Student Loan Repayment Guide for Young Lawyers
Executive Summary:
Student loans are a financial burden to most young lawyers. To help ease the burden of student loans, young lawyers have various repayment plans they can select to possibly reduce their monthly payments and total amount paid. These include standard repayment plans, graduated plans, extended plans, income-driven repayment plans, a special repayment program for public service borrowers, and private refinancing. Each plan has pros and cons based on a lawyer’s unique financial situation. It is important to consider how each repayment option affects you today and in the future before selecting a repayment plan.
Student loans from law school are one of the most significant financial burdens lawyers will manage over their lives. An average lawyer graduates owing over $160,000 in student loan debt. It is common for monthly student loan payments to exceed $1,600 per month. Even lawyers who start their careers in BigLaw will feel financially limited by their student loans. So what should lawyers do?
Understand Your Options
Choosing how to repay your student loans largely comes down to two factors: monthly payment amount and length of payments. For most repayment plans, a lower monthly expense requires a longer time of repayment. Vice versa, by making larger monthly payments, you can reduce the time it takes to repay your student loans. Each repayment plan requires a different payment amount and repayment time frame. Knowing these will help you better understand your options.
Federal Loan Options
Federal student loans are loans you took out through studentaid.gov when you attended law school. The two most common federal loans for lawyers graduating from law school are Direct Unsubsidized Loans and Direct PLUS Loans. Each loan has different interest rates depending on when you received the loan.
Another type of loan is a Direct Consolidation Loan. Lawyers who hold federal loans that are ineligible for some repayment plans may decide to consolidate those loans with their Direct Loans. The Consolidation Loan takes multiple federal loans and combines them into one loan where the interest rates from all the previous loans are weighted to determine a new interest rate. The consolidated interest rate is almost always slightly higher than the weighted interest rate of the loans pre-consolidation.
Standard Repayment Plans
10 Year Standard Repayment
The default repayment plan for every lawyer with federal loans is the standard 10-year repayment plan. This plan typically has the highest initial monthly payment amount of all the repayment plans. Borrowers may pay less in total due to high monthly payments and a 10-year repayment timeframe, but it is not always the best option. Other repayment plans are available for lawyers interested in reducing their monthly payment amounts.
Graduated Repayment Plans
Graduated repayment plans acknowledge that you will make more money later in your career. Therefore, initial payments in the first years of repayment are lower than the 10-year standard repayment plan. Graduated Repayment Plans can be for ten years and up to 30 years. The payment amount increases every two years. The last few years of repayment will be substantially higher than the initial payments. Graduated Repayment Plans also result in borrowers paying more over the life of their loans than borrowers repaying through a 10-year standard repayment plan.
Extended Repayment
Extended Repayment plans stretch monthly payments over 25 years instead of 10 years. Since the number of payments is higher, the monthly payments are lower. These payments can be fixed like a 10-year standard repayment plan or graduated, increasing every two years. The monthly amount owed will be lower than other plans, but lawyers will likely pay more in total to repay their student loans.
Selecting graduated or extended repayment plans is not common, but they are available to young lawyers when the situation is right.
Income-Driven Repayment Plans (IDR)
IDR plans assist borrowers with high student loan amounts and incomes that could not reasonably afford to make standard 10-year repayment amounts, plus support an appropriate lifestyle. IDR payments are a percentage of the discretionary income of the borrower. Amounts owed are recalculated each year depending on your income and family size. The federal government forgives any remaining student loan balance at the end of the IDR plan.
Some of the loans eligible for IDR plans include:
Direct Subsidized
Direct Unsubsidized
Direct Graduate PLUS loans
Direct Consolidation loans
How do you calculate IDR monthly payments?
IDR payments are dependent on your discretionary income. To calculate your discretionary income for IDR plans:
Look up the Federal Poverty Line for you. The Federal Poverty Line is calculated based on where you live and how large your family is. For 2022, it is $13,590 for a single-person household in the contiguous 48 states.
Then multiply your Federal Poverty Line amount by 1.5 or 150%. For the single lawyer, this will be $20,385.
Refer to your prior-year tax return and look for the Adjusted Gross Income amount (AGI). On the 2021 Form 1040 (the first page of your taxes), this is line 11.
Subtract 150% of the Federal Poverty Line by your prior year AGI. The amount left over is your discretionary income.
Multiply your discretionary income by the percentage listed for your chosen IDR plan.
Divide this by 12 to determine your monthly payment.
Example: A single lawyer graduated law school with a monthly payment of $1,600 through a standard 10-year repayment plan. They work for a non-profit organization that pays too little for them to afford the $1,600 per month payment. In 2021, their AGI was only $60,000. After subtracting 150% of the federal poverty line, their discretionary income is $60,000 - $20,385 = $39,615. Depending on the IDR plan they select, their payment can be as low as 10% of their discretionary income or $3,961.50 per year. The monthly payment will be $330. Much lower than the $1,600 owed in a standard 10-year repayment plan.
Revised Pay As You Earn Repayment Plan (REPAYE)
REPAYE calculates your monthly payment based on 10% of your discretionary income. REPAYE payments are based on the income of you and your spouse if you are married. A lawyer must make 25 years of payments before receiving forgiveness for the remaining loan amounts.
Pay As You Earn Repayment Plan (PAYE)
PAYE calculates your monthly payment based on 10% of your discretionary income. PAYE is different from REPAYE because PAYE will never allow your monthly amount owed to exceed the 10-year standard repayment plan amount. REPAYE will. Lawyers must make 20 years of payments before receiving forgiveness for the remaining loan amounts.
Income-Based Repayment Plan (IBR)
If you had student loans before July 1, 2014, you likely have to pay 15% of your discretionary income for 25 years. If you received your first student loan after July 1, 2014, you might be eligible to only pay 10% of your discretionary income for 20 years. Like PAYE, the monthly payments will never exceed the 10-year standard repayment amount. IBR allows you to place loans in an IDR plan that are ineligible for PAYE and REPAYE without a Direct Consolidation Loan.
Income Contingent Repayment Plan (ICR)
ICR plans are the least likely IDR plan for young lawyers to choose because their monthly payment is higher than the other plans. Borrowers will pay either the lesser of 20% of discretionary income or the monthly payment amount for a 12 year fixed loan using each loan’s interest rate. After 25 years, the government forgives any remaining student loan balance.
Considerations Lawyers Need to Understand About IDR Plans
IDR plans can be an attractive opportunity for lawyers with a student loan balance that far exceeds their income. The ability to pay substantially less each month and have a future balance forgiven can be appealing and save tens of thousands of dollars for lawyers in the right situation. Before you sign up for an IDR repayment plan, you should understand these considerations:
Forgiveness is taxable: Forgiven student debt does not mean you no longer have to make payments. That is because forgiven debt is taxable, even for student loans. If a lawyer completes an IDR plan with a $100,000 loan balance, they will owe taxes on the $100,000. Lawyers in an IDR plan will need to save and invest a portion of their savings from the lower monthly payments to accumulate enough money to make this large tax payment at the end. Currently, borrowers who obtain forgiveness between now and the end of 2025 will not owe taxes for forgiven amounts. This provision expires after 2025. It is unclear if Congress will extend this provision.
Recertify income annually: Lawyers in an IDR plan must recertify their income annually. Lawyers must submit the recertification form on Studentaid.gov by the annual deadline, or they will likely face much higher payments. Forgetting to recertify can also increase the total amount owed because the amount owed will increase by any accumulated unpaid interest. This higher loan balance will increase the monthly payments that a borrower will pay. In addition to potentially higher monthly payments, lawyers may no longer be eligible to return to their PAYE, IBR, or ICR plan.
Not all loans are eligible for IDR: Most loans issued after 2010 are eligible for IDR plans, but borrowers should check if all of their loans are eligible. If you have ineligible loans for IDR plans, you can consolidate the ineligible loans with eligible loans to create an IDR-eligible consolidation loan.
A 20-25 year career is a long time: Some lawyers graduate law school before turning 25. So it can be daunting to choose a 25-year student loan repayment plan knowing how much life can change over 25 years. Lawyers who begin their careers in a public or non-profit sector may lateral to a higher-paying private or in-house counsel role. In addition, your income will naturally rise over your career. A higher income will increase your monthly payments over time, possibly resulting in higher monthly payments that may pay off the loans before receiving forgiveness. You cannot guess how your future career will turn out.
Married Couples can reduce income and loan amounts: For ICR, IBR, and PAYE plans, married borrowers are allowed to file separate tax returns. If one spouse makes significantly more income than the other, it is possible to reduce your monthly payments by filing taxes Married Filing Separately. But Married Filing Separately can make you ineligible for certain tax deductions and credits, which may raise your annual taxes. Married borrowers in a REPAYE plan always base their income on the joint income of the spouses. Consult with a tax professional before filing separately to compare the student loan savings vs. the possible additional tax costs.
Use IDR plans to qualify for Public Service Loan Forgiveness (PSLF)
Lawyers working in the public and non-profit sector have access to the Public Service Loan Forgiveness (PSLF) program. PSLF allows borrowers to make lower monthly payments through an IDR plan, receive loan forgiveness after only ten years, and receive tax-free loan forgiveness. It is an ideal plan for lawyers who forgo higher-paying private jobs to serve their country and community.
PSLF is a great deal, but the program is notorious for being difficult to receive forgiveness due to its requirements. Borrowers with eligible loans must make 120 qualifying payments while working full-time for a qualifying employer. Borrowers can learn more about PSLF requirements in The Lawyer’s Guide to Public Service Loan Forgiveness.
Privately Refinance Federal Student Loans
The final option to repaying student loans is privately refinancing your student loans. A new lender will pay off your federal student loans, and then the lender will issue you a new loan for the paid-off amount. The benefits of refinancing include a lower interest rate and consolidating all the federal student loans into one easier-to-manage private loan.
To be eligible for a private refinance, a lawyer typically needs a good credit score to qualify. Privately refinanced loans can be an appealing option for borrowers looking to reduce their monthly payments, but there are trade-offs with the lower monthly amount owed. First, as seen during COVID, the government can pause student loan repayment and potentially forgive student loans. After privately refinancing their loans, a lawyer misses out on future federal payment pauses and loan forgiveness. In addition, federal loans are more lenient for unfortunate circumstances. If a lawyer misses a payment, some privately refinanced loans can accelerate the debt owed. These acceleration clauses mean one missed payment may result in the entire loan amount becoming due. Finally, as seen throughout this blog post, there are many different repayment options for federal student loans. Borrowers can switch between these repayment plans if they need to. Once a federal student loan borrower privately refinances their student loans, they no longer have access to these repayment plans.
Final Takeaways
Repaying law school student loans is a financial burden, and many lawyers will struggle to balance these payments with the cost of their lifestyle. Lawyers need to consider all of their options before selecting a repayment plan.
The default 10-year standard repayment plan may be too expensive for a lawyer to pay each month. They should consider other options like:
Graduated Repayment Plans
Extended Repayment Plans
Income-Driven Repayment Plans (IDR)
Income Contingent Repayment (ICR)
Income-Based Repayment (IBR)
Pay As You Earn (PAYE)
Revised Pay As You Earn (REPAYE)
For lawyers who want to pay their loans off quickly with the option to benefit from future government forgiveness or pauses, the 10-year standard repayment plan may be a suitable option. PAYE has a lot of benefits that are appealing for young lawyers who believe IDR plans fit best into their future career goals. For lawyers who want to work in the public or non-profit sectors, PSLF is the ideal plan. Lawyers with a stable high-paying job who hate the thought of debt or want to pay as little as possible to repay their student loans may find private refinance to be their best option.
These are general observations and may not reflect your unique financial situation. Take time to weigh the monthly cost, the total amount paid, and other trade-offs when evaluating the best option for you.
Student loan repayment can be overwhelming for young lawyers. If you are looking for professional advice and guidance when selecting the best student loan repayment plan for you, check out our solutions. Developing Financial offers a one-time student loan repayment analysis that includes a recommendation on the best repayment plan for you and a checklist for repaying your student loans. For young lawyers who believe student loans are only a piece of their financial life, Developing Financial also offers a comprehensive financial planning process that addresses student loan repayment, investing, insurance, employer benefits, saving/spending, and many other parts of your financial life. Schedule a free 30-minute Meet & Confer to talk with a Certified Student Loan Professional™ who works specifically with young lawyers. Together we will talk about the student loans you owe and what an ideal repayment plan would look like before deciding if working together is in our best interests.
Disclaimer: Nothing in this blog should be considered financial advice or recommendations. Your questions are unique to you and your own personal financial circumstances. You should consult with a financial professional before making a financial decision. See full blog disclaimer.