Student Loans
Try to borrow as little money as possible to finance your legal education. Many people, including knowledgeable financial advisors, your parents, and even people associated with law school administration will repeat the mantra that "student debt is good debt." This statement is incredibly out of date. My guess is that the huge backlash against law schools is due more to the combination of student loans and high tuition than the employment situation. Law school graduates have faced pretty dismal career prospects and post-graduate employment for many years, but rising interest rates and tuition have buried students in debt. But I digress...
Law School Student Loan Key Points:
Student loans are far too easy to obtain
Inaccurate and out of date advice is often given to law students regarding the reality of loans
Very high interest rates: 6.5% - 8.5%
Not dischargeable through bankruptcy
Accrued interest amortizes before repayment begins
Dynamics of repayment is poorly understood by most law students
Dynamics of the role of interest is poorly understood by most law students
IBR and other payment assistance programs are poorly understood by most law students
Student loans are far too easy to obtain
Little financial analysis goes into the grant of a student loan. The law school typically authorizes a student to borrow a certain maximum amount of student loans, and this maximum is usually far greater than yearly tuition and living expenses. Just because you can borrow more, doesn't mean that you should. Although bankruptcies or delinquencies will hinder your ability to borrow, having a low FICO score will not prevent you from the ability to obtain more than $50,000 or $60,000 per year in student loans. As far as I know, only your past credit history is considered. The companies and school that disburses your student loan does not take into account your ability to have and maintain sufficient future income to make minimum payments.
Inaccurate and out of date advice about student loans:
"Don't worry about student loans, even if the loan balance is high, the interest rates are low (2%-4%) and you can pay them off over many years."
More info about this below, but interest rates on student loans vary between 6.8 and 8.5%. The higher the interest rate, the less incentive you have to string out your payments over time. Law school loans carry extremely high interest rates. High interest rates also increase the amount of your monthly payments.
"Student loan debt is good debt"
Except that it isn't. Student loan debt is actually BAD debt. Student loan debt is unlike all other forms of debt because a debtor (e.g. you) cannot discharge student loan debt through bankruptcy.
How does this play out? Say you rack up 10,000 in credit card bills to pay for food and groceries during law school. If you can't find a job and can't pay off your credit card, you can declare bankruptcy and your credit card debt disappears. Your credit will take a hit, but you get a fresh start. You cannot get rid of student loan debt. If you declare bankruptcy, you will still have to repay your student loans. If you declare bankruptcy, interest continues to accrue on your student loans.
Most people who tell you that "student loan debt is good debt" don't understand how much it costs to attend law school. Law school is incredibly expensive, especially when compared to tuition prices just 10-15 years ago. Somebody who graduated from the University of San Diego School of law any time prior to 2004 has no concept of how much law school costs. These statements get more true with each passing year as tuition continues to increase. The more years into the past that somebody graduated, the cheaper their tuition (and lower their interest rate), and the less relevant their advice re: loans.
Here is a real life example: I used to work with somebody who graduated from Boalt Hall in 2003. During his last year of law school, Boalt increased tuition to 11k per year. That means that this person paid LESS tuition money for his entire legal education overa all three years than a student would pay for ONE YEAR (one semester now) at University of San Diego School of Law.
The table below shows tuition increase for several years. This data is from:
| 2004-2005 | $30,796 | xx |
| 2005-2006 | $33,826 | 6.3% |
| 2006-2007 | $35,896 | 2.8% |
| 2007-2008 | $37,704 | 2.1% |
| 2008-2009 | $39,204 | 0.2% |
| 2009-2010 | $40,014 | 2.4% |
| 2010-2011 | $41,414 | 1.8% |
| 2011-2012 | $42,574 | -0.3% |
| 2012-2013 | $43,860 | $44,502 | |||
| 2013-2014 | $45,860 | $45,860 |
A quick look at the chart will show that tuition per year increased over 10,000 (per year!) between 2004-2005 and 2010-2011. Think about it, somebody who graduated in 2005 paid a maximum of $95,388 in tuition. A student who enrolled just 3 years later (enrolled in 2008) paid a minimum of $116,922 in tuition (a difference of over $21,000 dollars--and this difference is most likely accruing interest at 8.5%).
Use some common sense when talking to people who graduated from law school. Many times you will hear things such as "I had to sell my car to pay tuition." Note that, at one point in time, it may have been possible to sell your car to pay tuition, but this is no longer the case. For some perspective, even if you owned and sold a brand new BMW 5 series car at blue book value, you could only pay for tuition and living expenses for one year of law school.
Very high interest rates: 6.5% - 8.5%
Student loans for law school typically comprise a combination of Stafford Loans and Grad PLUS loans. Stafford loans may provide up to $18,500 per year of loan money. Note that this figure does not cover the cost of tuition for even one semester at University of San Diego School of Law. Stafford Loans fall into two camps: subsidized and unsubsidized. Subsidized Stafford Loans do not accrue interest while you are in school, however subsided Stafford Loans max out at $8,500 per year. You can typically receive up to $10,000 dollars of unsubsidized Stafford Loans per year. These loans begin to accrue interest at 6.8% from the moment of disbursement.
Unlike some Stafford Loans, the interest on Grad PLUS loans are not subsidized and these loans begin to accrue interest at up to 7.9% per year (used to be 8.5%). Grad PLUS loans usually represent the bulk of debt for most students required to borrow money to fund law school. Most students must borrow upwards of $35,000 of Grad PLUS loans per year to cover the remaining balance of tuition and also to cover living expenses.
Common Student Loan Scenarios that Most Law Students Don't Appreciate
How Much Interest Accrues While You're in School?
That depends on the type of loan you have. Subsidized loans (e.g. a subsidized Stafford loan) accrues no interest while you're in school. Unsubsidized loans (e.g. unsubsidized stafford loans and GRAD PLUS loans) accrue interest while you're in school. Accrued interest is capitalized when you begin repayment of your loan. Here's how it plays out:
First year tution costs $45,860. You also need to borrow $15,000 for living expenses for the first year (see here). This means you will need to borrow $60,860 for your first year of law school. $8,500.00 of the $60,860 is subsidized stafford loans. It does not accrue interest while you're in school. The remaining $52,360 comes from either GRAD PLUS loans or unsubsidized Stafford Loans. GRAD PLUS loans are currently at 7.9% and Stafford Loans are currently at 6.8%. The average interest rate on the $52,360 will be about 7.35%. That means that you start accruing 7.35% of interest on $52,360 during your first year of law school. Two years later, after you graduate and take the bar and repayment begins, you will have accrued about $7,700 dollars of interest. This $7,700 is added to the $52,360 that you borrowed, along with the $8,500 that didn't accrue interest and your repayment total is around $68,566. This is why a lot of graduates get surprised by their total amount owed once repayment begins. A lot of times you will hear people say, "I borrowed 150k, but I owe in repayment 175k." The difference between amount borrowed and the repayment amount is due to the interest that accrues while you're in school. Also note that the above calculation is for one year, interest will accrue on the loans you take out for your second and third year, although this will be less interest because it doesn't accrue for as much time.
Student Loan Debt Spiral
Large amounts of non-dischargeable debt causes a number of problems for graduates. The biggest problem is a failure to come up with enough money to pay the interest that accrues each month on the principal balance of your loan. Every person who graduates law school and who borrows money needs to know one number: the amount of interest that accrues each month on your principal balance. See the student loan matrix of death.