The Associate Attorney's Guide to Student Loans

Find out in 5 minutes whether you’re on the right track with your student loans.

So you want to get rid of those law school loans??

You’re not alone, as most Associates cite their student loans as their top financial roadblock.?

This article will help you understand, in simple terms, whether you’re on the right track with your student loan strategy.?

Will an Income-driven Plan, or Refinancing save me the most money??

Getting this question wrong will cost you, on the low end, tens of thousands of dollars.

Thankfully, there’s a simple metric to help determine whether an income-driven plan or refinancing makes more sense for you.?

This metric is what’s called your “debt-to-income” ratio.

Here’s the formula to calculate your personal debt-to-income ratio:?

Debt-to-income ratio = Your total student loan balance ÷ Your total household income before taxes

If your personal number is higher than 1.5, you should read Section 1 on income-driven plans. If it’s lower than 1.5, skip ahead to Section 2 on refinancing.

Section 1: Income-driven Plans

WHAT’S AN INCOME-DRIVEN PLAN??

An income-driven plan is exactly what it sounds like, it’s a student loan repayment program that uses your level of income to determine your monthly payment amount.?

This type of plan makes the most sense for Associates who have a high level of debt relative to their gross annual income (salary before taxes).

THERE ARE 4 INCOME-DRIVEN PLAN OPTIONS:?

• Income-Based Repayment (IBR): Payments are equal to 15 percent of discretionary income, with loan forgiveness after 25 years.?
• Pay As You Earn (PAYE): Payments equal to 10 percent of your discretionary income with loan forgiveness after 20 years of payments.?
• Revised Pay As You Earn Repayment (REPAYE): Like PAYE, REPAYE sets your monthly payments at 10 percent of discretionary income. REPAYE is open to more borrowers, but if you have graduate school debt, it will take 25 years of payments to qualify for loan forgiveness.?
• Income-Contingent Repayment (ICR): Payments are the lesser of either what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income or 20 percent of your discretionary income. Under ICR, federal student loans are forgiven after 25 years of payments.?

SO WHICH PLAN MAKES THE MOST SENSE FOR ME??

For 99% of Associates, either the PAYE or REPAYE program will be the best option.?

PAYE is a pure forgiveness play.?

REPAYE is good for attorneys who would rather have a smaller tax bomb in 25 years or those who are eventually planning to refinance.

WHAT’S THIS “TAX BOMB” YOU JUST REFERRED TO??

It’s critical to understand that debt “forgiven” under any of the 4 income-driven plans is taxable to you as income.?

For example, if your loan balance upon forgiveness in 20-25 years is $100,000 and you’re in a 25% tax bracket, you will owe Uncle Sam $25,000.

ARE INCOME-DRIVEN PLANS EVEN A GOOD DEAL THEN?

Again, they’re a great option for Associates who have a large student loan burden relative to their annual salary.?

They are a bit wacky, though!?

What I mean by that is the most cost-effective strategy is to make the lowest payments possible between now and loan forgiveness, which consequently produces a higher loan balance forgiven.?

This is wacky because conventional wisdom tells us it’s best to make higher payments to pay debt off faster…not the case with income-driven plans!?

To wrap your head around this, answer the following question: would you rather pay $1 today, or 25 cents in the future??

Definitely 25 cents in the future, right??

To tie this into our discussion on income-driven loans, the $1 paid today represents paying off the principal balance of your loans, whereas the 25 cents in the future represents paying a fraction of the balance (i.e. the $25,000 tax bomb in the example above) upon loan forgiveness.?

Furthermore, you can wisely invest money today and presumably earn a rate of return on that money to pay the “tax bomb” that’s due in the future – this rate of return will discount the cost of the tax bomb to you!

WHY IT’S WISE TO WORK WITH A PROFESSIONAL

Let’s be real for a second, this stuff is confusing to most people…?

It takes professional expertise and counsel to determine which income-driven program is best and to formulate a plan to pay for the impending tax bomb.?

A proper plan can easily save you tens of thousands of dollars; I see it every day!

Use this link to schedule a 15-minute introductory call to further explore whether it’s even a good fit for you: https://calendly.com/tacticalwealthpartners/15min

Grab a free copy of my e-book here: https://biglaw.tacticalwealthpartners.com/biglawfreedom

Section 2: Refinancing

WHY REFINANCE??

Refinancing your student loans is one of the best things you can do when you graduate assuming you aren’t seeking loan forgiveness.?

Why??

You’re paying thousands of dollars of unnecessary interest each year.?

That interest is keeping you from paying down the student loan balance.?

And the student loan balance is keeping you from building wealth.?

So, refinance those loans and start paying them down!

YOU’LL SAVE A TON OF MONEY?

Compound interest is a wonderful thing.?

Compound interest in reverse will kill you.?

If you’re paying an average 6.8% interest on your student loans, you need $566 a month for every $100,000 you’ve borrowed just to cover the interest alone.

REFINANCING IS USUALLY QUICK AND EASY?

You can get a preliminary quote within five minutes. If you have all your loan documents together, it might take you another 15 minutes to submit the application electronically.?

I recommend you check around with ALL the different refinancing companies to get the best rate.

YOU DON’T HAVE TO REFINANCE ALL OF YOUR LOANS?

Sometimes an Associate is worried about refinancing everything at the same time. Maybe you have an attractive fixed interest rate on an undergraduate loan? There’s no need to include it in the package that gets refinanced.?

Maybe you want to dip your toe into the waters but keep some of your loans in the federal program.?

There’s no requirement to refinance student loans in bulk. Refinance the portion that feels comfortable and keep moving.

CONSOLIDATION AND REFINANCING AREN’T THE SAME THING!?

Many people mix up these terms.?

Consolidation is combining all of your loans into one federal loan. Unfortunately (for you), the government averages the interest rates of all of your loans and then rounds them up to the nearest 1/8th%.?

Refinancing occurs when a private bank or lender repays your federal loans and issues a new loan to you, typically at a much lower interest rate.?

Refinance. Don’t consolidate.

YOU CAN REFINANCE AGAIN LATER

If you’re just starting your career, you might not get the best rate due to your credit score and debt-to-income ratio.?

Or maybe you’ve paid off half your loan and are now convinced that a variable rate makes sense for the rest of the payoff.?

There’s nothing stopping you from refinancing your loans again.

How to Get the Best Interest Rate

BE IN GOOD CREDIT STANDING?

Your credit score is only good for a few things. One of those is getting a good rate on your student loan refinance. You’ll probably need at least a 650 credit score. If you have an average credit score, you will probably receive an average offer.

HAVE WORK EXPERIENCE?

Unlike when you applied for federal loans, the private market wants proof that you’ll pay them back. Showing work experience lessens that risk. If you’ve been employed for over a year, you’ll likely get a better rate than if you haven’t started your first job.

BE AWARE OF CURRENT MARKET RATES?

Keep an eye on current market interest rates. Interest rates have been at historic lows, but when Janet Yellen speaks, you should be paying attention to make sure you’re ahead of future interest rate increases, especially if you want to lock in a fixed rate.

APPLY WITH A COSIGNER?

Adding a cosigner is good for you but bad for the cosigner, since they’ll be on the hook for the loan too. Make sure you understand what happens if you or your cosigner dies. A cheap life insurance policy on you is well worth the cost if your loans aren’t forgiven upon your death.

HAVE A LOW DEBT-TO-INCOME RATIO?

Again, these aren’t your Department of Education “no credit required” loans. The private lender is going to want to know you can make monthly payments and they’ll determine that by looking at your debt-to-income ratio. If yours is high, you may not get the best rate

CHECK OUT MULTIPLE LENDERS?

Be sure to compare multiple lenders to find the best offer on the market. Lenders have different underwriting models that determine your loan eligibility, so use that to your advantage. Apply to multiple lenders to see what rates you are offered and find the one that is best for you.

WHY IT’S WISE TO WORK WITH A PROFESSIONAL

Refinancing your student loans is a permanent decision.?

In other words, once you refinance your loans you will never be eligible for any of the federal loan forgiveness programs.?

Therefore, professional counsel is critical to ensure refinancing is the best long-term strategy.?

Here’s an additional bonus—I’ve negotiated a special deal with each of the main refinancing companies so that you get extra cash back when you do.

Use this link to schedule a 15-minute introductory call to further explore whether it’s even a good fit for you: https://calendly.com/tacticalwealthpartners/15min

Grab a free copy of my e-book here: https://biglaw.tacticalwealthpartners.com/biglawfreedom