Alternative to Federal Loans

Discuss various money matters here. Loans (federal and private), scholarships, lottery winnings, or other school finance related information and queries.
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Re: Alternative to Federal Loans

Postby guano » Mon Jul 22, 2013 1:30 pm

moshei24 wrote:
guano wrote:
moshei24 wrote:And another issue with a fallback is that it's always in the back of your head as a way out, so you don't end up putting in 100%. Even subconsciously it could affect you.

Actually, I look at it as a business arrangement - you want to succeed, and will put full effort into succeeding, but you should still limit the downside risk.

As for the classic hedge analogy, it's not a classic investment either. It's more like an alternative investment. These are the rules of the game and the tools available. It is up to you to determine the optimum balance of risk, reward, and cost.
By choosing a T6 at high cost, you're upping the potential reward by upping the risk (cost), compared to a free ride at a lower ranked school. By increasing the cost you can decrease the risk.

Remember, if you succeed, and end up in biglaw, the cost is minimal considering your salary (do the math. The increased cost is no more than a few months' salary, especially at the backend when you're at a 3rd/4th year pay scale)
But if you fail, which is always a possibility, then the difference can be immense

The 3rd/4th year pay scale is a good point. I wasn't even thinking in those terms. By those years, I'd probably accrued about $15,000 more of loans/interest by going federal. Am I underestimating that?

As a 4th year, your salary will be $17,500 per month.
So it's just one month's salary that you're talking about, or two extra payments (assuming half your salary)

Like I said, if things go well (biglaw) the cost of the hedge is minimal
If you fail (and need IBR, PAYE, etc.) the benefit is huge.
Assuming even a 3/4 chance of success, the difference between upside cost and downside benefit is a good proposition

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Re: Alternative to Federal Loans

Postby A. Nony Mouse » Mon Jul 22, 2013 1:33 pm

moshei24 wrote:True. That is what it comes down to. But it's not a classic hedge, as in the alternative isn't that attractive either. 20-25 years of barely making it is bad. The only attractive alternative would be 10 years in PI to pay off the loans, but from what I hear LRAP isn't as simple as it seems, and you could get screwed doing it. Do you know anything about it?

But the thing is, you only get the 20-25 years of barely making it if you can't find a job that will cover your loans on the standard 10-year repayment plan in the first place. And if you can't find that kind of a job, you're screwed trying to pay back your Discover loan, because they won't use income-based repayment.

The 10 years in PI isn't the same as LRAP - it's available to anyone regardless of what your school's LRAP program is like (or if, like at my school, it's practically nonexistent). You make 120 payments (under IBR/PAYE, which are technically distinct from PSLF, these are capped a proportion of your income) while working in an eligible public sector job (it need not be legal), and your debt is forgiven. The payments need not be consecutive, so you don't get "kicked out" or anything - so if you worked in private practice for 3 years either before or during doing 10 years of public service, you're still eligible.

I also think the idea that having IBR/PAYE as a "fallback" means you won't try 100% is pretty laughable, frankly. You try 100% because you want what it is you're trying for. IBR/PAYE aren't a "way out" in the sense that they're equal to getting biglaw and paying stuff off quickly and making a lot of money; they're a safety net for if you come out of law school $150K in debt and earning $40K a year. If that "fallback" means you're not going to try very hard, I wonder about your work ethic.

Besides, you can try 100% and still get screwed. And some people who don't try 100% will come out on top. That's the way the world works.

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Re: Alternative to Federal Loans

Postby cinephile » Mon Jul 22, 2013 7:30 pm

I just wanted to add one more thing: until you start law school, how can you be entirely certain that you even want to practice law? If at any point you want to drop out - or if you have to because of an illness or a family emergency, etc. - you're going to have much greater difficulty repaying your private loan even if it's only for one year's worth of costs. I have a friend who was so passionate about [the idea of] environmental law. She just finished 2L and she loved every bit of her first two years and even her 1L summer internship. But this summer she worked at the type of firm that has the type of law she always dreamed she wanted to do, and suddenly she realized she didn't enjoy it. She has absolutely no idea what she's going to do now, but is looking into non-legal careers because she only ever wanted to be an environmental lawyer and now she realizes it didn't live up to the dream. Similarly, a friend of mine came to law school with the singular desire to do biglaw. But he never cared about law, just the $, and he's spent this summer working as a SA in a firm that he was so excited to work for, and he's miserable. And he too is looking for non-legal careers now because this wasn't what he thought it'd be.

Maybe you grew up in a family of lawyers and worked as a paralegal for years and know definitively that this is what you want to do, but these people thought they knew they what they wanted too and now they realize it isn't at all like they thought it'd be. And if you end up moving on to some other career that is less lucrative, the opportunity to use PSLF/IBR would mean so much.


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Re: Alternative to Federal Loans

Postby NYstate » Mon Jul 22, 2013 8:05 pm

moshei24 wrote:And another issue with a fallback is that it's always in the back of your head as a way out, so you don't end up putting in 100%. Even subconsciously it could affect you.

If you aren't going to try because with government loans youmight be able to live with your $120,000 of non-dischargable student loans in a way that won't completely destroy you, by all means take the private loans.

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Re: Alternative to Federal Loans

Postby trojandave » Tue Jul 23, 2013 12:55 pm

In my mind it makes sense to max out the Stafford (the rate is still close enough to the 5.49 Discover that it won't really set you back that much, and you get the added benefits of the federal loans. This is especially true if the pending student legislation passes and the rate goes even further down this year.) Then use Discover for the remainder. You'll split the difference and be able to at least use IBR or PAYE for half of your loans if you need it, and you'll get the benefit of lower interest for the other half (especially compared to Grad Plus.) Granted, the Grad Plus rate may come down too then it's worth re-evaluating... Another benefit is that Discover puts you on a 20 year repayment (though you can absolutely pay it off faster without penalty), meaning if you have any hardship, your minimum monthly payment is far less than it would be on the 10 year. This isn't as great as forbearance or deferment if you're out a job, but it's still a nice little benefit if you'd ever need it.

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