The Associate Attorney’s Guide to Student Loans

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

Introduction

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 Student Loan Guide 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 you determine whether an income-driven plan or refinancing will make more sense.

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 Chapter 1 on income-driven plans.

If it’s lower than 1.5, skip ahead to Chapter 2 on refinancing.

Chapter 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’s 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 who are planning to eventually 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 though!

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!


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Chapter 2: Refinancing

For helpful information about refinancing, I’d highly recommend reading my friend The Big Law Investor’s “Student Loan Refinancing Guide”.

Check it out here: https://www.biglawinvestor.com/student-loan-refinancing/

He even negotiated “cash bonus” deals for those who move forward with refinancing their loans!

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.

 


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