There is a great debate in the legal and financial aid community. Is it a good idea to borrow money for law school? How much is too much? When is law school a mistake?
To be clear, this analysis is critical and should be considered by any perspective law student, but there is a downside. The question often lost in the noise is how to borrow for law school.
Students who make the decision to borrow money for law school need to be very careful about where they source these funds. Mistakes can turn a financial hardship into a hopeless situation.
Graduate PLUS Loan basics
A Graduate PLUS Loan is a federal student loan that is provided to students who complete the FAFSA. The advantage to a Graduate PLUS loan is that students are able to borrow up to the full cost of attendance. The disadvantages to the Grad PLUS loans are the rates and fees.
At present, interest rates on a Graduate PLUS loan start at 7.6%. Making things worse is the onerous origination fee of 4.248%. That means borrowers who need $10,000 to pay for school, start with a student loan balance of $10,424.80 and pay interest of over $66 per month. As time passes, the balance grows. With law school prices at record highs and many graduates facing six figures of student loan debt, the large fees and high interest rates present serious peril to any aspiring lawyer’s finances.
On the surface, the federal student loan option seems less than ideal…
Private student loans
Private lenders target concerned borrowers by advertising lower interest rates and zero fees.
The low rates and fees make the private loans look very compelling on paper to the students who have the income or cosigners necessary to qualify. (Note: the underwriting criteria for private loans is far more strict than for federal loans… not all borrowers will qualify.)
Even with lower interest rates and zero fees, the private loans still don’t stack up to the seemingly overpriced federal option…
An essential insurance policy
Graduate PLUS student loans come with two very important borrower protections.
First, borrowers have the option of Income-Driven Repayment (IDR) Plans. These IDR plans enable borrowers to make payments based upon what they can afford rather than what they owe. This protection ensures that a borrower never has to decide between putting food on the table or staying current on his or her federal student loans.
Secondly, borrowers are able to qualify for Public Service Loan Forgiveness (PSLF). Though the PSLF program definitely has its warts, it remains an excellent opportunity for young lawyers who want to pursue public interest work despite their large amounts of student debt. As an aspiring patent attorney who discovered in law school that he really loved criminal prosecution, this program helped me sleep better at night.
Ideal outcomes in rain or shine
Graduate PLUS loans and the insurance they provide may come at a premium compared to private loans, but the premium is manageable.
Lawyers who end up on the lower end of the legal pay scale will be glad they stuck with the federal loans. Those that land the high paying jobs will find it quite easy to get out from under the high interest rates of the Graduate PLUS loans. At present approximately 20 different lenders offer student loan refinancing services. Highly compensated lawyers should be able to secure lower interest rates with relative ease.
The strategy with Graduate PLUS loans is that students should willingly pay extra for the excellent borrower protections that come with federal student loans. Once, those borrower protections are no longer necessary, graduates can transition to private loans that do not offer the same perks.
Law school may be a great opportunity, but it comes with risks for all students. Make sure your borrowing decisions protect you in case your plans change.
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