A Hypothetical Class of 2014 Law Student’s Journey Into Debt
February 8, 2012

 

Recently, Inside the Law School Scam’s LawProf discussed the amount of law school debt a student may expect to take on and provided NALP figures of starting salaries as a comparison.

LawProf used some research I provided, and I’m g

 

rateful for his linkback to the LSTB. Unfortunately, some of what I sent him was inaccurate due to my own error (esp. how much Stafford Loan borrowing is possible), so I’ve decided to

 

create a detailed hypothetical of law school loan repayment based on current, applicable law.
To that end, I taught myself the dark art of loan amortization—something they should teach in junior high school, not that I blame mine. This post will show us how much law school debt a class of 2014 student might reasonably take on given a few assumptions. They are:

1.No undergraduate debt (ha!)

2.No scholarships

3.No savings, job, income, work-study, family connections, etc.

4.Full-time status maintained throughout law school and graduation within three years

5.Eligibility for all relevant loans

6.Attendance at New York Law School. Why? Not to beat up on it, but because its tuition guarantee program removes the tuition increase variable from the calculation. Indeed, I freely admit that NYLS’s unusually high price tag and high cost of living skew the results towards significantly more debt than a typical 1L will start taking on this year. That said, accuracy is important to this project, and as you’ll soon see, the interest and repayment rates are so high that it doesn’t really matter.

7.Interest accrues monthly, which in reality is not true. Interest on student loans actually accrues daily, but it won’t cause too much inaccuracy in the hypothetical.

8.…And every other common sense assumption required to make this work.

 

Law students are eligible for three types of loans: Subsidized Stafford Loans,Unsubsidized Stafford Loans, and Grad PLUS Loans (for professional students). Subsidized Stafford Loans are limited to $8,500 per year, though this will change next year when provisions of the Debt Ceiling Bill go into effect and make law students ineligible for Subsidized Stafford Loans. Unsubsidized Stafford Loans cover an additional $12,000 of tuition, up to $20,500 total. Both types of loans have an annual interest rate of 6.8% and a fee of 1.0%, which is taken out of the loan at the time of origination. Interest does not accrue on Subsidized Stafford Loans while the student is enrolled at least part-time. Unsubsidized Stafford Loans accrue interest immediately. Both loans can be deferred until graduation, after which they are eligible for a six-month grace period during which interest accrues but payments are not demanded. The grace period means that from the time of the last set of disbursements (we’ll assume in August before the 3L year begins and graduation is in May) until repayment first occurs, fifteen months will transpire. This means the grace period ends in the November after graduation, and the first payment will be due in December.

 

Grad PLUS loans are similar to Unsubsidized Stafford Loans except their annual interest rate is 7.9% and the origination fee is 4.0%. Grad PLUS loans now make it possible for law students to finance not only their full law school tuition minus available Stafford Loans but also to provide for living expenses. The government’s rationale behind this is that professional education is rigorous, so students shouldn’t have to work outside of class. Its heart is in the right place but the results are grotesque.

 

Because there’s a limit to the amount one can borrow in Stafford Loans each year ($20,500), we’ll go through three scenarios of Grad PLUS Loan borrowing based on how much the student borrows for living expenses:living alone, with family, and not using Grad PLUS loans for living expenses at all. I’ll also include repayment plans except the graduated repayment plan (10 years) and the extended graduate repayment plan (25 years) because I have no idea how to calculate them. You can useED’s website for that if you are interested. Student debtors are ineligible for extended repayment plans (fixed or graduated) if the principal on their debts is below $30,000, which will pose a problem for the Subsidized Stafford Loans in our example.

 

I will also give two examples for each scenario placing our graduate on Income-Based Repayment (IBR). IBR calculates a monthly payment based on gross income, family size, total loan principal, their average interest rate, and cost of living. I do not know when the repayment rate is calculated or recalculated each year. After 25 years, the government cancels the loans, leaving the student debtor to pay income tax on the forgiven sum. Thanks to the Health Care and Education Reconciliation Act of 2010, new borrowers in 2014 will have their loans forgiven after only 20 years. I interpret this to mean that people who begin borrowing in 2014 will have the shorter IBR time frame. The government covers interest on subsidized loans for the first three years of repayment if the graduate’s monthly repayment rate does not. I am fairly sure this applies to three years of payments and excludes the grace period. While the monthly payment is partly determined by the average interest rate of all the loans, I believe the payments are distributed among the loans in proportion to the loans’ share of the total remaining principal, and interest on the loans accrues according to their listed rates, not the average.

 

In the first sub-scenario, our hero will live alone, earn the mythical Biglaw $160,000 starting salary at month zero, and live within the continental United States for cost of living purposes. In the second sub-scenario, our hero will be married to a spouse with no IBR-eligible debt, file jointly, have two children, earn a combined gross income of $70,000 to start, and also live within the continental United States. Yes, I’m assuming the kids will live with their parents for at least 25 years (unless our hero had some combination of two kids and parents living under the same roof over that time period). It won’t save them a whole lot of money, but it is a perverse incentive to keep kids at home just to have cheaper IBR payments.

I will not use IBR’s complementary program, Income Contingent Repayment, which cancels loans after 10 years for graduates who work in the public interest (though income tax on the forgiveness isn’t required). In normal economic times, incomes grow, so I will give our hero a two percent raise every year.

 

Here’s an outline of what happens to our hero.

 

I. Grad PLUS Goes to Living Expenses (Alone)

A. Standard Repayment Plan: 10 Years

B. Extended Repayment Plan (Fixed): 25 Years

C. IBR

1. Biglaw ($160,000)

  1. 2.Middle Income ($70,000)

 

 

II. Grad PLUS Goes to Living Expenses (w/ Family)

A. Standard Repayment Plan: 10 Years

B. Extended Repayment Plan (Fixed): 25 Years

C. IBR

1. Biglaw ($160,000)

  1. 2.Middle Income ($70,000)

 

 

III. Grad PLUS Goes to Tuition Only

A. Standard Repayment Plan: 10 Years

B. Extended Repayment Plan (Fixed): 25 Years

C. IBR

1. Biglaw ($160,000)

  1. 2.Middle Income ($70,000)

Visit Matt Leichter’s Site to see the very detailed conclusion…

This article was originally posted on 9/5/11 but was so thorough we had to repost it with his approval 🙂

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