A Quick Story on Losing $200,000

I finally did the math to figure out how much money I lost by not being able to refinance my student loans.

I didn’t want to write this article.

Ever since I paid off my student loans, I’ve been focused on the future. But a part of me has always wondered: just how much interest did I pay while eliminating my student loans? What if I had been able to refinance my student loans? How much interest would I have saved and what would that have been worth had I invested it in the markets?

Here’s my loan story.

I graduated law school in 2009 in the midst of the Great Recession. Luckily for me, my firm deferred us a few months until mid-January 2010 rather than revoking our offers. When I started working in 2010, I had $191,985 in student debt: six different loans with interest rates ranging from 6% to 8%. At that time, the student loan refinancing companies didn’t exist. You were stuck paying a higher interest rate than Greece. Sure, you could consolidate your loans, but consolidation bundles your loans into one to simplify your payments (and typically rounds up your interest rate by 1/8 of a percent).

With no other option, I focused almost exclusively on paying off my student loans, averaging payments of $2,878 per month from my first day on the job until paying off the last loan.

It took me seven years and a lot of interest along the way (although I hit “net worth zero” significantly earlier since you should also be funding your retirement accounts while paying off debt).

I kept good records during this awful time. In my first year of working, I paid $12,278.06 in interest alone. I kept such good records because the sheer anger made me want to preserve the number as some future war story I imagined telling (am telling?!).

That’s more than $1,000 a month in interest payments. At a marginal tax rate of near 40%, you need to earn about $1,665 (or $20,000 a year) to tread water by covering the interest payments.

By the time I paid off my loans, I had paid a sickening $49,837 in interest alone! This doesn’t even touch the $191,985 of actual debt. The $50,000 is merely a “thanks for letting me borrow all this money” tip left on a nearly $200,000 bill.

So here’s the math I’ve never done before: what if I had been able to refinance? I could have escaped the brutal 6% to 8% rates. That would have meant less interest overall. It also means that more of my payments would have gone toward the principal from the very beginning.

Refinancing makes a lot of sense once you know that you’re going to repay your loans (i.e., you aren’t pursuing any forgiveness program). By my third year in law school – after having secured an offer from an AmLaw 200 firm – I know that I would be repaying those loans. So, ideally, the best time to refinance would have been as soon as I borrowed the full amount for my 3L year.

I’ll save you the suspense. I would have saved about $22,000 in interest.

How did I get to that number?

First, in 2019, the amount of debt I graduated with would have been a bit smaller, since the balance would have accrued less interest during my 3L year. When prospective law students are calculating their total cost of attendance, they often forget that those loans will be accruing interest while you’re in school.

If I had refinanced during my 3L year, I would have graduated with $187,769 in debt (that’s a savings of more than $4,000 right there.)

Over the life of that loan – assuming I would have made the same average payments of $2,878 a month – I would have shelled out $27,967 in interest.

$49,837 (what I really paid) – $27,967 (what I could have paid with a 3L refi) = $21,967 in interest savings.

What does paying $22,000 less in interest mean?

Let’s lay out some possible knock-on consequences. I finished paying off my loans at the end of 2016. So if I had refinanced as a 3L, in January of 2017, I would have had $22,000 more to invest. At a pretty reasonable 7% rate of return (which factors in inflation), after 30 years that $22,000 would have been worth $178,556.

And what if I could get an 8% rate of return? That would mean $241,010 in 2047.

Let’s split the difference and call it $200,000 in inflation-adjusted dollars. That’s one-fifth of a million dollars wiped off my balance sheet thanks to a ridiculous government program gauging me on interest rates.

What would I have done with $200,000 in 2047?

I have no idea. I’m not 66 yet. But here’s what the younger version of myself thinks $200,000 could mean:

  • Four fewer years of working (if you’re saving $50,000 a year)
  • A vacation condo close to the beach in Florida
  • Opening up an artisanal taqueria just for fun
  • Paying for college
  • Starting 529s for the grandkids
  • Multiple around-the-world trips
  • A Tesla
  • $8,000 in extra annual retirement spending indefinitely

The point is, you can do a helluva lot with $200,000. That’s why I didn’t want to write this article. It’s too late for me. I’ve already paid the interest.

It’s (Probably) Not Too Late for You

For several months, I’ve been telling the folks over at CommonBond that they should figure out a way to get comfortable lending money to law students with an offer letter in hand. Without even doing the math, I know that it’d be an excellent deal for future-millionaire-lawyers-in-the-making looking to pay less interest and to pay off their student loans a little sooner.

Well, I’m happy to announce that CommonBond realized this was a win-win scenario and, starting now, you can now jump-start your refinancing plan a year early, based on the strength of your job offer. CommonBond’s offer of loan refinancing for third-year law students is a first in this business. Now, your accepted job offer is proof enough that you’re a safe bet.

That’s huge because every year that you can reduce interest will mean substantial savings (in my case, I would have saved $4,000 during my 3L year alone).

And yes, you can still get the $400 cash bonus when you sign up.

And no, when you refinance during your 3L year, you don’t have to start making payments right away. You still get a six-month grace period after graduating before you begin repayments.

Still not convinced? Refinancing now also allows you to lock in interest rates if you’re worried they’re going to continue to rise. CommonBond calculates your interest rate based on the income in the offer letter, so you should expect the same rate that you’d get if you were refinancing your loans during the first few months of starting a job.

This is an exceptional opportunity offered by a lending team that is paying attention to the market and crafting niche products to benefit you. I can’t think of anything more specific than an offer pitched to 3Ls!

You guys have it lucky.

I want my $200,000 back.

Let’s talk about it. Are you a law student who’s been thinking about refinancing? Are you a recent graduate who has financed with a different company? Let us know about your experience.

Joshua Holt

Joshua Holt is a practicing private equity M&A lawyer and the creator of Biglaw Investor. Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He is always negotiating better student loan refinancing bonuses for readers of the site or finding honest companies that provide student loan advice for a fair price.

Save more money than your friends

One email each week covers personal finance, financial independence, investing and other stuff for lawyers that makes you better.

    Seven thoughts on A Quick Story on Losing $200,000

    1. Welcome back! Been checking your blog every week waiting for the next post!

      Really eye-opening to see the impact that interest has.

      One thing to consider if you’re refinancing during school is to think about the already accrued interest. Since interest will have been accruing for at least two years, you’ll want to save up some of that summer associate money and pay off the accrued interest first. Otherwise, when you refinance, you’ll basically be capitalizing that accrued interest into your refinanced loan. Just something to think about.

    2. I know I have had 2 cups of coffee and no food this morning, but my stomach hurts reading this. I am relieved to know I now have my loans behind me, but I will probably never stop playing the ‘what if’ game. Let’s just keep telling ourselves that being a lawyer is worth at the end of the day.
      Congrats on making a real life actual change in the world with the new refinancing option.

    3. Thanks for posting this – love your stuff!

      I get that there are two camps on this, but isn’t the interest sort of beside the (economic) point? It would be really interesting to see a post comparing two numbers: the amount you actually paid in student loans vs. the opportunity cost you gave up. In other words, how much would you have made in the market from 2009 – present if you had only paid the minimum on your loans and invested the excess in a market-tracking index fund?

      Just a hunch, but given the state of the market since 2009, I suspect you would’ve come out better off economically in the latter scenario.

      Regardless, congrats on paying off your loans and thanks for providing thought-provoking material!

    4. You are most definitely correct, we miss out on investments and the compound interest in our favor. On the flip side, without the debt you may not have gone to law school when you did; nor have this blog that connects us with interesting people. Thanks Biglaw Investor.

    5. I graduated law school in the mess of 2020 and recently started my Biglaw job (after the start date being deferred 4 months). In my research on retirement accounts to prepare to make elections in a few weeks, I came across this site. I’ve been on here for hours today looking at everything. This is a great resource, and I really enjoy all of your content! Thank you!

      I will keep this particular piece of advice in mind for after the COVID student loan relief ends. Right now, I’m really appreciating the 18 months (March 2020 to September 2021) of no interest and payment deferrals!

      1. Thanks for the kind words! Glad you found the site. Right now you’re one of the extremely lucky ones graduating into a Biglaw job (notwithstanding the four month deferral) but with a 0% interest rate on student loans, so I love to hear that you’re taking advantage of it by maxing out retirement accounts, paying off debt, etc.

    Leave a Reply

    Your email address will not be published.