This actually brings up a very interesting question, "From a pure debt-recoery standpoint, which is better: Big Law or LRAP?" I know that many people will say, "Well that depends one the situation." But imagine a situation in which a big law person maximizes the opportunity for that route, and the public interest person does the same. Then what is your answer?
Ballpark calculation, assuming $150k owed:
- $36k salary
- 10 year repayment schedule
- $300 per month loan payments
- $360,000 total gross income
- $36,000 total loan payments
- $300,000 unpaid principal / interest forgiven at ten years
2) Big Law
- $320k salary plus bonus
- 10 year repayment schedule
- $1,800 per month loan payments
- $3.2 million total gross income
- $200k total loan payments
- $150k in loans paid in full after two years, give or take
The LRAP example is based on the Income Based Repayment (IBR) and public service loan forgiveness programs created by the College Cost Reduction and Access Act (CCRAA) of 2007. In the Big Law example, I'm just making a gross estimate assuming that you would make more or less regular payments and apply at least half of your first and second year bonuses to paying down the loan. Your debt would be gone in two years instead of ten, and you'd be roughly $3 million ahead ten years out. This is also assuming you're getting Wachtel level bonuses at 100% of salary (you said maximize ...). Neither example accounts for raises, taxes, etc., of course. But the difference is so gigantic that it can't possibly matter. If you go the Big Law route, then you can either walk away and do public interest after two years, or work ten and retire, doing 100% pro-bono for the next twenty. I'll let you decide which you think comes out "ahead." Can you stand Big Law for two or ten years? Can you even get it?
Under the new, federal LRAP, can time you spent working for a nonprofit prior to law school count toward the ten years?
Davis' LRAP program is pretty unique. I was shocked when I heard the work requirement was only 30 hours a week (apparently its a new thing they started to help people who had kids or dependents they had to take care of). Given that I would like to have kids someday and have two parents who will likely be incapacitated in the next 10 years, its very nice.
Time that you work in public service or non-profit jobs before you graduate from law school does not count for the purpose of loan forgiveness. This is because the clock starts running only once you enter the LRAP program. Most of these programs are not calendar time service commitments in exchange for forgiveness. School LRAPs work (and manage to be tax free) by making you loans to pay off loans, which then get forgiven after a certain period of time. Their formulas determine how much of your current payments they will cover (up to 100% in some cases), and as long as you remain in eligible employment (and make the actual payments on your original student loans) then the short term LRAP loans issued to cover your payments will just disappear.
For CCRAA loan forgiveness, the "time" is actually counted by the number of monthly payments made while under Income Based Repayment. So you have to 1) Qualify for IBR based on your income and the unadjusted amount of your loan payments; and 2) Make at least 120 payments under IBR (10 years if made continuously). This applies if you work for the government, military, or any 501(c)(3) agency, as well as in certain specified public service jobs not otherwise covered.
If you work in a job which is not considered public service (i.e. private sector), then you have to make 25 years worth of payments under IBR in order to gain forgiveness. You can move in and out of IBR as many times as you want, over any period of time, if your income goes up and down. During any period when your income is low enough, you can elect to make IBR rather than standard payments. Once you accumulate a total of 120 payments under IBR, no matter how long it takes you to make them, you get full forgiveness of any remaining balance. The point about hours required for a person to be considered employed is a good one. As written, the law requires "full-time" employment to qualify for IBR. But we'll have to check the regulations when issued to see what specific hourly requirements will satisfy the "full-time" rule.
It's also important to note the big difference between IBR and current school funded LRAP plans. Current LRAPs actually make small, forgivable loans to you that cover the full standard payment for your regular law school student loans. The programs usually also require you to elect a certain repayment schedule such as 10 or 15 years. But IBR only reduces the amount you are required to pay each month -- not the amount of interest and principal due
. If your payments under IBR do not cover the full amount of interest due, then any left over adds to your loan balance, and your total debt grows each month rather than shrinking. This is why $150k in loans balloons to $300k forgiven after ten years, even though you've made $36k in payments over that time. This is also the reason that any income based repayment scheme in fact must include forgiveness at some point -- if it did not, then borrowers would be stuck with an infinite series of payments on an ever growing debt that they could never pay off.
Under many school LRAP plans, the temporary loans made to cover your regular payments are forgiven after just six months or a year. If you're in the plan for three years, then leave for the private sector, then it's as if you made three years worth of regular payments, even though LRAP may have covered all of them. With IBR, if you make very low payments for three years and then begin a much higher paying job and leave IBR, then you'll actually be worse off because your balance will be even higher than when you graduated. You might have no other option besides IBR for maintaining a viable budget with a very low income. But you can wind up paying a lot more in total interest if you use IBR only for a short time and never return for long enough to gain forgiveness.
What are the odds of a school ending its LRAP program? Has it happened before?
It's a virtual given that, once CCRAA is fully implemented in published regulations, all school LRAPs will mandate that graduates participate in the Income Based Repayment program as the primary means of payment reduction and forgiveness. Some schools may then choose to subsidize the already lower payments under IBR. Others may refocus their LRAP programs to help only pre-CCRAA borrowers, those with private loans (not eligible for CCRAA), international students (who can't get federal loans), or those working internationally (who probably can't qualify for CCRAA on account of not filing or paying US income taxes).
More likely most schools with poorly funded programs (which is pretty much all of them other than the Top 10 - 15 schools) will be thrilled to just wash their hands of the whole affair. They would love to redirect funds now devoted to LRAP into things like summer and post-grad public interest fellowships, or even just handing out more merit $$$ to new students. The top ranked and really wealthy schools will probably follow Harvard's lead and do more innovative things with their money, like boosting grant aid or waiving big chunks of tuition up front, since those are more newsworthy than just cutting some poor slob's loan payments by 80%.
Schools that change their LRAPs will most likely provide transition or legacy coverage for students with non-CCRAA eligible debt. They will also (or at least they should) very prominently and strongly suggest that all new students take only Stafford and PLUS loans rather than private loans, if they plan to rely on LRAP to retire any part of their debt. The big problem with most school funded plans is less that they might "end" and more that many are just chronically underfunded. It's all well and good that the formula says you're eligible for $10,000 a year in benefits, but if they don't have the money to cover everyone, then they either arbitrarily deny people or reduce everyone's benefits by however much they need to get within budget.
I was unaware that LRAP includes undergrad loans, very interesting.
Some school plans do and some don't. The CCRAA plan applies to all federally guaranteed loans issued through the Stafford, GradPLUS or Perkins programs, but not to private loans issued by either school funded programs or commercial lenders.
Don't forget though that the forgiven loans are counted as income for tax purposes, so that could leave you with a pretty heavy tax burden (but still worth it).
For now this is an issue, but only because they have not yet gotten around to adding an exemption to the tax code like the ones allowed for every other similar program. It'll be fixed before anyone ever has to face it, because if it isn't then they would be hitting people making $40k per year with tax bills for $150,000.
But the downside is that you're stuck with a fixed cost for at least 10 yrs. What if you wanted to buy a home in the future and can't get a good rate or can't take out a big enough loan as you may want because they factor in 1) your income and 2) your existing debt (among other things of course).
I worry that even if they forgive loans after 10 yrs and only chip away 15% of your total income, that fixed cost (in addition to your whatever other fixed costs, e.g. insurance, etc) you have, is going to prevent your ability to actually save money for your future - e.g. sock away a decent amt for your retirement, and for a home, etc.
The typical back-end ratio
used by lenders when looking at mortgage applicants is 30 - 40% of gross income. If you keep your use of other forms of debt like credit cards and auto loans to a reasonable level, then IBR payments should not cause you any problem in getting a mortgage. Keep in mind that the formula is 15% of gross income above 150% of the federal poverty level
IBR Payment = 0.15 x (Gross - 15,315)
So if you make $40k, then IBR payments would be $3703 per year, or $309 per month. That's only 9% of total gross income and should not on its own cause a problem for anyone trying to save or applying for other forms of credit. If you come out owing the usual $100k or more, then that $3,703 per year is also going to be 100% interest. With gross income less than $55k per year you can take up to $2,500 of that as a deduction just like mortgage interest
. So that means you're really only losing about $250 in after tax income per month.
No matter what your other goals, being stuck with a fixed cost that is around 9% of your gross income sure beats being stuck with one that is 50 - 60% of your gross.
More details on LRAP plans for law school graduates appear in: Figuring out Financial Aid