Part Four of Four in a Series by Heather Jarvis
In the final installment of her series, student debt expert Heather Jarvis discusses which student loan repayment strategies best fit your existing financial circumstances and your employment expectations.
Law graduates work in a variety of positions earning a range of salaries, and there is a student loan strategy to fit any career path you choose to pursue. Some law grads practice in large private law firms, some join or create small law practices, still others choose to devote their careers to government or nonprofit service. Consider what you want to do with your law degree and which student loan repayment strategies best fit your existing financial circumstances and your expectations for employment and earning over time.
REALISTICALLY ESTIMATE YOUR FUTURE EARNINGS
Employment data for the class of 2011 from NALP (the Association for Legal Career Professionals) indicate that starting salaries for recent law graduates vary greatly. NALP estimates that the highest salaries of $160,000, earned by attorneys working in the largest law firms, account for perhaps 10 percent of salaries. Small-firm positions account for over half of the jobs taken in law firms, and typical salaries for those positions are $50,000 to $70,000.
Outside of private practice, most salaries are $75,000 or less. Government and public interest job median salaries remain stagnant—$52,000 for government jobs, and $45,000 for public interest jobs.
Large law firms paying the highest salaries typically focus their recruitment efforts within the most exclusive law schools, and the majority of law graduates cannot realistically expect to land in one of these positions. NALP reports that most attorney starting salaries tend to cluster around the $40,000 to $65,000 range; the median salary for class of 2011 graduates with a full-time job lasting at least a year and reporting a salary was $60,000.
IT COSTS MONEY TO OWE MONEY
Interest starts accruing on most student loans as soon as you get them and keeps accruing until you have finished paying off the loans. When formulating your strategy, begin with the idea that the longer it takes you to repay your loans, the more it will cost over time. Grads with the ability to pay their loans quickly should consider doing so. That said, every student loan borrower needs a monthly payment he can afford, and federal student loan repayment plans allow for a range of flexible repayment options.
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.
Keep in mind that you need an affordable monthly payment, without forgetting that it costs money to owe money.
Income-Driven Repayment Options“Pay As You Earn” (PAYE) became available on December 21, 2012, for those who (1) got their first student loan on or after October 1, 2007, and (2) got a student loan on or after October 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.
Income-Based Repayment (IBR) is available for those who got their first student loan before October 1, 2007. 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.
Income-Contingent Repayment (ICR) is also available and should be considered, although it will not be as beneficial as IBR or PAYE for most borrowers. The formula used to calculate monthly payment amounts under ICR tends to result in higher monthly payments.
WHAT TO DO BEFORE YOU ARE WORKING FULL TIME
It takes time to find the right job. Here’s what to do about your student loans while you are job hunting:
1. Know your available grace periods. Student loans include a period of time after graduation before borrowers have to start making payments on their student loans—typically a six-month grace period (if you have Perkins loans, it might be nine months, but if you have private loans, there could be no grace period at all; check with your loan servicer to be sure). Recognize that each loan has only one full grace period, and if the grace period on any of your loans has already been used, you will need to make a decision about how to handle these loans more quickly (for example, this might apply to you if you spent six months or more after undergraduate school before entering law school).
After the grace period, borrowers who do not select a repayment plan will automatically be enrolled in “standard” repayment. But standard repayment can result in a high monthly payment, and you need a monthly payment you can afford.
2. Consider the advantages of income-driven repayment options over forbearance. Although unemployed student loan borrowers may qualify for temporary postponement of payments or forbearance, forbearance may not be the best available strategy. If you don’t pay all the interest that is accruing, it may be capitalized—or added to the principal of the loan. Capitalization is expensive because you end up paying interest on interest. When a borrower chooses forbearance, any unpaid interest is capitalized following the forbearance period. There are limits to when and how much interest capitalizes under the income-driven repayment options. Borrowers with subsidized loans in IBR or PAYE benefit further—because unpaid accrued interest is subsidized for the first three years in repayment. In light of the unfavorable capitalization of unpaid interest at the conclusion of forbearance, unemployed grads should consider the potential advantages of choosing to enroll in an income-driven repayment plan in lieu of entering forbearance.
WHAT TO DO IF YOU ARE IN PRIVATE PRACTICE
When developing a student loan strategy, graduates working in private practice need to evaluate their current income and future salary expectations in addition to their total financial circumstances. Salaries for attorneys in private law firms are occasionally as high as $160,000 per year, although most earn significantly less.
1. Grads with high income as compared to their balances should consider the advantages to repaying their loans aggressively. Some grads in private practice can afford to make large monthly loan payments, pay more than the minimum required, and will minimize the total cost of their loans over time by repaying their loans quickly. Borrowers who earn a lot as compared to how much they owe will not always qualify to choose IBR or PAYE and in any event should consider making payments of more than the minimum. But if you owe other more expensive debt (like credit cards or private student loans), it can make sense to pay somewhat less on federal student loans just until you have retired the more expensive debt. Having some cash in the bank for emergencies is also smart. It is important to take into account your total financial circumstances and goals when developing a student loan strategy.
2. Grads with high balances as compared to their income should calculate whether they are likely to qualify for income-driven repayment forgiveness. A number of attorneys in private practice will earn annual salaries that are lower than their student loan balance, particularly in the early years following graduation. These lawyers need to balance their need for an affordable monthly payment with the fact that lower payments often result in higher interest charges over time. Still, when shopping for an affordable payment, borrowers should consider the advantages to the income-driven options, including the potential for forgiveness after 20 years for PAYE or 25 years for IBR. Useful calculators are available at studentaid.ed.gov.
3. If you predict you may have a balance forgiven, prepare for the potential tax bill. If a student loan borrower has a balance forgiven based on participation in an IBR program, the amount canceled is taxable as income to the borrower under current law (that’s not the case for balances forgiven based on public service). Some borrowers may owe substantial amounts in tax as a result of the forgiveness. Decide whether you might be in this circumstance and prepare for the eventuality well in advance by estimating what you may owe in tax and saving over time to cover the cost.
WHAT TO DO IF YOU ARE IN GOVERNMENT OR NONPROFIT EMPLOYMENT
Grads working full time for pay in the government, a 501(c)(3) nonprofit, or a qualifying public interest organization should research available loan repayment assistance programs, determine how much they might benefit from Public Service Loan Forgiveness, and take the steps necessary to benefit from the available programs. To qualify for Public Service Loan Forgiveness, a borrower must:
- make the right kind of payments,
- on the right kind of loans,
- while working in the right kind of job, and
- for 10 years.
1. Choose one of the income-driven repayment options. 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 careful to get the payments in on time because late payments don’t count toward forgiveness.
2. Consolidate federal student loans you borrowed from a bank or private lender through the FFEL (Federal Family Education Loans) program. Because only Federal Direct Loans are eligible for Public Service Loan Forgiveness, some grads will need to consolidate to get older federal loans into Federal Direct so that the loans are eligible for Public Service Loan Forgiveness. Be careful deciding whether to consolidate Perkins loans because they have their own cancelation provisions that would be lost upon consolidation. Borrowers typically choose to consolidate toward the end of their grace period.
3. Keep good records so you can prove you earned forgiveness. Be prepared to verify your income and family size annually as required for borrowers in income-driven repayment. Download the Employment Certification Form from studentaid.ed.gov. Complete the employment verification process every year and submit the form annually and every time you leave an employer. Understand that you’ll need to apply for forgiveness and demonstrate that you met the requirements of the program.
Law grads will be well-served by considering their career goals and expectations when crafting a personalized strategy for managing student loan debt. Life changes such as getting married, changing jobs, having a baby, or buying a house can influence whether your initial student loan repayment strategy is still the best one for you. To minimize your costs and reach your goals, it’s a good idea to reassess your repayment plan each time something significant changes in your life.
- Recognize that each loan only has one full grace period, and if the grace period on any of your loans has already been used, you will need to make a decision about how to handle those loans more quickly.
- Capitalization is expensive because you end up paying interest on interest.
- If you owe other more expensive debt (like credit cards or private student loans), it can make sense to pay somewhat less on federal student loans just until you have retired the more expensive debt.
Vol. 41 No. 9