Reader Q&A: What Would You Do?

Here from me and Student Loan Investor Travis Hornsby on the best way to tackle your debt before your new career kicks in.

Recently a reader wrote in asking if there was anything he should be doing now to head off the student loan disaster that awaits when he begins repayment in the fall once his job starts.

With over $200,000 in student loan debt, it can be a little frustrating during the summer. You’re focused on passing the bar, taking a bar trip and getting settled in your new location. Meanwhile, the student loan debt monster is churning around 7% interest on your big balance. For our reader, that’s about $1,200 a month in interest each month. He’s getting hosed with no ability to repay the debt!

This will go on for about four months before he starts working, costing him a ridiculous $4,800. If you think that’s highway robbery, you’re not alone.

How can he save a few thousand dollars?

I thought the answer pretty obvious but wanted to get another perspective, so brought in site sponsor Travis Hornsby from Student Loan Planner to suggest a possible course. But first, let’s talk about my solution.

Biglaw Investor: The obvious (yet overlooked) solution

When I first read this question, I immediately remembered a conversation I had with the Biglaw Investor’s team over at CommonBond. These guys and gals have already solved this problem. It just looks like the solution hasn’t reached our reader.

The obvious choice here is to refinance your loans immediately. Why pay 7% interest when you can get a variable rate in the mid 2% range today?

By refinancing your law school loans as soon as you graduate law school, he can cut his accumulating interest from $1,200/month to a more reasonable $450/month.

That’ll save him $750 each month for a total of $3,000 in his pocket.

Our reader thought this was a good idea but had a couple of concerns:

  • No Job. “Did you forget?” he said. “I don’t have a job, so I have no proof of income. I’ll never qualify to refinance my loans.”
  • Really, I Don’t Have A Job. “And even if I did somehow qualify, I don’t have a job. I can’t begin repayment now. I need to defer these loans until I get my first paycheck.”

Luckily, CommonBond has already considered these problems. The solutions are pretty easy:

  1. You don’t need paystubs to qualify with CommonBond (or Laurel Road). If you have an offer letter that includes your start date and starting salary, you can use it to prove your income. Problem solved.
  2. Relax. Payments on CommonBond refinanced loans won’t begin until you start working. They understand that when nothing is coming in to your bank account, nothing is going to be leaving it either. You won’t need to worry about having to scrounge together four student loan payments before you begin working.

The solution seems obvious to me. If you know you’re going to pay off your loans, you’ll save around $3,000 by refinancing them as soon as you graduate. Not only will you save a boatload of money and defer payments until you begin working, you’ll also take care of the student loan refinancing paperwork during the summer, putting you ahead of the curve once you start working in the fall.

But now I’m going to turn it over to Travis, since he has another plan you should consider.

Student loan planner: Flexibility is key

(Student Loan Planner here) When you graduate law school, it’d be nice to commit to a $6,000 monthly payment for a five-year refinancing term. However, life happens.

Maybe you’ve got credit card debt you need to polish off first. Perhaps you want to figure out your budget before you’re ready to refinance. You’ll know a lot better what a huge monthly payment feels like when it actually leaves your bank account. Before that, it’s theoretical.

A ton of my lawyer clients want to keep the required payment low in their first year, obtain lower interest costs, and have the option to pay more. Enter the Revised Pay As You Earn program (REPAYE).

REPAYE subsidizes 50% of the interest that your required monthly payment doesn’t cover. Since loan servicers use the prior year tax return to determine this payment, in the first-year post law school, most new lawyers owe $0 a month. Because of how the government calculates REPAYE’s interest subsidy, that means most lawyers would have an effective interest rate 50% below what’s stated on their account.

Of course, this subsidy is temporary if your income is above $150,000. Once your required payment soars to $1,000 a month or more, the subsidy mostly goes away. However, that usually takes two years after law school to happen as most law school debt is in the six figures.

So what does this plan look like once you graduate law school? Consolidate everything right away with the federal government on Waive the processing delay, and enter REPAYE immediately. That starts the clock on the REPAYE interest subsidies, which cut your 6% to 8% interest rate for the first year to 3% to 4%.

Your required payment is $0 a month, but if you prepay $2,000 a month or more, that doesn’t impact the interest subsidy. You could even pay $6,000 monthly if you like, but you don’t have to.

A year into your job, you might discover you actually hate Biglaw and want to get out to become a public-sector lawyer. If you refinanced, you’re stuck there for at least the term it takes to pay back your debt. By keeping the loans with the government, you retain the flexibility to utilize the Public Service Loan Forgiveness program.

In fact, for those of you who are unsure about staying in the private sector, I’d highly recommend focusing on retirement and Health Savings Accounts along with general taxable investment savings. You can build up assets while retaining flexibility on your loans so that you can modify your strategy later accordingly. Once the uncertainty is gone, you can use savings for a lump sum payment, slow down pretax deductions, and get serious about paying down the loans.

After your first year, you’ll know whether you’re going to stick around at that high paying private sector law job. At that point, assuming interest rates haven’t soared, you’ll be able to lock in that low 5-year interest rate on a refinancing. If you made prepayments, then the lower loan balance will reduce the required payment you’d have to make. I call this strategy REPAYE & Refinance +1.

I don’t have a problem with refinancing right away if you’re aware of all your options, but most lawyers are not. The one I outlined above is only one of the choices available.

If you would rather not spend dozens of hours learning about the various loan repayment strategies, you can get my thousands of hours of expertise instead to find the best approach for you. Whether you’re in family law making $75,000 or Biglaw making $180,000+, I can help make a plan that gets you out of debt faster and cheaper. Hit me up at [email protected] to find out more or check out my free spreadsheet.

Conclusion: Which plan is better?

(Biglaw Investor: It’s me again.) I thought my plan to refinance a good solution, particularly since it seems most recent graduates don’t realize that you can refinance your law school loans before you start working.

However, Student Loan Planner came up with a creative solution to effectively cut your interest rate in half while testing the waters in Biglaw. I can see the appeal to many risk-averse lawyers that want to preserve their options going forward.

This is why I’m always telling people that spending $300 to speak to a professional for student loan advice is a drop in the bucket compared to your potential savings.

As Donald Rumsfeld said, there are known unknowns (things you know you don’t know) but there are also unknown unknowns (things you don’t know that you don’t know). When you consult with a professional doing this every day, you make sure you’ve eliminated all of the unknown unknowns when it comes to your student loan repayment plans.

Joshua Holt is a former 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.

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