Student Loan Plan: Managing Law School Debt

Michael Lux Blog, Student Loan Plan 0 Comments

In this edition of the Student Loan Plan, we look at ways Emily can manage her mountain of law school student loans.  .  If you want tips for dealing with your student loans, contact us.

Jan writes:

  1. I took out around ~125,000 in principal of student loans for law school over the course of three years.  I graduated in May 2014. I am on a 10-year repayment schedule and started payments on most of the loans after the 6-month grace period ( a few had longer grace periods) (so I have made 10 monthly payments on most).  Does it make sense that my total outstanding debt is currently at ~135,000?  I suppose it could make sense with compounded interest and the fact that a large portion of my current monthly payments goes toward interest.
  2. I am considering refinancing.  My overall interest rate is 5.53% across all my loans.  I have thought about just refinancing some “private” loans that I received directly from my school, which have relatively high interest rates. But the overall savings from doing that would not be very great (because the principal amount on them isn’t that high).  An alternative move would be to refinance those loans as well as some of my federal loans (direct plus with high interest rate).  Is it common for people to refinance just for a subsection of their loans like this?

Is my balance right?

Your first question is a relatively common question.  Most people do not go beyond the simple analysis of whether or not the balance seems right.  Given the numbers you have provided, the total balance does seem like it could be the right amount.

However, you should demand a little more out of your student loan servicer.  Get old statements and review the numbers month over month.  Look for inconsistencies.  If you have any questions, ask them until they are answered to your satisfaction.  Calculation errors are not common, but it is on you to make sure that they didn’t happen in your case.

The Partial Refinance Option

For starters, getting rid of the high interest private loan debt is definitely a good first step.  Refinancing those private loans on the private market can save hundreds of dollars a month from day one.  Even for relatively small loans, the interest savings can add up quickly.  The sooner this step can be done, the better.

Things get much more complicated with the federal debt.  A partial federal loan refinance is not terribly common.  In most cases a borrower either thinks they will need the federal perks (such as loan forgiveness or income driven repayment) or they see it as unnecessary.  If you think you need the perks, it makes sense to keep it available for as many loans as possible.  If they won’t be necessary, then just getting the lowest rate on the private market is the best option.

The exception to this rule might apply in your case.  The situation would be where you decide you don’t need the federal perks, but some of your federal loan interest rates are low enough that you can’t save money on the private market.  Suppose you have three federal loans at 3%, 7%, and 8%.  If you can consolidate at 4% it makes sense just to include the two high interest loans and to leave the low-interest loan with the federal government.

However, especially in the case of a lawyer with a large amount of student debt, it is important to consider the federal perks before you give them up.  Public Service Student Loan Forgiveness is a big one that comes to mind.  If you ever end up being a government employer or working for a non-profit, you could be eligible to have your loans forgiven after 10 years.  Given the large number of attorneys that either work for the government or a non-profit, this program would apply to a number of attorneys.  If you are committed to private sector work, it is a moot point, but if a career path shift may be in your near future, it might be worth leaving the federal loans untouched.

Bottom Line

There is no one size fits all solution to managing student debt.  Borrowers who keep a close eye on their lenders and carefully weigh all of their options will be the ones who end up making the best decisions.