Student Loan Repayment Strategy for Government Lawyers

Michael Lux Blog, Strategy, Student Loans 0 Comments

Government attorneys are not the highest paid lawyers, but what many government jobs lack in terms of salary, they make up for in great employee benefits… especially when it comes to student loans.

The Big Perk: Public Service Loan Forgiveness

Under Public Service Loan forgiveness, a borrower can get all of their federal student loan debt forgiven after 10 years of public service.  The technical requirement is that borrowers have 120 certified payments.

In order to reach the 120 certified payments, three key requirements need to be met:

  1. Eligible student loans – Many federal student loans are not eligible, such as FFEL, Stafford and Perkins, but this eligibility issue can be cured via federal student loan consolidation.
  2. Eligible repayment plan – The main repayment plans that qualify for PSLF are the income-driven repayment plans (ICR, IBR, PAYE, and REPAYE).  Notable plans that are not eligible include the graduated and extended repayment plans.
  3. Eligible employer – If you are not working full-time or your employer isn’t technically eligible for the program, none of your time will count.

The best way to verify that you are on your way to PSLF is to submit an employer certification form.  Sending in this form is the best way to make sure you have met the necessary requirements and are on the right track.  For more about the Public Service Loan Forgiveness Program, be sure to check out our article on the Basics and the Fine Print of PSLF.

Should I worry about Public Service Loan Forgiveness being eliminated?

Many government attorneys have more than six figures of student loan debt.  The elimination of PSLF would clearly be devastating.

The good news is that there are a number of hurdles in place that prevent the government from eliminating the program:

  • Political – Eliminating this program would likely be an extremely unpopular move.
  • Legislative – PSLF is currently the law.  It will take an act of Congress to change it.
  • Contractual – Many Master Promissory Notes (federal student loan contracts) include the PSLF language.

Due to these limitations, proposed changes to the PSLF program almost always apply only to new student loan borrowers.

However, if you are still concerned about the possibility that PSLF is eliminated, you can always start setting aside extra money in a Plan B account.  If PSLF ends up not working out, you have a chunk of money ready to attack your debt.  If PSFL comes through, you have a nest egg for retirement or the next phase of your life.

Picking the Best Repayment Plan

With a four different income-driven plans available, picking the best plan may not always be an obvious choice.  There are a number of considerations that might make one plan better than another.

These considerations include:

  • Marital Status
  • Whether or not your spouse has student loans
  • When you took out your first student loan
  • The types of student loans that you have
  • Your loan balance relative to your current income

Ideally, you can pick the federal repayment plan that results in minimal spending each month.  The less you spend on your student loans during repayment, the more that can be forgiven at the end.

To find the best repayment plan for your particular situation we recommend checking out the Federal Student Loan Repayment Estimator.  This tool will help you compare your expected monthly payment based upon your income, marital status, family size, and state of residence.  The repayment estimator also will tell you how much debt will be forgiven at the time PSLF kicks in.  However, please note that the repayment estimator assumes 5% raises each year.  This assumption may not be valid for many government positions.

Another tool that may be useful for picking out a repayment plan is our article on deciding between IBR, PAYE, and REPAYE.

Private Student Loan Strategy for Government Attorneys

The perks for private student loans are far more limited.  Private student loans do not offer loan forgiveness or repayment plans based upon your income.  There is also little reason for hope coming in the form of government assistance.

The reality is that these loans just need to be paid off in full.  The most efficient way to eliminate this debt is to pay the minimum on all of your student loans except the loan with the highest interest.  This high loan gets paid off with every extra penny you can spare.  Once the highest interest loan is paid in full, you can move on to the next highest interest loan for aggressive repayment.  As loans are eliminated, you will free up more money each month to attack the remaining debt.

Another tool to attack private student loans is to refinance with a private lender.  The way this works is the private lender pays off the student loans you specify, and you repay the lender, at hopefully a much lower interest rate.  This has become a very quickly growing and competitive industry over the past 5 to 10 years, with well over a dozen lenders offering private consolidation.  The idea behind the process is that the graduated and employed version of you is much less of a credit risk thank than the unemployed student version who first applied for your student loans.  The lender gets a safe investment, you get a lower interest rate.  Just be careful not to include your federal student loans in this process as it would mean they were no longer eligible for PSLF or income-driven repayment plans.

Managing Bar Study Loans

If you have a bar study loan, you will likely want to get rid of it as soon as possible.  We have found the interest rates on these loans to typically be outrageous, in some cases higher than credit card interest rates.

Unfortunately, these loans are not actually student loans, so most student loan refinancing options are not available.  The best option from a lower interest rate perspective is usually to refinance using a personal loan.  If you shop around for personal loans you are likely to find a lower interest rate than most bar study loans.

Other tools to aid in repayment

LRAP from your law school – Many law schools offer loan repayment assistance programs for their graduates who work in public service.  The quality of these programs varies greatly from school to school, but it is definitely worth investigating.  Click here for summary of school based loan assistance programs.

LRAP from your state – In addition to school based loan repayment assistance programs, 26 states offer some sort of LRAP.  The quality of the programs vary greatly from state to state.  The American Bar Association has a comprehensive list of all these state based programs.

Student Loan Assistance Programs from your employer – Many employers offer a student loan perk as a tool to recruit and retain employees.  Some employers do better jobs than others when it comes to getting their people enrolled.  Here again, the quality varies from one place to the next, but it is definitely worth investigating.

Federal Student Loan Database – The Department of Education keeps a detailed database of all federal loans.  The National Student Loan Database is a great way to learn exactly how much you owe on your federal loans, the loans types that you have, and who services your loans.

Retirement Programs – Contributions to retirement plans such as 457s and 401(k)s reduce your AGI on your taxes.  This also will reduce your monthly payment on your student loans.  These programs are a great way to start building your retirement and keep your monthly student loan payments low.

Things to keep in mind

Taxes on Forgiveness – One key benefit of PSLF is that the forgiven debt is not taxed.  This is an exception to the typical IRS rule.  If you end up leaving public service and plan on getting your loan balance forgiven after the standard forgiveness that comes after 20 to 25 years on an income-driven repayment plan, know that the forgiven debt is taxed.  That means if you have $50,000 forgiven, the IRS will treat it as though you had an additional $50,000 of income the year your debt was forgiven.

Be sure to submit your Employer Certification Form – Even though this form is not technically required, it is highly recommended.  Our research found that more than 1 in 3 applications are rejected.  If you get in a habit of doing this each year, you can save yourself further headaches, especially if you change employers.

Watch out for Capitalized Interest – If your monthly payment is smaller than the monthly interest that your debt generates, that interest is not immediately added to your principal balance.  This is good because it means you won’t be charged interest on that interest.  However, certain events cause that interest to be added to your principal balance.  This process is called interest capitalization.  Some are unavoidable, such as consolidating your federal student loans, or changing repayment plans.  Other times, the interest capitalization is avoidable, such as missing your yearly income certification.

Be careful consolidating your loans – For many consolidation is an essential step because it is necessary to get certain federal loans eligible for PSLF.  Be sure that you are consolidating your loans with the federal government and not a private lender.  Additionally, federal consolidation is a free service offered directly by the Department of Education.  There is no credit check or income requirement.  Private consolidation (also called refinancing) is an entirely different process.  It may get you a lower rate, but you lose out on PSLF and income-driven repayment plans.  Be sure to talk with your loan servicer about all the implications of consolidating your federal student loans.

Bottom Line

There really isn’t a one size fits all strategy for government attorneys to pay off their student loans.  The good news is that there are a multitude of different programs that can make government work a viable option for attorneys with student debt.