Law School Loans: How to Refinance and Consolidate

Jason Thomas went to law school for the money.

The student loans never bothered him because he was going to graduate, start practicing law and make a whole lot of money.

“When you start law school, everybody thinks they’re going to be rich,” Thomas said. “It isn’t until your friends start graduating, and you hear the trouble they have finding jobs and paying back loans, that it gets a little scary.”

It really started getting scary when he discovered something called the bimodal distribution curve for lawyers’ salaries.

The bimodal distribution curve means the bulk of new hires fall into two categories. About 50% of law school graduates start their careers earning $40k-$65k a year. Only one-in-five start at $160k-$180k.

For that reason, a median salary, rather than an average salary, gives us a better idea of what law grad will probably earn. The median entry-level salary for law school graduates in 2016 was $66,499.

That won’t make you rich when you consider the average law grad has $140,616 in combined undergraduate and law school debt. Under the Standard Repayment Plan that figures to about $1,611/month for 10 years.

The U.S. Department of Education recommends graduates should limit loan payments to 8-10% of their total monthly income. In order to afford the $1,611 monthly payment on $140,616 of student loan debt, you would need to make between $193,320 and $241,644 per year.

The Standard Repayment Plan is just too expensive for anyone with that amount of debt, so there are three practical options:

1. Private Refinancing
2. Federal Income-Driven Repayment Plans
3. Public Service Loan Forgiveness (PSLF)

How to Refinance Your Student Loans with a Private Lender

Step 1: Start your search online

There are a number of online lenders that specialize in refinancing student loans. The ultimate goal is to find a lower interest rate and monthly payment, but look for other perks as well. Some companies pair up with law firms to offer incentives like a referral bonus or student loan contributions as an employee benefit.

Here are some of the more popular companies that refinance student loans:

• SoFi
• CommonBond
• Earnest
• Credible
• LendKey

Step 2: Get a quote

Each of these companies will have you fill out a form to get a quote. Most of them will do a soft pull on your credit report to help determine the interest rate.

Step 3: Negotiate a deal

Take your lowest quote and see if the other companies will beat the rate. Check for origination fees and factor that into the cost.

Step 4: Compare with Federal Repayment Plans

The federal plans have benefits not offered by private companies such as income-driven repayment options as well as forbearance and deferment. The refinanced rate needs to be lower than your original loans. You would need to have a secure job with a high income to give up federal repayment benefits.

When Federal Repayment Plans are the Best Option

Federal repayment plans are best for borrowers with a high amount of student loan debt and thus need options like income-driven repayment, forbearance, deferment and loan forgiveness.

The federal plans especially favor those with a low-to-average income. Income-driven repayment plans will allow them to keep monthly payments affordable, and for cases with large amounts of debt, loan forgiveness could save a lot of money. Forbearance and deferment will suspend payments in case of unemployment, economic hardship, returning to school, military deployment or serving in the Peace Corps.

Let’s take a look at the repayment options available for average law school grad.

He or she probably graduated from a public law school where the average loan debt was $96,054 and landed a job with a $65k salary, which is about the median.

The Department of Education reckons the student loan repayment for someone with that salary should be in the range of $433-$542 per month. There are several options available including the Standard Plan, private refinancing, income-driven repayment like Pay As You Earn (PAYE) or Public Service Loan Forgiveness.

*Income was adjusted to reflect average public defender salary

The first thing you should notice is that the Standard Plan is more than double the recommended monthly payment. Private refinance with a generous 4.6% interest rate doesn’t put a dent in the monthly payment. Doubling the refinance loan term to 20 years gets you closer, but even then, you’re outside the recommended amount and paying a lot more for it.

Then we come to Pay As You Earn, one of the four types of federal income-driven repayment plans. Under PAYE, monthly payments are capped at 10% of your discretionary income, and the remaining loan balance is forgiven after 20 years. That means the first year of payments are only $391/month. But you should factor in a 3.5% annual increase in income, so by the end of 20 years you would be paying about $807, and your income should be about $115k a year. At that point, the remaining $83,141 balance is forgiven.

PAYE makes a lot of sense for the average law school grad, but there is another option – Public Service Loan Forgiveness (PSLF) — that was still available in the summer of 2018. There hass been talk from the Trump Administration about ending the PSLFprogram, but as of July 2018, it still existed.

The PSLF program forgives all remaining loan debt after 10 years of on-time payments and employment in qualifying public service jobs. More than half a million law school graduates have registered, including one Jason Thomas.

It wouldn’t be accurate to say Thomas chose the PSLF option. Lawyers fates are determined by their position on the bimodal distribution curve and how much debt that have.

Thomas, like a lot of lawyers, spent over six figures on his degree and didn’t see much of a return when he graduated. The only job he could find was a $40k salary to be a public defender in a small town in Florida’s panhandle.

He was destined for Public Service Loan Forgiveness.

With $170k in student loans, the Standard Repayment Plan was out of the question, and private refinancing wouldn’t do enough to lower monthly payments. His only option was an income-driven repayment plan and because he worked in the public sector, he was eligible for PSLF as well.

“It wasn’t bad until I got hired into my public position and realized I could never pay that money back,” Thomas said. “There’s a lot of ways to make $40k a year without that kind of debt. But I don’t regret it because I met my wife in law school, and I’ve started my beautiful family here.”

The income-driven payments did exactly what they were designed to do and allowed him to keep most of his salary. Thomas has used it to put a mortgage on a home and even save for retirement.

When Refinancing is the Best Option

Student loan refinancing is best for law school graduates with a steady job and a high income. They shouldn’t need or qualify for federal repayment benefits.

A lawyer in this category probably graduated from a top-ranked private law school — where the average loan debt was $134,497 — and joined the group of 20% of new hires that earn at least $160k a year.

The recommended monthly payment for a lawyer with that amount of debt and a $160k salary is between $1,066-$1,333.

The Standard Plan comes at a hefty price – $1,540/month – but if you were to refinance those loans to a lower interest rate, you’ll save $140/month and $15k overall. Still, the monthly payment is outside the recommended 10% of your income. Opting to extend the loan term to 15 years will help you reach the target payments, but it’s going to cost nearly $20k more to do so.

The decision comes down to whether or not there are better things to do with the extra $364/month. To make that kind of a salary, you’re probably working in a major metropolitan area with a high cost of living. The extra money could be the difference needed to get a mortgage or invest in retirement.

Refinancing was a no-brainer for Dustin Fitzpatrick, who racked up $159k in student loans to get a diploma from Yale Law School. That earned him a $160k salary year from a law firm in Miami.

“When you first look at the debt after graduation, it was like a punch in the gut,” Fitzpatrick said. “I had expected it going in, but it still gave me a shock.”

Fortunately, his law firm had a partnership with SoFi that offered a $500 signing bonus, but the more important number, the interest rate, wasn’t competitive enough. Fitzpatrick got a few quotes from other online refinance companies and took the lowest one back to SoFi. After a bit of haggling, he got the low rate and the signing bonus.

“It was a little bit difficult,” Fitzpatrick said. “But I got SoFi to go from 5.1% down to 4.6% after getting a quote from CommonBond.”

That 0.5% difference put an extra $50 in his pocket each month and saved nearly $5k in interest.

Federal Consolidation Pros & Cons

Pros:

• Lower monthly payment
• Flexible repayment options
• Renewed eligibility for deferment and forbearance

Cons:

• Longer repayment period
• Pay more in the long run
• Ends grace period
• Can’t consolidate private loans into federal consolidated loan

Private Refinance Pros & Cons

Pros:

• Potentially lower interest rate
• Potentially lower monthly payment

Cons:

• Lose forbearance and deferment options
• Lose eligibility for loan forgiveness
• Potential application and origination fees

How to get the lowest interest rate on your law school loans?

• Have a high credit score
• Good employment history and strong income
• Use a co-signer with good credit and income
• Low debt-to-income ratio
• Agree to a shorter term – the longer the term, the more interest you pay
• Shop around!