Many law school graduates face the daunting task of paying off their student loans. As someone who paid off undergraduate loans and currently is paying off law school loans, here is some advice.
- Create a budget. The first step in paying off student loans is to know what money comes in and control what goes out. This means creating a budget. Every law grad should begin by using a spreadsheet to list after-tax income; fixed expenses, such as rent and utilities; and other common expenses, such as entertainment, gas and food.
If the law grad is shocked after seeing what money is going out, it's time to cut expenses. Recent law grads should continue to live like law students, not like accomplished lawyers. This does not mean going back to eating ramen noodles, but grads should live below their means.
Packing lunch three times a week and limiting dinners out, drinking office coffee instead of stopping for that venti skinny latté, and replacing cable television with a subscription to Netflix are some basic ways to cut back.
A really committed law grad could even skip happy hour. All right, I probably just lost a few readers, but the point is to find responsible ways to cut spending. Every little expense adds up.
That said, because unexpected things happen in life, law grads should build an emergency fund. Suze Orman, a popular financial media personality, suggests saving eight months of living expenses.
- Create a plan of attack for the loans. First, law grads need to figure out what they owe. Because law grads usually have several loans, they must become familiar with each loan's balance and interest rate. After gathering this information, they should put it in a spreadsheet separate from the budget spreadsheet.
Second, law grads should find a loan payment method that works for them. Some financial advisers suggest paying off the loan with the lowest balance first and then proceeding to the next smallest loan. Others suggest paying the minimum payment on every loan, then putting extra money toward the loan with the highest interest rate until it's paid off.
Regardless of which method a grad chooses, he always should use common sense to adjust his payments.
- Know the loan-repayment options. Law grads struggling to pay off their federal loans should consider federal direct consolidation loans, which offer several repayment options. Information is available at http://studentaid.ed.gov.
Additionally, private loan providers have programs that reduce loan interest rates. Many loan providers offer the automatic debit program, which, after enrolling, will reduce the loan's interest rate by a certain percentage. When making payments, graduates should ensure that lenders allot any extra payments to the loan the grad wants to reduce first. Some loan providers also offer an interest rate reduction if the graduate pays on schedule for a specific time period.
- Pay more than the minimum. Law grads should pay extra every month and avoid years of compounding interest, which can save a lot of money in the end. Students still in law school should consider making interest payments now to reduce overall loan amounts.
- Take advantage of free money. Many employers provide matching contributions to employees' 401(K) plans. It would be foolish not to take advantage of this free money. It's important for law grads not to focus so intensely on paying off loans that they neglect saving for retirement.
Recent law grads should contribute up to the maximum amount of money that their employer matches. But a law grad who expects to leave his current job soon should investigate whether the matching program has a vesting time period. If he leaves before the matching contribution vests, he may not be entitled to the company match.
Also, depending on total income, certain graduates can claim a federal tax deduction for student loan interest paid. IRS.gov has more information.
- If all else fails, seek forgiveness. Law grads who feel hopelessly mired in debt but long to serve the public good should think back to their law school personal statements, where they promised to use their degrees to save the world. With the Public Service Loan Forgiveness Program (PSLF), they can keep those promises.
PSLF allows law grads who work in public service to discharge the remaining balance of their federal Direct Loans after 10 years of full-time employment in public service and making qualifying payments beginning after Oct. 1, 2007. Studentaid.ed.gov has more information.
- Don't go back. Finally, some law school grads who have not yet found jobs may be considering going back to school. They shouldn't. Going back to school amounts to more loans and accruing interest. It is best to face the task of paying off the loans because, in most instances, student loans can't be discharged in bankruptcy, and creditors could garnish wages or attach property.
A law grad should not jump back over the first hurdle but rather should face that second hurdle with these tips in hand.