Repaying Debt for Law School: Federal Programs Make It Doable, Not E...

The Association for Legal Career Professionals has released data on starting salaries of 2011 law school graduates, reporting a median salary of $60,000.  So how can these recent graduates afford to repay their student loans?

The N.Y. Times says law schools are facing an existential crisis over rising tuition, debt, and underemployment, but this may be just a teeny bit overwrought. For example, as will be detailed below, a graduate making $50,000 a year in a public service job can pay under $420 a month on federal student loans for ten years and have the rest forgiven.  Also, many law graduates have long had modest incomes.  The law school world is adjusting back to that longterm reality in the aftermath of a bubble that burst.  Several classes got caught in the middle of it, but even for them, there are some ways to cope.

Don’t get me wrong. Law schools in general need to keep tuition down by sticking to the core curriculum and avoiding frills, while reducing the number of seats to get the supply of lawyers more in line with demand.  Unless applicants can get into the top five or so schools, they should be bargain hunting to minimize debt.  At least in the short term, until law schools can reduce capacity, many are filling empty seats at deep discounts.  This year in particular, it’s a buyers’ market.  But for those graduates who don’t make big salaries and already took out big federal student loans, there are solutions, thanks to U.S. Department of Education repayment options.  The calculations below are based on the DOE federal student loan repayment calculators.

Law salaries are bimodal (meaning incomes are clustered at the high and low ends, with few salaries right around the median).  The largest law firms pay starting salaries of $160,000, but only 14% of graduates make in that range.  Many graduates make much less, in the $40,000 to $60,000 range.

So let’s focus on an unmarried, childless graduate making less than the 2011 median, using a round figure of $50,000 in adjusted gross income, with student loan debt all in federal loans.  For graduates with private student loans, things are murkier and generally tougher--those loans are not covered by federal repayment programs.   As the Consumer Financial Protection Bureau put it, call your servicer.   And good luck!  (Note to current law students and applicants:  to maintain access to federal repayment programs, use federal loans, maxing out on the lowest interest ones, and then with federal Grad Plus, you can usually cover all you need.)

If a single law graduate is making $50,000 a year and has only federal student loans (Stafford, Perkins, Grad Plus, Consolidation), what amount will have to be paid per month?  Given the salary we're focusing on, the graduate may be working for a federal, state, or local government agency or a tax-exempt nonprofit organization. Under the federal Income Based Repayment (IBR) plan, public service workers (in any capacity, not necessarily as lawyers) making $50,000 a year will have to pay $416 a month for 10 years, whether they borrowed $100,000, $150,000, $200,000, or more.  The unpaid debt is forgiven after 10 years of payments made while working as a public service employee.  The debt forgiveness is not taxable for those in the public service IBR program.  Payments can go up with pay raises and are capped at 15% of discretionary income (income in excess of the poverty level, currently $11,170 for a single person).

On this program, a graduate will be able to handle student loans while working as a prosecutor, public defender, city or county attorney, assistant attorney general, or as a lawyer for a conservation or civil liberties non-profit organization.  At the end of ten years, these lawyers will come to the end of the repayment period and free up more income to go toward a mortgage, retirement savings, or other financial goals. They can also then decide to go into private practice, free of student loan debt.

Let’s assume instead that a 2011 law graduate is working for a small law firm at the same modest salary of $50,000. Small firm jobs seem to be the largest sector of legal employment for recent graduates of all but a few of the very top schools, ones that serve as feeders to "big law."  (And by the way, those graduates working in big law are well paid, but not very happy these days. The relative psychic rewards of other types of practice should not be overlooked.)  To check out any particular school’s detailed employment information for 2011 as reported to the American Bar Association, go here.

IBR is still available in the non-public service sector, but with a longer repayment period until debt forgiveness.   The monthly payment at an income of $50,000 will still be $416 until income goes up, but the repayment period until debt forgiveness will be 25 years and the amount forgiven after 25 years will be taxable.  Not great, but doable.  These lawyers will have to plan ahead and save to be able to pay the taxes after 25 years, but in the meantime their  monthly payments will be manageable, capped at 15% of discretionary income.  And in the private sector, their incomes may have more chance of rising to the point where they can pay off the loan balance in full in less than 25 years.  Otherwise, it will be a middle-middle class life, not an upper-middle class one.

To avoid a 25-year repayment period, there are some other options for modestly-paid, non-public service lawyers with only federal loans.  If the total student loan debt is $100,000, a single grad making $50,000 can really suck it up and pay about $1,170 a month (ouch) on the “standard plan” for 10 years (the exact amount depends on the mix of loans and their interest rates, 6.8% on Stafford loans of up to $20,500 per year of school and 7.9% on Grad Plus for amounts over that).  That's ten years to the end of debt, but on a very tight budget.  That may be too much for most to bear.  It is too tight a budget under the standard assumption that 20% of gross income above the poverty level is about all a person can afford on student loans, or $650 a month on adjusted gross income of $50,000.  See here for an excellent academic study of how much student loan debt repayment is too much to handle.

So an alternative, a little less austere, is a graduated 10-year plan, in which case the initial payment will be about $825 a month, that is, for the first two years, and then the payment will go up.  For those not confident about being able to handle the increases, for example with pay raises, they could choose an income contingent repayment (ICR) plan, which with $50,000 in income and $100,000 in debt would require paying $650 a month for 188 months (15 years, 8 months).  ICR is based on payment of 20% of adjusted gross income above the poverty level and is subject to adjstment to changing income.

If the total debt is greater than $100,000, say $150,000 or $200,000, the standard and graduated 10-year plans will be out of reach, making the only realistic options IBR or ICR.  The ICR payment will still be about $650 a month based on $50,000 in income, but the repayment period is going to approach or equal 25 years with this level of debt, so graduates with that much debt might as well go for the lower IBR plan over 25 years, $416 a month until income rises.

Now, some law graduates are unemployed, and they can qualify for forbearance on their student loans. But they may be better off signing up for ICR, in which case the payment will be zero until they start having income above the poverty level, and the months of unemployment will count toward the 25 years to forgiveness.

If your head hurts after reading this (and I've left out a lot!), you’ll probably agree that we need a simpler student loan repayment system without so many options, one that accepts that in the normal course some former students will make modest incomes or won’t benefit at all from their education.  We may need front-end regulation to reduce the problem of lack of benefit; see here for my paper on the new regulation of for-profit schools' access to the federal student aid programs under the Gainful Employment Rule, which went into effect July 1.  The UK system of student loans builds into its simple repayment formula the reality that not all students see income gains from education, providing for no loan payment in years in which a former student makes less than the equivalent of about $33,000 a year and payment of 9% of income above that until the loan is repaid or 25 years, whichever comes first.

Our student loan system is very complicated, but there are some doable options.  Keeping debt low is particularly important for those who don't have an excellent shot at a big firm job or don't want one, don't plan to go into public service, and don't want to end up in a 25-year repayment plan.  Applicants should really want to be lawyers, look for merit scholarships and in-state tuitions that allow them to keep debt low, preferably under $100,000, and once in school, they'll need to work hard and smart and make contacts in the profession.  All doable, but not the high life.