American Bar Association data show that in 2012, out-of-state tuition at public law schools averaged $36,202 per year and private law school tuition averaged $40,634. Factoring in “indirect costs” such as books, housing, board, and health insurance (which can cost between $12,500 and $25,000 per academic year), the stated “cost of attendance” at the most expensive law schools nears $75,000 per year.
A legal education requires a major investment of time and money. If you rely on student loans to finance your education, follow these steps to reduce your overall costs and manage your student loans successfully.
Recognize Where Your Decisions Have the Greatest Impact
Two-thirds of undergraduates graduate with debt, owing an average of $29,000 in loans for their education. Typical law students borrow more than $125,000 in student loans during law school.
You don’t decide how much your law school charges in tuition so focus on minimizing the expenses youcan control.
Live in a cheap place. Transportation, food, and housing represent major expenses that can vary greatly depending on your choices. If you develop a detailed budget that reduces those costs, you can minimize how much you need to borrow in student loans. For example, consider living with roommates, using public transit, and eating mostly at home.
Minimize the amount of interest you pay over time. Law students borrowing to finance education typically borrow federal unsubsidized loans first, up to $20,500 each school year. Students who need more financing usually borrow Direct Graduate PLUS (Grad PLUS) loans next. These federal student loans have fixed interest rates, currently 6.21 percent for unsubsidized loans for graduate and professional students, and 7.21 percent for Grad PLUS loans. Some students with exceptional financial need also may borrow federal Perkins loans, low-interest campus-based federal student loans.
If you are spending borrowed money, recognize that it costs more to buy things (including education) with borrowed money. Interest starts accruing on most student loans as soon as you get them, and interest keeps accruing until you have finished paying off the loan.
The amount of interest that accrues on your loan from month to month is determined by a “simple daily interest” formula. The formula consists of multiplying the loan balance by the number of days since the last payment times an interest rate factor representing a daily rate. Using this formula, a typical law graduate owing $125,000 at today’s rates (7 percent) would accrue about $720 in interesteach month.
If you don’t pay the interest while you are in school, it will be capitalized, or added to the principal of the loan, and then you end up paying interest on interest. That gets expensive fast. Unpaid interest can increase your loan balance by 15 to 20 percent by the time you graduate.
Many recent graduates rely on federal student loan repayment plans that include low monthly payments based on income. But understand that the longer it takes you to repay your loans, the more you will pay over time. If you can establish an aggressive repayment strategy, you can significantly lower the cost of your loans over time.
Avoid private student loans. Since federal loans can’t be used for post-graduate expenses, many law graduates borrow private student loans to cover the costs of a bar review course and for living expenses while studying for the bar. Take care to minimize your borrowing of that bar study loan; it isn’t just more debt, it’s a whole different kind of debt. 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 are likely to go up over time. Private loans lack the flexible repayment options, discharge, and forgiveness provisions of federal student loans.
Manage Your Debt Wisely
Federal student loans have flexible repayment and forgiveness provisions. Most law students rely on student loans to finance education. Concentrate on reducing the costs that are within your control, minimizing interest charges, and avoiding expensive private loans. These steps will put you on track to successfully manage your student debt. n
Three Ways to Minimize the Price of Legal Education
Recognize that your housing is the biggest cost you can control.
Understand that you must actively manage your student loan repayment.
Avoid risky and expensive private student loans.
Student Debt Series
Want more information on managing your finances? Read our four-part series tackling student debt (also written by Heather Jarvis). Installments appeared in the November 2012 and January, March, and May 2013 issues of Student Lawyer.
Heather Jarvis is an attorney specializing in student loans and is the founder of askheatherjarvis.com.
Vol. 43 No. 2