Get a Grip on Your Student Loans
by Heather Jarvis
id you borrow a lot of money to pay for your education? You are not alone.
The typical recent law student borrowed $75,728 to attend a public law school, or $124,950 to attend a private school, according to data from the American Bar Association. Two-thirds of undergraduates graduate with debt, owing an average of $24,500 in loans for their education.
It Pays to Know Your Student Loans
Law graduates typically have a combination of federal and private student loans. Federal loans include Stafford loans, GradPLUS loans, and Perkins loans. Federal student loans have fixed interest rates and come with important borrower protections, flexible repayment provisions, and opportunities for forgiveness.
Private student loans present significant risks to student borrowers and are typically more expensive than federal loans. Private student loan interest rates are usually variable and will almost certainly go up over time. Private loans lack the flexible repayment options, discharge, and forgiveness provisions of federal student loans. Recent law graduates typically borrow a private student loan to pay for a post-graduate bar review course and many also have private student loan debt from undergraduate education.
Understanding what kind of loans you have and your repayment options will help you establish a smart strategy to minimize the cost of your student loans.
Choose the Right Repayment Plan for Your Circumstances
There are lots of "repayment plans," some better than others. In general, you should repay your loans as quickly as you can afford to. A good repayment strategy balances your need for affordable monthly payments with the reality that the longer it takes to repay debt, the more the debt costs over time.
Unfortunately, choosing a repayment plan can be confusing, so take some time to fully understand the trade-offs between the different options.
Standard repayment (for a loan that isn’t consolidated) means that you’ll pay equal monthly payments over a 10-year period. Monthly payments will be high, but because you’ll pay off your loan quickly, you will pay less interest. If you consolidate your loans, the standard repayment term can be as long as 30 years. A 30-year repayment term will result in lower monthly payments but much higher interest charges over time. If you need low monthly payments, consider income-driven repayment options (see below) before choosing a long-term repayment plan.
Income-Driven Repayment Options for Federal Student Loans
If your debt is relatively high as compared to your income (which is the case for many recent law graduates), the income-driven repayment plans provide significant advantages. Monthly payments are established as a percentage of income so that when you don’t earn a lot, your payments are low. Direct loans will offer three income driven repayment options, but not every option will be available for every borrower.
President Barack Obama’s "Pay As You Earn" (PAYE) program will soon be available for those who did not owe a balance on a federal student loan on Oct. 1, 2007, and got a student loan on or after Oct. 1, 2011 (one loan can count for both requirements). Under PAYE, annual payments are capped at 10 percent of "discretionary income" and any remaining loan balance is forgiven after 20 years of qualifying payments. Discretionary income is defined as the amount by which a borrower’s adjusted gross income exceeds 150 percent of the federal poverty rate for the borrower’s family size.
Income-Based Repayment (IBR) is available for federal student loans regardless of when the loans were issued. Under IBR, annual payments are capped at 15 percent of "discretionary income" and any remaining loan balance is forgiven after 25 years of qualifying payments.
Borrowers benefit with subsidized loans in IBR or PAYE, because unpaid accrued interest is subsidized for the first three years in repayment; however, IBR and PAYE are available only for borrowers who demonstrate a partial financial hardship. This status is calculated based on a borrower’s debt-to-income ratio and family size. Average graduating debt and starting salaries mean that recent graduates typically qualify.
Also, the original Income-Contingent Repayment plan is available and should be considered (although for most borrowers it will not be as beneficial as IBR or PAYE).
Income-driven options can be great for student loan borrowers who are not earning substantial incomes, for borrowers who want to minimize their federal student loan payments to repay more expensive private student loans more quickly, for borrowers in public service, and others. The income-driven options have the disadvantage of requiring annual income verification and other paperwork, and because monthly payments are low, interest charges will be correspondingly high.
The income-driven options share many similar characteristics, but there are significant differences, as well. Start by determining which income-driven options are available to you and evaluate which of the available options provides the most benefits. The details matter, so research your options thoroughly.
More Repayment Options
Under a Graduated Repayment Plan, payments start out low and increase during the repayment period, typically every two years. Graduated repayment can work if you have relatively quick increases in earnings, but compare the benefits of income-driven repayment options before choosing graduated repayment.
Extended repayment plans also are available if you owe more than $30,000, but you will pay more interest because the repayment period is longer. Again, if what you need is a low monthly payment, compare the benefits of the income-driven options before choosing extended repayment.
Use the Department of Education’s calculators, available at http://1.usa.gov/T4XpAX, to estimate repayment amounts under the different repayment plans.
Public Service Loan Forgiveness
The public service loan forgiveness program is designed to encourage individuals to enter and continue full-time public service employment.
To qualify for Public Service Loan Forgiveness, a borrower must:
The Right Kind of Payments
Qualifying monthly payments include only those made under an income-driven repayment plan or a payment of at least the amount due under a standard 10-year repayment schedule. Be aware that payments made under a graduated or extended repayment plan do NOT count toward forgiveness. Qualifying payments do not need to be consecutive but be careful to get the payments in on time, because late payments don’t count toward forgiveness.
The Right Kind of Loans
Only Federal Direct Loans are eligible for Public Service Loan Forgiveness. Note that if you started borrowing student loans (like Stafford loans and GradPLUS loans) before July 2010, you might have borrowed federal student loans from a bank or private lender through the FFEL program (Federal Family Education Loans). If so, you must consolidate FFEL loans into Federal Direct Loans for those loans to be eligible for Public Service Loan Forgiveness. Private student loans are never eligible for Public Service Loan Forgiveness.
The Right Kind of Job
Qualifying public service employment under Public Service Loan Forgiveness is full-time, paid work in the government, a 501(c)(3) nonprofit, or a few additional nonprofit positions. "Full time" for most lawyers is an annual average of at least 30 hours per week, unless the employer requires a greater number of hours for full-time status.
Understanding the available forgiveness provisions and repayment plans will help you find the right balance between monthly payments and total costs over time.
Finally, plan to reevaluate your repayment strategy whenever you have significant changes in family circumstances, income, or employment. D
Heather Jarvis is an attorney and student loan expert. She specializes in providing