[Editor's Note: The second in a three-part series, this article picks up right where Part I leaves off and continues the discussion on student loan debt-borrowing and repayment. In the article below, it is presumed that the reader has borrowed FEDERAL student loan debt for the purpose of completing a legal education.]
Recently, I shared with you a little bit about my legal education journey, my acquisition of student loan debt, and my goal and strategies toward repayment. If you have not already done so, I suggest that you read that post prior to reading this one, to familiarize yourself with what has been discussed thus far.
Student loan debt has plagued our nation and continues to be a front-line topic in recent political debate. In the past five years, much legislation has been passed on this issue and much more is still being debated on the state and federal level. Recent legislation includes the elimination of government-subsidized Stafford Loans for graduate students and the temporary elimination of the long-standing interest subsidy during the six month post-graduation grace period. Likewise, the interest rate rebates given to borrowers who make their first 12 monthly payments on time has been temporarily eliminated. Over the past five years, there has been a surge in repayment options ranging from unemployment deferment to income-based repayment plans, as well as public service and public interest repayment and forgiveness options. I am extremely grateful for the work being done on the national and state level to assist students like myself who are plagued with student loans.
I firmly believe that student loan debt repayment can be managed if borrowers are better informed about their rights and responsibilities. It is not my aim to tell borrowers how to immediately rid themselves of student loans (anyone who knows this secret, please do share it with me). However, I hope to share with the readers some of the lessons that myself, my former law school classmates, and my colleagues say that we wish we had known about student loan borrowing and repayment. As I stated in my previous article, debt is debt and student loans must be repaid.
1. Be Realistic
If you are funding your lifestyle with massive debt, it is important to consider the implication of each major financial decision that you undertake. At this point, it is probably too late to dwell on whether attending law school and/or spending a semester abroad was a smart decision. However, going forward, consider whether it would be rational to obtain yet another degree funded with student loans or to take a cross-country “discovering myself” European tour. Take a closer look at your complete financial picture and be realistic when making major financial decisions, especially if eliminating student loan debt is a concern or priority of yours. Also be realistic in your efforts to repay your student loans—do not become over-zealous in your efforts so as to sacrifice your health, sanity, and well-being.
2. Consider Part-Time or Contractual Employment
The first piece of advice often given in the area of personal finance and managing debt is “earn more, spend less.” In other words, find ways to increase your income while reducing your expenses. In Part I, we briefly discussed ways to reduce expenses. Here, however, we will discuss ways to generate additional streams of income.
Looking back at my law school experience, I would urge current law students to consider paid part-time work while enrolled in law school,but only to the extent that doing so would not compromise the law school experience or cause the borrower to neglect his/her academic duties. Working part-time should not necessarily entail clocking in hours at a company. Be creative! Can you afford to tutor youths at a nearby school? Can you babysit for a couple who needs one or two date nights a month? Are you a comedian or entertainer or do you have special photography or MC’ing skills? Can you contribute written pieces to an online or print publication or can you review books and company products? These skills can be tapped into as a source of additional income to support your day-to-day living. Keep in mind that the American Bar Association (ABA) stipulates that a full-time law student may not work in excess of 20 hours per week.
The advice above is not limited to law school students; the notion of “earning more and spending less” is applicable to law school graduates who want to eliminate their student loan debt. A law license arms attorneys with a plethora of income-generating opportunities. Among these are the opportunities to develop a side solo practice, draft legal documents periodically, edit bar review or bar exam essays, teach at a nearby community college or university, or contribute to an online or print legal publication. Be creative as you seek ways to generate additional sources of income!
3. Begin Repayment ASAP
Borrowers do not have to wait until graduation or until the grace period is up to begin making payments on student loans. If you elect to begin repayment prior to the scheduled repayment day, the primary focus should be on repaying the principal first. As with other forms of debt, remember that paying the monthly minimum is not always the smartest move to make. If it is financially feasible for you to devote more funds towards the elimination of your student loan debt, consider paying more than the monthly minimum amount due.
A concept that I recently adopted was that of treating my debts as a utility bill. I would not go a month without paying my electric, gas, or water bill. Why then should I go a month without paying on my student loan debt?
4. Pay Attention During Exit Counseling
Prior to law school graduation, all federal student loan borrowers are required to complete an Exit Counseling session. During this session, each borrower will be instructed on the borrower’s rights and responsibilities as it relates to their student loans. Additionally, borrowers are provided with useful tips and information on how to manage student loan repayment post-graduation.
I urge all borrowers to pay attention during this session for a number of reasons. First, during this session, you will most likely receive a print-out of all of your federal loans (undergraduate and graduate). This print-out will include the principal balance of each loan, the amount of interest accumulated on each of your loans to date, the name of your lender and servicer, and the repayment status of each loan. Personally, this was my first time seeing all of my federal student loan debt (balance and interest) listed cumulatively. Second, because this session is federally mandated, the instructor should be well-versed on all legislative changes related to student loans, and will likely be abreast of all proposed legislation in this area. This is your opportunity, as a borrower, to ask a knowledgeable professional about your rights, responsibilities and repayment/loan forgiveness options. Third, as a component to the exit counseling, most law schools will include a brief discussion on personal finance with focus on debt-management and budgeting. All in all, pay attention during exit counseling and periodically review the materials provided to you during the session.
5. Flee from Bar Study Loans
A new trend among law school students is to borrow a bar study or bar exam loan prior to graduation. These loans are traditionally given for the purpose of assisting graduating law students with bar exam related expenses including payment for exam preparation course, exam registration costs, housing and living expenses, licensing fees, etc. Students are likely taking these loans as a cushion, just in case finding post-graduation employment takes a while longer than expected. Before electing to borrow a bar study loan, be certain to inquire of the lender and understand their responses to the following questions: (1) what is the interest rate; (2) is there a grace period, and if so, what is the grace period; (3) are there any loan fees (repayment or disbursement or reserve fees) and if so, can these fees be waived; (4) what is the repayment term; (5) when must repayment begin; (6) are there any repayment incentives; (7) what is the loan limit; (8) is there a prepayment penalty; and (9) is your individual credit history and credit score sufficient to qualify for this loan or would you need a co-signer?
To the extent possible, I would advise graduating law students to flee from bar exam or bar study loans. These are private loans and their interest rates are traditionally variable (and typically higher than those of federal student loans). Furthermore, your bar loan cannot be included in your federal student loan consolidation package and the various repayment plans may not be available. Speak with your financial aid counselor about other scholarship or borrowing options before resorting to bar exam/ bar study loans.
6. You Do Not Have to Consolidate
Caveat: the information discussed in this section applies primarily to FEDERAL student loans (Direct and FFEL Stafford subsidized, unsubsidized and PLUS), and not necessarily to private loans or Perkins loans.
As a student loan borrower, you will frequently hear the term “consolidation” being used when discussing student loan repayment. Consolidation is a process whereby a borrower works with his/her lenders to combine all or a select number of his/her student loans into one new loan with the hope that the monthly payments and interest rates will be reduced. For federal student loan consolidation, all of the borrower’s student loans are combined into one package (a new loan) with a fixed rate for the life of the loan. What does this mean for the borrower? This means that rather than having to make separate monthly payments to different creditors each month, the borrower can make one payment to one lender. This also means that the borrower creates a new loan with a fixed interest rate for the life of the loan without the hassle of undergoing a credit check or obtaining a co-signer.
Before one elects to consolidate, it is important to understand the implication of this decision, as well as the advantages and disadvantages of consolidation. Among the most-frequently cited reasons why borrowers consolidate are convenience and cost-savings. As mentioned earlier, by consolidating, a borrower will only have to make one payment a month (unless the borrower elected to do several consolidations or elected to exclude certain loans from his/her consolidation package). When loans are consolidated, the fixed interest rate of the new loan is based on the weighted average of the interest rates on the loans being consolidated. In exchange for the borrower making lower monthly payments (extending the repayment life of the loan), the borrower will pay more on the debt due to the continued accruing interest. Once loans are consolidated, they cannot be removed. Therefore, it is important for a borrower to ensure that the cost-savings being offered are actually beneficial to the borrower.
For borrowers who are currently receiving borrower benefits on their original loans, bear in mind that some of these benefits may be lost if and when the loans are consolidated. Before consolidating, make sure that the benefits you will gain from consolidation will outweigh the benefits that you currently retain if the loan debts are kept in their original form (interest rate discounts, principal rebates, and any other previously acquired cancellation benefits).
Additionally, it would be wise to inquire into the following matters before undertaking consolidation. First, how is the previously acquired interest being treated when all the loans are consolidated? In other words, will the principal and interest retain their separate identities or are they capitalized in creating the new loan? Second, if and when making “extra” monthly payments, can you direct the money to “principal only” or “interest only” portions of the loan? Third, does the lender charge a prepayment penalty or fee to individuals who elect to pay the loan off before the term of the loan?
Personally, I am not an advocate of student loan consolidation because I do not believe that stretching out the repayment period of a loan or refinancing the loan at a mildly lower interest rate in exchange for a lower monthly payment is the wise loan repayment strategy. The truth of the matter is that while consolidation may help a borrower attain a lower monthly payment, that borrower will accumulate several thousand dollars of additional interest (“debt”) as a result of extending the life of the loan.
In deciding whether to consolidate or not, borrows should keep in mind the following four pivotal points. First, if you are struggling to make your monthly payments, talk to the lender about their various deferment options or repayment plans (we will discuss these in part III of this series). Second, if you have federal student loans, the interest rates are now fixed (and have been since July 1, 2006) so your concern should not be having higher interest rates than the current market rates. Third, if you want additional time to pay your loan, keep in mind that the longer it takes you to pay the loan, the more money you will have to pay back as a result of the accruing interest. Fourth, if you are tired of the hassle of making multiple student loan payments each month, consider setting the student loan repayment on an automated withdrawal from your bank account.
Another reason why I am not an advocate of student loan consolidation is because of my belief that “debt can be handled if you break it down into smaller repayment pieces.” By keeping your loans separate, the borrower can target the debt with the highest interest rate for accelerated repayment (making extra payments on this debt with any available funds) while paying the minimum on all other student loan debt. This debt elimination strategy is often called the avalanche approach. Conversely, a borrower can target the debt with the smallest balance and once paid off, can divert that money to the next smallest debt and so forth. Why the smallest balance, you may ask? Some individuals find it the most rewarding because of the perceived “small victories”—it fuels motivation and re-energizes a commitment to rid oneself of debt. Whichever strategy (avalanche or snowball) works for you, adopt it and stick with it.
7. Take Advantage of Education Tax Incentives
Attaining a law degree is an expensive endeavor, but don’t worry, the federal government knows this as well. Consequently, there are several tax incentives available to individuals paying and/or borrowing to pay for education related expenses. We will focus on two in particular in this article, although I will advise that borrowers visit the Internal Revenue Service (IRS) website and/or speak with a tax professional.
The first tax incentive worth pointing out is the student loan interest deduction. If your modified gross income is less than $75,000 (or $150,000 if filing a joint return), the IRS grants a special deduction for the student loan interest that you paid during the year. This deduction can reduce the amount of your income subject to taxes by up to $2,500 per year. The second tax incentive worth discussing is the lifetime learning credit. This tax benefit provides that an individual can claim a lifetime learning credit of up to $2,000 for qualified educational expenses paid while enrolled at an educational institutional.
Keep in mind that these are just two of the tax benefits available for education. Law school students and graduates should inquire into other tax benefits such as the tuition and fees deduction and business deductions for work-related education.
8. No Matter What, Do Not Avoid Your Lenders/Servicers
Please, whatever you do, stay in contact with your lender. Report all changes of your address and other contact information. Open and read every mail and email sent to you by your lender or servicer. If repayment gets burdensome or impossible, contact your lender immediately to discuss your options. Do not dodge or ignore your lender or servicer or their collection agency representatives. Keep in mind that ignoring your lender and not paying your debt can lead to serious, severe, long-term financial consequences.
As I conclude part II of this three-part series, it is my hope that the information presented is useful and informative. I do not attest to know the ins and outs of student loan borrowing and repayment. Like many borrowers, I am learning as I go along the process and I invite you to share your experiences and information learned with me, as well as our readers. Join me in part III as I conclude with a detailed discussion of the various repayment plans available to federal student loan borrowers.