Editor's Note: Since the writing of this article, the federal Student Loan Debt Relief program has been blocked due to two court decisions; the Supreme Court has agreed to hear arguments for both appeals in February. In the meantime, the Biden administration extended the federal student loan payment pause into 2023. The US Department of Education announced loan repayments may resume as late as 60 days after June 30, 2023.
Federal student loan payments are set to resume in 2023. Whether you’re concerned about being able to manage your monthly payments or you’d just like to save money on interest, now is a great time to consider a new repayment plan.
Here, we’ll focus on two popular ways of paying off law school debt — refinancing and consolidating — and the pros and cons of each. Keep reading to learn which one is right for your situation.
Law School Loan Refinance
Usually, the main goal of refinancing law school loans is to reduce the amount of interest you’re paying over the life of the loan. To do this, borrowers typically reduce the payment period of their loan. But that means your monthly payments may not be much lower and could be considerably higher. For this reason, refinancing works best for people working in the private sector, earning a good salary, and enjoying a sense of job security.
To get a sense of the trade-offs in refinancing, let’s look at a simple example. We’ll say that Sumana has a loan balance of $100,000 at 7% interest, with 7 more years on her term. Her current payment is $1509, and the total interest she’ll pay over the life of the loan will be $26,779. Now let’s see what happens if she refinances at 5% interest.
|5 Years||7 Years||10 Years|
If Sumana wants to reduce the time she’s in debt, as many refinancers do, her monthly payment would go up, but her total interest paid over 5 years will drop by about half. That’s a savings of $13,552.
On the other hand, if Sumana prefers not to increase her monthly payment, she can keep the same term of 7 years. In that case, she’d still save $8,000 in interest — plus her monthly payment would drop a bit to $1,413.
Sumana could also lower her monthly payment considerably by extending her term to 10 years, but she wouldn’t save anything in interest. In this case, she’s better off looking into consolidating law school loans. We’ll get into refinancing vs. consolidating student loans below.
One drawback to refinancing federal student loans is losing access to certain federal protections: loan forgiveness programs, income-driven repayment plans, and forbearance options. That’s because when you refinance, you’re paying off one or more federal loans with a new, private loan.
That said, high earners usually don’t qualify for loan forgiveness or income-driven repayment plans. And if you’ve previously refinanced your student loans (some folks do it more than once), then losing federal protections is no longer an issue.
Still think you want to refinance law school loans? Before moving forward, decide on your financial goal (after saving on interest): either reducing the time you’re paying off the loan, or keeping your monthly payment about the same.
How To Refinance
With two of your big decisions already made — whether to refinance, and what your financial goals are — the process of refinancing itself is pretty straightforward.
1. Check Your Credit History
Lenders set interest rates based on an applicant’s credit score. Requirements vary, but many lenders like to see a credit score of 670 or higher. If your credit score is below 670, you may choose to take some time to build up your credit before proceeding.
You can request your credit report for free from AnnualCreditReport.com. You can find out your credit score for free from Experian, and through some banks and lenders.
2. Find Out If You Qualify for Biden’s Loan Forgiveness Plan
Under Biden’s forgiveness plan, federal student loan borrowers earning up to $125,000 (as individuals) or $250,000 for those filing jointly may qualify for up to $10,000 in forgiveness.
Amounts forgiven under this plan will not be considered taxable on the federal level. Some states have announced that they will charge income tax on forgiven amounts. The application is expected to go live in October 2022. Borrowers can make sure that their contact information is accurate in their Student Aid account.
The application for loan forgiveness will be open until December 2023.
3. Run the Numbers in a Student Loan Refinancing Calculator
An online student loan refinancing calculator can tell you what interest rate you’ll need to qualify for in order to make refinancing worth your while. It can also show you different loan term options. Generally, the longer the repayment timeline, the lower your monthly payments, but the more you’ll pay in interest over time. Shorter timelines mean higher payments and less interest paid.
4. Compare lenders
Go online to research the top lenders who offer student loan refinancing. Select a handful with strong reputations that also offer your target interest rate.
5. Prequalify To See Terms
Prequalify to see what the loan terms are. (This requires only a soft credit check, which doesn’t affect your credit score.) When comparing terms, don’t just go with the lowest interest rate. Also look for any added benefits (such as unemployment protection), cash-back bonuses, and customer service ratings.
6. Select a Lender and Apply
Once you’ve settled on a lender, gather the documents you’ll need to make a formal application. They may include W2s or pay stubs to verify your income.
Pros and Cons of Refinancing
Carefully review the pros and cons of refinancing student loans before you make a decision.
|Pros of Refinancing||Cons of Refinancing|
|High earners don’t qualify for many federal protections||Potentially giving up federal protections, including loan forgiveness|
|Save money on interest — possibly tens of thousands of dollars over time||May not be worth it if your new interest rate isn’t significantly lower than your current|
|Pay off loans faster||Not intended to substantially lower your monthly payment|
Consolidating Law School Loans
Debt consolidation involves taking multiple loans and combining them under one new loan with just one monthly payment. The main goal is to simplify your finances — not to save money in interest.
Borrowers with federal student loans may utilize a federal program called a Direct Loan Consolidation. Your new loan’s interest rate will be the weighted average of all the old student loans’ interest rates, rounded up to the nearest eighth of a percent. This means your interest rate might actually be slightly higher than the rate you were paying before consolidation on some of your student loans.
When you consolidate, you’ll also have the option to select a new repayment plan. The Standard plan (which spreads payments evenly over 10 years) will still be available, but consolidation can also be a first step toward other plans of action, like loan forgiveness or income-driven repayment.
Private student loans cannot be consolidated using the federal program.
How To Consolidate
The Direct Loan Consolidation application process is available through StudentLoans.gov and comes with no fees. Simply fill out the online application, or you can print out a paper version and mail it. It may help to gather all of your loan records, accounts, and bills as you work through the form. The process takes about 30 minutes total.
If you have a loan that will be paid off in a short amount of time, you might consider leaving it out of the consolidation. The same goes if you have already made qualifying payments toward forgiveness on certain loans.
Your first new payment will be due within two months of when your Direct Consolidation Loan is first paid out.
Pros and Cons of Consolidating
Just like refinancing, there are advantages and disadvantages of student loan consolidation.
|Pros of Consolidating||Cons of Consolidating|
|Can lower your monthly payment||Pay more in interest over the life of the loan|
|Simplifies repayment||Extends your repayment period|
|Renews eligibility for federal protections, including Public Service Loan Forgiveness (PSLF)||Can cause you to lose credit for payments toward loan forgiveness|
|Doesn’t affect your credit score||Private loans and Parent PLUS loans cannot be consolidated with federal loans in the student’s name|
|Allows you to switch from a variable interest rate to fixed|
|Safer for average earners or if your finances are unstable|
What Are Some Solutions for Handling Law School Debt?
If you’re passionate about having a career in law and are confident in your abilities, don’t let the costs of your education deter you from pursuing a rewarding profession.
Managing law school debt might seem overwhelming, but having a strategy can help you pay off your debt.
Here are several solutions to consider:
Making Interest-Only Payments While in School
While under the federal student loan deferment program, you aren’t required to make any payments while you’re in school, paying at least the amount of interest that is accruing on your loans each month could help keep your student debt from snowballing. And if you are able to pay more than just the interest, it’s a smart idea. The faster you pay down your loans, the less they’ll generally cost you over time.
Picking a Repayment Plan that Fits Your Budget
Once you graduate and start working, you’ll likely have a few financial priorities competing with your student loan repayment. In general, it can be a smart strategy to pay down law school debt as soon as you have a steady income, but paying down your loans too aggressively could leave you without enough savings.
Building up an emergency fund can provide you with a buffer in case you have unforeseen expenses. It can also make sense to start putting a percentage of your income toward a retirement fund to take advantage of potential long-term gains. You may want to factor your savings goals into your budget and pick a student loan repayment plan that fits your cash flow.
Putting any Extra Funds Toward Your Debt
Alternately, you can make paying down debt your top priority and put any extra income you have toward your highest-interest loans. Of course, if you choose this route, you may want to make sure you have a financial safety net in place first. This law school debt repayment strategy is typically called the avalanche method.
Essentially, while making regularly scheduled payments on all your loans, with the avalanche method you’d make additional payments on your highest-interest loans first. This method helps reduce the amount of total interest you’re paying. And by paying your loans down early, you could save on interest payments over the years because the faster you pay off your student loans, the faster you can stop paying interest on your debt.
Relating to the strategy above, you could try to cut back on your monthly expenses and put that extra money toward your debt payments. While sticking to a budget can be challenging, it is one tool to help you stay on track with your spending.
Can you cut back on certain expenses each month? You may have to make a few sacrifices (within reason), but you probably don’t need to cut back on everything. See what simple changes you can make to your budget to find extra money to put toward your law school debt. Paying more than the minimum monthly payment on your student loans can go a long way towards getting out of debt faster and, therefore, making fewer interest payments.
Making Your Loan Payments Cost Less
What if instead of taking that job at a top law firm, you opt to go into public defense or spend a year traveling? If you find yourself looking for a way to make your federal loan payments more manageable, income-driven repayment plans can also lower your monthly payment by capping the amount you pay based on your discretionary income and household size.
With these plans, you may pay more interest over the life of your loans. But if your monthly payments are too high, income-driven repayment plans can bring them down.
Another option that can potentially reduce the cost of monthly payments (in one way or another) is to refinance your student loans with a private lender, like SoFi. When you refinance, a private lender gives you one new loan to pay off your existing student loans (including your law school debt and the undergraduate debt you may still have). Your new loan will have new terms and a new (hopefully lower) interest rate.
Instead of paying on multiple student loans, you’ll just have to worry about paying off one loan. If you qualify for a lower interest rate and shorten your loan repayment term, you may pay less in interest over the life of the loan.
Refinancing federal student loans with a private lender means you’ll no longer be able to take advantage of the benefits that come with federal loans, like income-driven repayment plans, deferment, and forbearance.
Employer Student Loan Repayment Assistance
If you work in legal aid or the public sector, your employer may be able to help pay down your loans. The best time to discuss repayment assistance is when you’re negotiating a new position. Benefits will vary from employer to employer.
Two popular ways of paying off law school debt are refinancing and consolidating. Refinancing is typically used by high earners in the private sector who aren’t eligible for loan forgiveness. The goal is to pay off loans faster while saving money on interest. Direct Loan Consolidation is a federal program targeted to average earners in government and nonprofits. The goal of consolidation is to simplify your finances by combining multiple federal loans into one — without losing federal protections.
Considering refinancing your law school debt? Learn more about whether SoFi student loan refinancing is right for you.
SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.
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Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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