Private Student Loans in Place of 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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big_willy_style_333
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Private Student Loans in Place of Federal Loans?

Postby big_willy_style_333 » Mon May 22, 2017 4:44 pm

I am leaning towards applying for private student loans instead of using Stafford/GradPLUS loans. My parents have great credit and are willing to co-sign, so I think I could get a fairly low rate (~3-4% if my understanding is correct). After graduation, I plan on some sort of clerkship then big law. I think I will graduate with ~120k in debt, and I am going to Stanford, so although I don't plan on using it, the LRAP seems more reliable than PSLF from what I can tell (true?). FWIW, assume SO will become spouse in fall of 3L.

I have seen that a lot of TLSers refinance their federal loans to private loans after graduation, but I haven't seen many that use private loans while in school. I want to make sure I understand all of the downsides to private loans, so why should I not opt for private loans over federal loans?

Also, if anyone has taken out private loans, where did you get the best rate, best service, etc.? What should I know before starting the application process?

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gsy987
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Re: Private Student Loans in Place of Federal Loans?

Postby gsy987 » Mon May 22, 2017 5:01 pm

I'm curious to hear of this 3-4% interest rate! The sense I got from talking to the vast majority of people is that private student loans are quite a bit higher.

enoca
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Re: Private Student Loans in Place of Federal Loans?

Postby enoca » Tue May 23, 2017 2:16 am

The main benefit of federal loans is protection for when everything goes wrong.

mcmand
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Re: Private Student Loans in Place of Federal Loans?

Postby mcmand » Tue May 23, 2017 2:22 am

enoca wrote:The main benefit of federal loans is protection for when everything goes wrong.


Yeah. I don't see the point in doing private loans initially, even assuming these interest rates will be more competitive than the federal ones. Shit can go sideways really fast, even going to Stanford and landing something prestigious. Having flexible repayment options baked in (which they will be, assuming the law doesn't change before you sign your promissory note) will be hugely beneficial if your planned future big firm collapses or fires you or something else ghastly.

Private lenders have no reason to be nice to you if you need help. You cannot discharge the debt in bankruptcy absent serious hardship. Not worth it considering the big financial risk.

If your parents want to really do you a solid, they could pay some of your interest during law school so it doesn't capitalize while you're unable to pay it off.

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Nebby
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Re: Private Student Loans in Place of Federal Loans?

Postby Nebby » Tue May 23, 2017 8:16 am

This is one of those "sounds great in theory" scenarios.

Npret
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Re: Private Student Loans in Place of Federal Loans?

Postby Npret » Tue May 23, 2017 8:49 am

Nebby wrote:This is one of those "sounds great in theory" scenarios.

Agreed. OP wait until you actually graduate Stanford and have a big law job. Then you can kiss those federal protections, such as they are and subject to change, goodbye.

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big_willy_style_333
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Re: Private Student Loans in Place of Federal Loans?

Postby big_willy_style_333 » Wed May 24, 2017 5:35 pm

Okay, thanks for all the replies! So if the firm at which I land a job collapses, and I am unemployed for a year+, what sort of flexibility would I have with federal loans that I wouldn't have with private loans? Just that the debt is more easily discharged through bankruptcy? Or do you have the ability to postpone payments? Any specific advantages would be helpful.

Are there any characteristics of fed loans that would make them a better choice as far as paying loans with a clerkship salary?

Thanks again, trying to get as much info as I can about how to best shoulder this debt

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Hennessy
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Re: Private Student Loans in Place of Federal Loans?

Postby Hennessy » Fri May 26, 2017 10:54 am

big_willy_style_333 wrote:Okay, thanks for all the replies! So if the firm at which I land a job collapses, and I am unemployed for a year+, what sort of flexibility would I have with federal loans that I wouldn't have with private loans? Just that the debt is more easily discharged through bankruptcy? Or do you have the ability to postpone payments? Any specific advantages would be helpful.

Are there any characteristics of fed loans that would make them a better choice as far as paying loans with a clerkship salary?

Thanks again, trying to get as much info as I can about how to best shoulder this debt


Not discharged on bankruptcy - no student loans are (or at least it's incredibly hard, you can't just file a Chapt. 7 and expect not to pay them anymore.)

Federal refinancing programs are your flexibility. If you lose your BL job and end up in mid-law, you're gonna need to refinance to an income-based plan, unless you have a fairly low balance. $300k is payable on BL salary, but impossible on midlaw salary, and you lose the ability to refinance with those low-interest private loans.

I'd only take a private loan if my total loan balance was going to be < $100,000, and even then I'd take the $20.5k / year in Federal loans first.

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A. Nony Mouse
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Re: Private Student Loans in Place of Federal Loans?

Postby A. Nony Mouse » Fri May 26, 2017 11:20 am

Just one clarification - income-based plans don't refinance your loans, they just change your payments (they're not strictly the same thing - the interest rate and lender stay the same).

The benefit of federal loans is primarily that there are a variety of loan forgiveness plans. If your income/debt ratio meets a certain requirement (anyone taking out sticker or even half or so is going to meet this even in good paying jobs), you can get on an income-based plan that caps your payments and then after a period of time forgives your debt completely (20/25 years, it may go up to 30, or if you're in certain qualifying PI jobs, 10). Repayment isn't a complete boon because currently you're taxed on the forgiven debt as income, but depending on what assets you have at that point you will still probably come out ahead over paying the entire loan plus interest. (If you get forgiveness at year 10 for PI work there's no tax liability.)

If you take out private loans there is no ability to cap the loan based on your income, or ever get the loan forgiven. (I think private lenders will offer some forbearance options but I think that's also easier with the federal loans in that if your income is low enough your payment is zero but it still counts to the total time to forgiveness, so you don't need forgiveness.)

Lots of people who end up in biglaw and know they're going to be able/willing to pay off their debt in 4-5 years will refinance with a private lender after graduation, to reduce the interest and because they know they won't use the protections of the federal loans. But it doesn't make sense to take out the federal loans initially, when you enter law school, because you don't know for certain yet that you'll get that biglaw job and be able to pay off the debt. (Some people also won't refinance right away in biglaw because they want to be sure they can handle th job for long enough.)

Some people don't like relying on these programs because there is always the chance they'll get taken away. Even so they'll usually take out federal loans on enrolling do refinance with private lenders later for the reasons above.

mcmand
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Re: Private Student Loans in Place of Federal Loans?

Postby mcmand » Sat May 27, 2017 1:50 am

big_willy_style_333 wrote:Okay, thanks for all the replies! So if the firm at which I land a job collapses, and I am unemployed for a year+, what sort of flexibility would I have with federal loans that I wouldn't have with private loans? Just that the debt is more easily discharged through bankruptcy? Or do you have the ability to postpone payments? Any specific advantages would be helpful.

Are there any characteristics of fed loans that would make them a better choice as far as paying loans with a clerkship salary?

Thanks again, trying to get as much info as I can about how to best shoulder this debt


See everything that A. Nony Mouse said. If you're clerking, you can go on income-based repayment, so your more meager salary isn't entirely eaten up by your $1500+ monthly loan payment. And then when you're making big bucks, you can switch to a regular schedule (or even more aggressive schedule).

If everything goes to shit, you have the option of forbearance, rather than default. Still sucks because you'll be racking up interest while in forbearance, but you won't have a default on your credit report and all the other costs that come with defaulting (demand of immediate repayment, loss of some repayment options, etc.)

As others have said, no student loan, private or public, is easily discharged in bankruptcy. You need to basically prove you will never work again for a salary/wage that would ultimately pay it off, even 30 years later. Anecdotally and off the top of my head, with zero legal research, the instances I've read about where it does happen is where people suffer a crippling disability that limits their ability to work, or something like that.

The short of it is, you have no advantages of tying yourself to private loans right now when you have no sure bets or guarantees on what's going to happen when repayment begins. The sheer array of options federal loans provides should convince you that the flexibility is good for now. When you're ready to close some doors once law school has passed, you can refinance then.




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