Take no special action – Where others might struggle to handle the large bills of the standard repayment plan, large firm attorneys can keep pace with the high bills. This approach might work for some, but it lacks the efficiency of option number two and the flexibility of option number three.
#2: The aggressive plan – Borrowers going this route put the nice apartment and fancy car on hold. Instead, the big paychecks are used to eliminate as much student debt as quickly as possible. Going with the aggressive repayment route will save a fortune in interest. The lawyers that end up making less money at their next job will be glad they paid off their student loans as quickly as possible. The risk with this approach is that the lower salary might come sooner than expected. If that happens, borrowers might have less debt but regret not saving that money for future basic needs.
#3: The saver plan – The idea behind this approach is that you don’t know what your future needs and expenses will be, so the best thing to do is to put the money in savings. Lawyers who see their $190,000 salary become a $65,000 will be glad they saved what they could. The big risk with this approach is the spending on interest. Money in a savings account is lucky to earn 2%, while student loan interest usually charges between 6-8%. The extra spending on interest is the cost of flexibility.
The ideal path could be a mix of strategies. A young attorney might be conservative with their planning and start with the saver plan. Once it becomes apparent that the aggressive plan can be used to eliminate all the debt, the borrower switches strategies.
Tips for the Well Paid Attorneys
Spending some time putting together a comprehensive student loan plan is essential. An attorney with $200,000 in law school debt at an interest rate of 6% is being charged $1,000 per month on interest alone. The numbers are large enough that a minor tweak in strategy can save thousands of dollars.
Refinance carefully – Lenders like SoFi and CollegeAve love young attorneys. Your high salary and large debt mean you are a very lucrative customer. Unfortunately, refinancing isn’t the best move for everyone. Generally speaking, refinancing private loans to a lower interest rate is a smart move. Making the same move with federal loans is riskier. The benefit is lower interest rates, but the downside is that the refinanced loan is no longer eligible for income-driven repayment plans and student loan forgiveness. I usually advise people to avoid refinancing federal loans until they are confident they won’t need federal protections.
Consider the Graduated and Extended Repayment Plans – These older repayment plans are a lousy option for most borrowers. They are not eligible for any of the loan forgiveness programs, and most borrowers find the income-driven repayment plans result in the lowest monthly payments. Well paid attorneys can be the exception and may find that the graduated extended repayment plan offers the lowest possible monthly payment. By getting a lower monthly payment on federal student loans, a borrower can focus on eliminating higher-interest private loans or save the money towards other financial goals. The federal government has a calculator that can help borrowers compare monthly payments on various plans.
Don’t forget other goals – Student loans are not the only financial priority. Because a pension plan is pretty much extinct in the private sector, it is essential to start saving for retirement early. Retirement planning should be done side-by-side with student loan repayment planning. Most borrowers will find that there are ways to save for retirement and pay down student loans at the same time.
Small Practice and Solo Practitioners
Student loan repayment for most attorneys in the private sector can be a tricky endeavor. The big challenge for private sector attorneys is that there can be really good years and really bad years. Coming up with a plan that works during the up years and the down years is tricky.
Student loan refinancing should be utilized for private student loans. Eliminating private student loans is almost always goal number one. Quickly paying off private loans is important because these loans have very few options for borrowers who are struggling. One possible exception to the rule on private student loans would be for borrowers who have very low interest rates on their loans. It could make sense to pay the minimum on a loan at 2-4% interest and put additional funds towards retirement. If your investments are generating interest faster than your debt, you come out ahead by investing.
For the lawyer in private practice, the big perk to federal student loans is the Income-Driven Repayment (IDR) plans. If business slows down, borrowers can have their monthly payments immediately recalculated to reflect the change in income. This protection can be incredibly valuable in lean years. For this reason, borrowers should avoid the temptation of a private refinance for their federal loans unless they are sure that they no longer need IDR flexibility.
Borrowers on Income-Driven Repayment plans may also want to consider upping their pre-tax retirement contributions. This move can lower monthly IDR payments and increase retirement savings.
Ultimately, borrowers will need to find a balance between saving for the future and eliminating student loan debt. The more financial security you have, the more aggressive you can be paying down the debt. Those with more murky outlooks will want to make sure they have built up a significant emergency fund in preparation for what might come.
Is a shift to government work possible?
It is somewhat common for attorneys to bounce back and forth between the private sector and government work. For this reason, it is a good idea for all attorneys to understand the terms and conditions of the Public Service Loan Forgiveness (PSLF) program.
One key detail of the program is that the 120 required months towards PSLF do not have to be consecutive. Lawyers who start their careers in a clerkship should sign up for an IDR plan and certify their employment, even if the next position is with a firm. If they end up working for the government again, it could mean student loan forgiveness a year or two sooner.
The massive amount of debt that can be forgiven under PSLF can also shift the math on a decision between a government position and a private practice job. PSLF was created so that student debt doesn’t prevent people from pursuing public interest work. For many attorneys, it can be a difference-maker.
Being a lawyer can be financially rewarding, but many will struggle.
All attorneys paying down their student debt should consider ways to take advantage of the financially rewarding times. They should also have a plan in place to deal with any struggles.
There isn’t a one size fits all approach for lawyers in repayment. The key is to ask many “what ifs?” and to be ready for as many as possible.