The Guide to Law School Loans

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Nom Sawyer
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The Guide to Law School Loans

Postby Nom Sawyer » Tue Jul 20, 2010 10:10 pm

Introduction

Once you get through college, taking the LSAT, applying, and then deciding on a law school it seems as if you've finally finished and can finally relax. However, paying for the huge cost of law schools today also seems pretty important in the grand scheme of things. So here I'll break down the different type of loans, what to expect from each, and then weigh GradPlus loans against Private Loans.

You can go through section by section for a full overview about law school loans, or jump directly to the area that interests you.

A. Type of Loans
I. Federal Direct Stafford Loans
II. Federal Perkins Loans
III. School Specific Loans
IV. Federal GradPlus Loans
V. Private Loans


B. General Loan Profile

C. Federal vs. Private Loans
I. GradPLUS Benefits
II. Should You Consider a Private Loan?
III. Applying for Private Loans

D. Interest Rates & Other Concerns

E. Closing Thoughts


A. Type of Loans

I. Federal Direct Stafford Loans are the set amount of loans made available to all US citizens and eligible non-citizens who are attending law school (or any other graduate school). The total amount of these funds is $20,500 for every single student, but there is a further breakdown of this $20,500 into subsidized and unsubsidized amounts. Up to $8,500 is available subsidized (meaning that you don't need to pay interest while in law school) based on FAFSA.

Interest Rate: Fixed at 6.80%

Origination Fee: 1.00%

Other Fees/Benefits: 0.50% Guarantee Fee (Not charged unless a payment is missed in the first 12 months)

Interest & Repayment: Up to $8,500 subsidized with no interest until 6 months after graduation. Remainder of loan accrues interest, but repayment also begins 6 months after graduation.


II. Federal Perkin Loans are separate Federal loan funds given to many institutions each year. These funds are awarded to students as part of their loan packages with varying amounts based on financial need. Usually much smaller amounts of these loans are given, with most schools distributing a maximum of $5,000 to $6,000 per year per student.

Interest Rate: Fixed at 5.00%

Origination Fee: 0.00%

Other Fees/Benefits: 0.00%

Interest & Repayment: Fully subsidized so no interest accrues until you enter repayment period. Repayment period begins in the 10th month after graduation/

Extra Information: Has Forbearance (no need to make payments) for up to 36 months due to financial hardship. Forgiven upon death or permanent disability.


III. School Specific Loans are loans provided by a Law school's own funds in order to subsidize student loan costs or to provide more loan options to international students.

Interest Rate: Variable, usually better than GradPlus & Private Loans

Origination Fee: Variable, usually close to 0.00% or 1.00%

Other Fees/Benefits: 0.00%

Interest & Repayment: May be subsidized or unsubsidized


IV. Federal Direct GradPLUS Loans are supplementary loans made available to all US citizens and eligible non-citizens who are attending law school (or any other graduate school). The total amount of these funds that can be borrowed equals the difference between your student budget and any other aid you have received. These loans are what most law school students use to pay for all the costs of tuition and expenses that aren't covered by grants and the 3 loans listed above.

Interest Rate: Fixed at 7.90%

Origination Fee: 4.00% (1.50% is refunded if first 12 months of payments are made on time. If loan is consolidated before this period, no refund is given)

Other Fees/Benefits: 0.00%

Interest & Repayment: Interest accrues while in law school, but payments are not required until six months after graduation.

Extra Information: Has Forbearance (no need to make payments) for up to 36 months due to financial hardship. Forgiven upon death or permanent disability.


V. Private Loans are loans offered to students by banks in order to supplement the main Federal loans. They are usually used only once other options are exhausted or in certain cases to replace the GradPLUS Federal Loan. A more detailed discussion of the pros & cons of Private loans vs. GradPLUS loans is located further down.

Interest Rate: Variable Floating rates based on LIBOR or Prime Rate + x% (Usually lower than the GradPLUS fixed rate)

Origination Fee: 0.00 to 2.00% for most student loans

Other Fees/Benefits: Usually 0.25 to 0.50% interest rate reduction for ACH payment method. Also some other company specific benefits might be given.

Interest & Repayment: Interest accrues while in law school, but payments are not required until six months after graduation.

Extra Information: Has Forbearance (no need to make payments) for up to 36 months due to financial hardship. Forgiven upon death or permanent disability.


B. General Loan Profile


So now that you have the basic types of loans, how exactly are loans disbursed and what do you have to do for each of them? I'll go over a basic loan amount from a school and what exactly you have to do with the loans you have been offered:

Sample Loan:

Grant Aid or Scholarship- $10,000
Perkins Loan- $2,500
Direct Subsidized Stafford Loan- $8,500
Direct Unsub. Stafford Loan- $12,000
Optional Loans- $30,000


This would be the basic profile your given by your law school upon being admitted. Now it looks complicated, but basically everything is already locked in for you except for the Optional Loans. Your grants/ scholarship will automatically be credited, as will the regular Federal loans such as Perkins and Stafford. In this example you would not be making any payments for the above amounts (except perhaps for the optional loan which is discussed later) but interest WILL be accruing on your unsubsidized loans.

Thus $10,000 is given to you, $11,000 is a subsidized loan with no interest while you are in school, and the last $12,000 will accumulate interest at 6.80% starting immediately.

All you have to do at this point would be to:

1. Decide how much of the Optional Loans you want to borrow. You may not want to accept the full loans offered by the school if you think your cost of living isn't as high as their estimates.
2. Pick between going with GradPlus Loans or Private Loans. (Discussed in C.)
3. Apply for your chosen loan. (Discussed in C.)



C. Federal vs. Private Loans


The majority of Law Students, when deciding on supplemental loans to cover the rest of their tuition or living costs, choose Federal GradPLUS loans. This choice is usually the best option for many people, but is not always the cheapest option. GradPLUS is often chosen because of the built in benefits and the reduced risk from a fixed interest rate.

Here I will walk through the Pros and Cons of either program and help people decide if they definitely should choose GradPLUS or perhaps consider private loans.

I. GradPlus Benefits

1. Program Benefits

The GradPLUS loan has built in deferment, forbearance, and cancellation due to permanent disability or death due to laws governing the Federal programs. These mean that if you encounter serious hardship or injury, your loans will be easier to handle. Further if you are going to continue your schooling (say pursue a masters or PhD in the future) you will want to choose GradPLUS so you can defer your loans. Finally, all your loans, including Perkins & Stafford will all be under one lender, namely the Department of Education.


2. LRAP Consideration

This is one of the key issues you have to be aware of. If you are considering ever using the Federal IBR (Income Based Repayment) program to forgive your loans, only loans that fall under Federal Lending will qualify. Thus if you want to keep the option of IBR on the table for all your loans, you have to choose GradPLUS.

However, many schools have their own LRAP plans to help pay back your loans if you choose to go into public or service or have a lower income position coming out of law school. Here, you will need to check with your specific school if only GradPLUS loans qualify for your school's LRAP or if any loan will qualify. Again, if only GradPLUS loans qualify, you should go ahead and take GradPLUS loans to keep the LRAP option open.

Examples:
Berkeley accepts only GradPLUS loans for its LRAP Program- Almost all students should select GradPLUS Loans
University of Michigan considers any loan for its LRAP Program- Students could consider choosing Private Loans

This information is easily found on your school's financial information webpage once you have been admitted.

3. Fixed Interest Rates

The current interest rate is fixed a 7.90%, meaning that for the entire life of the loan you will not have any changes to your rate terms. Thus you don't have to worry about market fluctuations or a sudden spike in interest rates leading to extremely high costs on your loan.

II. Should you consider a Private Loan?

So with the benefits listed above, why would you want to consider private loans? I believe private loans are a good option for a certain group of people. First you need to review the benefits of GradPLUS loans and make sure they do affect you greatly or be willing to forego them. Secondly you must be willing to accept some risk and/ or have backup loan options or assets to help in case interest rates rise greatly. If you can handle those terms , private loans can be much lower in initial costs and interest rates over the term of your loan, thus saving you money especially due to the fact that interest accrues while you are in school.

For example, lets compare a private loan with 0% origination fee and a variable 6.3% interest to a GradPLUS loan with a 4% origination fee and a fixed 7.9% simple interest rate. This was basically the choice I faced this year when trying to decide which loan to use. I have also built in slight increases to the private loan to account for the variable rate. (Note- 1.5% of the origination fee is refundable after 12 months of payments, but interest will still accrue on its amount. For this illustration I am using variable rates of 6.3%, 6.5%, and then 6.8%)

So at the end of your law school career, you original loan for 1L year will be:

Under GradPLUS: 1.025 * 1.079 + (1.025 * .079) + (1.025 * .079) = 1.2679 + .015 possible
Under Private Loans: 1.00 * 1.063 * 1.065 * 1.068 = 1.2091


Taking 126.8% - 120.9% would mean you are looking at around a 6% difference in your loan amount (if you keep up to date on your payments) at the end of 3 years. This means a difference of $1,200 if you are borrowing $20,000, which is a substantial sum. If you factor in the loans from all 3 years of your law school education, your savings would come out to be over $3,000 if you only borrowed $60,000 total from private loans. Of course these savings could decrease in the future if the variable interest rate continues to rise. However there are a few private loans with no fees that have fixed interest rates.

Thus people who meet these 4 categories should consider looking into the private loan option:
1. Be willing to forego the Federal Benefits such as deferment or forgiveness upon death.
2. Attend a law school that offers LRAP for either private or Federal loans.
3. Can accept some risk or has financial assets / other loan options to consolidate loans in case of steep rise in interest rates ( more information in final section)
4. Has good credit and/or a cosigner with good credit.


III. Applying for Private Loans

Ok so if you decided to look into Private Loans, you need to know your options. There are many, many financial companies which provide graduate student loans, but usually most people go with large and well known companies like Chase, Discover, Sallie Mae, Suntrust, etc.

What should you do when trying to decide on your loan? Here are the things to look for:

1. Make sure you find a loan that has no origination fees. Origination fees not only add 2 to 4% cost right up front (thus making your loan almost as expensive as GradPLUS), but then this amount is subject to interest accruing over the next 3 or 4 years. Many companies offer 0% origination fee so don’t settle for anything else.

2. Apply to several loans to compare interest rates. Your looking into private loans to expand your options and save money. Thus you should compare several options by applying to several companies. Private loans don't give you a rate quote until you apply, so you especially need more then one option in case you are quoted a very high interest rate. ( For example, when I applied for private loans I was quoted 10.5% by one company and 6.1% by another… a difference of over 4.0%!)

3. Look for extra benefits that could add or reduce the cost of your loan. Many companies have special terms such as reducing your interest rate if you pay by ACH or a special bonus if you graduate.

As a basic starting point, I'll give some examples of decent companies to get a rate quote from: (If you are unsure about the LIBOR or Prime Rate information it will be discussed in the last section.)

Graduate Student Chase Select Loan:

http://www.chaseselectloans.com

Interest Rates: LIBOR + 3.5% to LIBOR + 6%

Origination Fee: 0%

Special Benefits: 0.25% interest rate reduction with ACH


Discover Student Loans:

http://www.DiscoverStudentLoans.com

Interest Rates: Prime +1.00% to Prime + 7.75%

Origination Fee: 0%

Special Benefits: Cash Reward of 2% of outstanding principal upon graduation


Suntrust Academic Answer Loan:

http://www.SuntrustEducation.com/academicanswer

Interest Rates: LIBOR + 3.5% to LIBOR + 10.75%

Origination Fee: 0%

Special Benefits: 0.25% interest rate reduction with ACH. Cash Reward of $300 for each loan upon graduation.


Finally you want to consider your payment terms for these loans. Unlike GradPLUS, you can choose to either defer all payment, pay only interest, or start payments immediately. I would suggest people consider paying interest only on your loans while in school. These payments are quite minimal as you are not paying down principal, but in the long run you can reduce your balance by a substantial amount.


D. Interest Rates & Other Concerns


If you have decided to consider private loans then you will need to know about the possibility of your interest rate increasing and what you can to do handle this. For one, many private loans have interest rate caps, but these are so high (usually around 18%) that they shouldn't really affect your consideration. Instead we need to look at the trends and future possibilities for the LIBOR and Prime Rate (as this is what your private loan interest rates depend on).

The LIBOR is the London Inter-Bank Offered Rate (what British banks use when they lend to each other) and the Prime Rate is what major banks charge their most credit-worthy customers. Thus the Prime Rate is usually around 2.5 to 3.5% higher then the LIBOR. Currently the LIBOR is at 0.53% and the Prime Rate is 3.25%.

Looking at our past decade or so, the Prime and LIBOR have stayed never exceeded 10% so chances of extremely high interest rates (approaching the 18% ceiling) are quite slim. However, during strong economic times like 2001 or 2006 the rates might increase up to 5% from what they currently are. At this point you would be paying a premium of 2%, 3% or even more over the GradPLUS loans fixed rate.

These costs are basically balanced by the fact that you have not paid an origination fee and that you have had a lower interest rate for sometime. Also, given that the economic climate is still unstable and that the Federal Reserve has expressed no interest in raising rates, we can expect relatively low rates for the near future.

Still, due to the fact that your loan terms are for 10, 15 or 20 years, you should have some back up plans to help paydown your private loans incase you face prolonged high interest rates. As every student has a significant portion of federal loans due to Perkins and Stafford, one method is to focus larger payments on your private loans, paying these off quickly while leaving loans that are at very low, fixed interest rate terms. Further, if you save assets or cash, you can have this as a backup and consider contributing more to your private loans if you face the prospect of rising interest rates. Finally if your family or parents with access to certain 401k funds, you can ask about the possibility of borrowing the money from their funds and repaying interest to them directly. This way you could consolidate private loans if interest rates skyrocket while keeping any extra costs within your family.


E. Closing Thoughts

For most people, GradPLUS loans are the easiest options to go with and hopefully the information here will help you manage your loans and know the terms/ costs/ and benefits you have for your loan package. However, for a certain group of people private loans can be a helpful supplement that will lower your total costs. If you meet the criteria outlined above and your total supplemental loans needed are not too high, I would recommend at least getting rate quotes to see if a private loan would be a good option. Keep in mind that these quotes will slightly lower your credit score, but will not affect it too much.

Finally, if you want further information about rates and trends for the LIBOR and Prime Rate you can look at these sites:

http://www.moneycafe.com/library/3monthlibor.htm
http://www.moneycafe.com/library/primerate.htm

If anybody has anything to add or any specific questions to ask me, just send me a private message or respond below and I'll be happy to help! I hope this will be a helpful article for a topic that does not have as many resources on TLS.

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Nom Sawyer
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Re: The Guide to Law School Loans

Postby Nom Sawyer » Wed Jul 21, 2010 12:38 pm

Here's a graphical representation of both the LIBOR and Prime Rates over the past 10 years:

Image

Image
Last edited by Nom Sawyer on Mon Jul 26, 2010 9:53 pm, edited 1 time in total.

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Kchuck
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Re: The Guide to Law School Loans

Postby Kchuck » Wed Jul 21, 2010 12:45 pm

this was good, thanks.

MissLucky
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Re: The Guide to Law School Loans

Postby MissLucky » Thu Jul 22, 2010 9:43 pm

Thanks for this - extremely informative and helpful! You organized what is a messy (but very important) topic clearly and accessibly. Nice work.

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Na_Swatch
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Re: The Guide to Law School Loans

Postby Na_Swatch » Fri Jul 23, 2010 7:45 pm

This site has some useful side by side comparisons of terms/ rates from many different private loan companies:

http://www.finaid.org/loans/privatestudentloans.phtml

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Nom Sawyer
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Re: The Guide to Law School Loans

Postby Nom Sawyer » Mon Jul 26, 2010 10:18 pm

Also, another important aspect of applying for private loans (and any loans you'll need in the future) is your Credit Score along with your parents or cosigners you'll be using.

If you haven't checked your credit reports before, you should definitely do it as part of the financial process of preparing for law school.. you can get your free reports from here (be careful of many other sites as they will try to charge you money):

--LinkRemoved--

Anyways if there is interest, i'll add a walk-through about how to access your credit reports as well as getting a free credit score report (this is slightly harder as the free sites won't contain a score, just links asking for payment to get a score to go along with your data).

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upalittletoolate
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Re: The Guide to Law School Loans

Postby upalittletoolate » Tue Aug 03, 2010 2:49 am

Great post- really well done!

Endgames
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Re: The Guide to Law School Loans

Postby Endgames » Wed Aug 04, 2010 3:46 pm

Great post. This info has made my research about fin aid much easier.

phi4life940
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Re: The Guide to Law School Loans

Postby phi4life940 » Tue Aug 10, 2010 10:36 pm

This is all very helpful but I have a question I think many law students would like answered....

What if your cost of attendance is much lower than your "actual" cost of attendance. For example...my school is only giving 4K or so for living expenses for a whole year. This will obviously not suffice. What should I do if I need another 12K on top of my school's cost of attendance???

It seems like most of these companies that offer loans will only loan you money up to your cost of attendance.....

HELP!!!! This is really stressing me out.

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Nom Sawyer
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Re: The Guide to Law School Loans

Postby Nom Sawyer » Wed Aug 11, 2010 8:01 pm

phi4life940 wrote:This is all very helpful but I have a question I think many law students would like answered....

What if your cost of attendance is much lower than your "actual" cost of attendance. For example...my school is only giving 4K or so for living expenses for a whole year. This will obviously not suffice. What should I do if I need another 12K on top of my school's cost of attendance???

It seems like most of these companies that offer loans will only loan you money up to your cost of attendance.....

HELP!!!! This is really stressing me out.


To clarify: you can get private loans in excess of the COL estimates made by your school. However, you will need to contact the private loan companies you are interested in about these loans as they usually require a school confirmation for normal loans. That process doesn't generate a hard limit (banks usually have their own limits on how much they will lend out) but it might give you higher rates.

Anyways, in your case the best advice is similar to trying to find a good priced private loan listed above, then contact several banks to ask them about their limits/ policy/ and rates. Also, try to cut down your COL by as much as possible as you don't want to borrow more than you have to.

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DeSimone
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Re: The Guide to Law School Loans

Postby DeSimone » Wed Aug 11, 2010 8:14 pm

Thank you for the post.

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2ofspades
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Re: The Guide to Law School Loans

Postby 2ofspades » Fri Aug 13, 2010 9:40 pm

Great post.

094320
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Re: The Guide to Law School Loans

Postby 094320 » Tue Aug 24, 2010 1:34 pm

..

clint4law
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Re: The Guide to Law School Loans

Postby clint4law » Tue Aug 24, 2010 1:47 pm

thanks

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Nom Sawyer
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Re: The Guide to Law School Loans

Postby Nom Sawyer » Tue Aug 31, 2010 10:46 pm

Additional Information: As many 1Ls have just started law school this week, they may be encountering the final step in loans which involves mainly:

1) Signing the promissory notes for your Federal Loans

2) Beginning payments on any loans that you have elected not to defer the entirety of. (Usually private loans)

These steps are usually fairly simple and your Law School or Private Lender will reach out with instructions on how to accomplish these final tasks. Usually an overarching location where you can view and manage all your loans will be created too.

However, if anyone has any questions/ comments/ or concerns just post or message me and I'll try my best to help out.

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pattonthicke
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Re: The Guide to Law School Loans

Postby pattonthicke » Tue Feb 22, 2011 12:27 pm

tag, great post

sophistical
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Re: The Guide to Law School Loans

Postby sophistical » Sat May 05, 2012 7:50 pm

Very helpful guide! I have a few questions:

1.
Based on your guide, private loan interest rates seem to be based partly on either the LIBOR or the PRIME rate. Let's say there are 2 different private lenders, and they both have the same total interest rate at the moment, but one is LIBOR based and the other is PRIME based. Which one would you pick and why?

2.
Nom Sawyer wrote:Under GradPLUS: 1.025 * 1.079 + (1.025 * .079) + (1.025 * .079) = 1.2679 + .015 possible
Under Private Loans: 1.00 * 1.063 * 1.065 * 1.068 = 1.2091


I took those 2 lines right out of your guide. I think I could use a little bit of help on the math. Are you sure this is how interest rates are calculated for loans? Don't they use a logarithmic formula ( http://en.wikipedia.org/wiki/Amortizati ... usiness%29 ) instead of simple interest?

Also, how did you get some of your numbers? I assume the loan amount for both lines is assumed to be 1, so that you can get the total amount you would be paying by multiplying the number on the right side by however much you borrowed. Even then, I'm not sure how some of the numbers were arrived at. I have a few guesses:

1.025: Is this 4% origination fee minus 1.5% refund for making the first 12 payments on time?

There are 3 multiplication signs. What does each group represent? Does it show the accruing of interest over 3 years?

1.2679 + .015: I can see how you got the 1.2679; you just followed the equation. But where does the .015 come from?

3.
When a company has a range (e.g. LIBOR + 3.5% to LIBOR + 6%), what determines where in the range you would fall as a lender? Is it only your credit (or co signer's credit) or are there other factors?

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Nom Sawyer
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Re: The Guide to Law School Loans

Postby Nom Sawyer » Sun May 06, 2012 12:41 am

sophistical wrote:Very helpful guide! I have a few questions:

1.
Based on your guide, private loan interest rates seem to be based partly on either the LIBOR or the PRIME rate. Let's say there are 2 different private lenders, and they both have the same total interest rate at the moment, but one is LIBOR based and the other is PRIME based. Which one would you pick and why?

2.
Nom Sawyer wrote:Under GradPLUS: 1.025 * 1.079 + (1.025 * .079) + (1.025 * .079) = 1.2679 + .015 possible
Under Private Loans: 1.00 * 1.063 * 1.065 * 1.068 = 1.2091


I took those 2 lines right out of your guide. I think I could use a little bit of help on the math. Are you sure this is how interest rates are calculated for loans? Don't they use a logarithmic formula ( http://en.wikipedia.org/wiki/Amortizati ... usiness%29 ) instead of simple interest?

Also, how did you get some of your numbers? I assume the loan amount for both lines is assumed to be 1, so that you can get the total amount you would be paying by multiplying the number on the right side by however much you borrowed. Even then, I'm not sure how some of the numbers were arrived at. I have a few guesses:

1.025: Is this 4% origination fee minus 1.5% refund for making the first 12 payments on time?

There are 3 multiplication signs. What does each group represent? Does it show the accruing of interest over 3 years?

1.2679 + .015: I can see how you got the 1.2679; you just followed the equation. But where does the .015 come from?

3.
When a company has a range (e.g. LIBOR + 3.5% to LIBOR + 6%), what determines where in the range you would fall as a lender? Is it only your credit (or co signer's credit) or are there other factors?


1.
The LIBOR rate is under the Prime Rate so in this scenario you should go with LIBOR

2.
So the calculations are based on simple interest for GradPLUS (which is what they use) in the first line and you are correct in that 1.025 is just the 4% minus the 1.5% refund and it shows interest accruing over 3 years (from your start to your graduation). The additional 0.015 at the end is just adding in the 1.5% if you dont achieve the refund (as an approximation).

The overall number is just the multiple of your original loan; so 1.25 is equivalent to $12,500 owed after three years if you borrowed $10,000 at the start of law school

The calculations for private loans is not simple interest but it isnt Log either. Log is based on constantly compounding interest. Banks don't use this though and instead most private loans use monthly compounding interest (which compounds 12 times a year). The difference between this and my calculation (which is annually compounding interest) is pretty miniscule so you can just ignore it for your comparison purposes.

3.
Your rate depends on both your credit, your co-signers credit, and the other things they ask you for when you apply for a loan (like monthly income/ assets/ etc.). A lot of times these things are uncertain though and you just have to apply and see what they offer.

Let me know if you have any further questions! (On here or thru PM again would be fine)

sophistical
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Re: The Guide to Law School Loans

Postby sophistical » Sun May 06, 2012 1:38 am

This guide should totally be in the "Useful Link's Thread". Why isn't it already listed?: viewtopic.php?f=2&t=152447

Initially I didn't see the harm in applying for as many loans as possible just to see what rates I would qualify for, but I just found out that my credit score will go down by 5 points for every such application. This is ridiculous! I can't believe my credit score is negatively affected just because some lenders refuse to give a full disclosure of their rates. I can understand if they charge me to check what I qualify for, but I don't want my credit messed up because I asked too many companies what interest rate I can get if I borrow from them. I'm just going to have to decide on a few (at most) lenders to send applications to.

By the way, you said you would pick LIBOR over PRIME, even if the total interest rate is the same. Why do you say this? Let's use hypothetical examples:

Example 1: LIBOR + 3.5% = 4.5% (assume LIBOR is 1% at the moment)
Example 2: PRIME + 1.0% = 4.5% (assume PRIME is 3.5% at the moment)

Why is example 1 better than example 2? If the 3.5% in example 1 and the 1.0% in example 2 are both fixed, I can understand why LIBOR would be superior; LIBOR peaked at around 5.5% based on your graph, and PRIME peaked at about 8%. But is this the same line of reasoning you followed in concluding that Example 1 would be superior?

Let's take these examples a step further. Assume that I'm right about the reason why LIBOR would make you pay less in the long run. What about if PRIME is slightly lower than LIBOR? At which point would you decide that PRIME is superior because it gives a significantly lower total interest rate?

By the way the 3.5% and 1.0% are taken out of real examples of lenders that you provided in your guide. I just made up LIBOR and PRIME so that I could come up with the same total interest for the purposes of my question. I hope the 3.5% and 1.0% are fixed until I pay off the entire loan, because if they aren't, there are two variables (the LIBOR/PRIME rate and the number that gets added to it) that could affect my interest rates, and I would be more nervous about the amount I would have to repay.

And finally, is it true that law students typically make 3 loans if they didn't get a scholarship that covers everything? (just before 1L, 2L, and 3L, respectively). If so, when is the best time to apply for a loan? I'm thinking if I apply too early, interest will start accruing before tuition is even due, but if I apply too late, I won't even be able to make the tuition payment in time. Another factor I'm wondering about is how long it actually takes me to get the loan money after I fill out whatever forms are necessary (I don't even know what paperwork I would have to do to get the loan at the moment, but your guide has made me feel a lot less lost) Any suggestions?
Last edited by sophistical on Sun May 06, 2012 1:51 am, edited 1 time in total.

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Nom Sawyer
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Re: The Guide to Law School Loans

Postby Nom Sawyer » Sun May 06, 2012 1:51 am

sophistical wrote:Initially I didn't see the harm in applying for as many loans as possible just to see what rates I would qualify for, but I just found out that my credit score will go down by 5 points for every such application. This is ridiculous! I can't believe my credit score is negatively affected just because some lenders refuse to give a full disclosure of their rates. I can understand if they charge me to check what I qualify for, but I don't want my credit messed up because I asked too many companies what interest rate I can get if I borrow from them. I'm just going to have to decide on a few (at most) lenders to send applications to.

By the way, you said you would pick LIBOR over PRIME, even if the total interest rate is the same. Why do you say this? Let's use hypothetical examples:

Example 1: LIBOR + 3.5% = 4.5% (assume LIBOR is 1% at the moment)
Example 2: PRIME + 1.0% = 4.5% (assume PRIME is 3.5% at the moment)

Why is example 1 better than example 2? If the 3.5% in example 1 and the 1.0% in example 2 are both fixed, I can understand why LIBOR would be superior; LIBOR peaked at around 5.5% based on your graph, and PRIME peaked at about 8%. But is this the same line of reasoning you followed in concluding that Example 1 would be superior?

By the way the 3.5% and 1.0% are taken out of real examples of lenders that you provided in your guide. I just made up LIBOR and PRIME so that I could come up with the same total interest for the purposes of my question. I hope the 3.5% and 1.0% are fixed, because if they aren't, there are two variables (the LIBOR/PRIME rate and the number that gets added to it) that could affect my interest rates, and I would be more nervous about the amount I would have to repay.


Oh I thought you meant that the additional amount was the same, so then it would have been LIBOR (1) + 2 = 3 or Prime (3) + 2 = 5.
If the final interest rate is the same there really isn't much difference between the two as they recently have basically moved pretty much in sync. Of course LIBOR is based on UK bank rates and Prime is on US rates so I guess if you had an inkling about a specific country's central bank strategy you should pick based on that :D (I'm just kidding).

Also yeah, I noted in the guide that every single loan application will lower your credit score (the same thing happens when you apply for credit cards or other loans). Is that kind of dumb? Yeah I think so since applying for more loans shows greater financial sense then just taking the first one... still that's how it works so the best way is just research the different private loans first and then apply to a couple of them. I think I applied to 2 or 3 total when I was a 1L.

sophistical
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Re: The Guide to Law School Loans

Postby sophistical » Sun May 06, 2012 1:52 am

Shoot, you replied too fast :D

I edited my post significantly by adding additional questions while you were replying. Sorry about that!

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Nom Sawyer
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Re: The Guide to Law School Loans

Postby Nom Sawyer » Sun May 06, 2012 2:01 am

sophistical wrote:This guide should totally be in the "Useful Link's Thread". Why isn't it already listed?: viewtopic.php?f=2&t=152447

By the way the 3.5% and 1.0% are taken out of real examples of lenders that you provided in your guide. I just made up LIBOR and PRIME so that I could come up with the same total interest for the purposes of my question. I hope the 3.5% and 1.0% are fixed until I pay off the entire loan, because if they aren't, there are two variables (the LIBOR/PRIME rate and the number that gets added to it) that could affect my interest rates, and I would be more nervous about the amount I would have to repay.

And finally, is it true that law students typically make 3 loans if they didn't get a scholarship that covers everything? (just before 1L, 2L, and 3L, respectively). If so, when is the best time to apply for a loan? I'm thinking if I apply too early, interest will start accruing before tuition is even due, but if I apply too late, I won't even be able to make the tuition payment in time. Another factor I'm wondering about is how long it actually takes me to get the loan money after I fill out whatever forms are necessary (I don't even know what paperwork I would have to do to get the loan at the moment, but your guide has made me feel a lot less lost) Any suggestions?


Hmm I think my guide was from 2 cycles ago so it might have missed some newer members. Anyways on to your questions:

1. Don't stress out too much about LIBOR and Prime... They really both just reflect the general inflation rate that is occurring within the economy. Usually you will just want to go with the one that has the lowest fees + interest rate quote.

2. And yes almost every single law school student has to get loans 3 times (which occurs prior to 1L, 2L, and 3L year). The process is all streamlined though and your school should give you the information you need to apply for Federal Grant aid and Loans.

The time table for applying to private loans is usually just concurrently with when you're applying for the basic Federal Loans. If you do decide to get the Private Loans the funds are usually disbursed directly to your school which then cuts you a check for whatever amount is left over after your tuition is paid. You usually receive this check right at the beginning of the semester.

Extra Point 3.
If you need funds to cover the initial move and expenses prior to starting law school, one easy way is to apply for a new credit card that will give you 0% interest for the first 6 months of year. Then you can just charge everything to the card and basically have a free loan at no interest (Although make sure you pay it back once you get your loan disbursement, you don't want to be hit with the 20% interest rate once the promo period is over).

sophistical
Posts: 29
Joined: Fri Mar 23, 2012 2:03 pm

Re: The Guide to Law School Loans

Postby sophistical » Mon May 07, 2012 11:47 pm

I just found the answer to one of my concerns, and I thought I would share it here to help people who might have the same question in the future.

My initial concern was:

I hope the 3.5% and 1.0% are fixed until I pay off the entire loan, because if they aren't, there are two variables (the LIBOR/PRIME rate and the number that gets added to it) that could affect my interest rates, and I would be more nervous about the amount I would have to repay.


I took these numbers from the hypothetical example 1 I posed:
Example 1: LIBOR + 3.5% = 4.5% (assume LIBOR is 1% at the moment)

I already know LIBOR varies. My concern is that if the 3.5% varied as well, then I would be much less certain of how much interest I would be paying.

I found out that in this example, LIBOR is called the base rate (AKA index). The index varies.

The 3.5% is called the "margin". It does NOT vary. This means the only factor that determines whether my interest rate will very is the index. If I choose a loan with LIBOR as the index, then my interest rate will depend on the LIBOR. If I choose a loan with PRIME as the index, then my interest rate will depend on the PRIME.

This is basic knowledge for people who have already gone through the loan process, but prior to reading this guide, I knew almost nothing about loans, so even this information was new to me.

Source: http://www.finaid.org/loans/prime_libor.phtml

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Nom Sawyer
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Re: The Guide to Law School Loans

Postby Nom Sawyer » Tue May 08, 2012 12:18 am

sophistical wrote:I just found the answer to one of my concerns, and I thought I would share it here to help people who might have the same question in the future.

My initial concern was:

I hope the 3.5% and 1.0% are fixed until I pay off the entire loan, because if they aren't, there are two variables (the LIBOR/PRIME rate and the number that gets added to it) that could affect my interest rates, and I would be more nervous about the amount I would have to repay.


I took these numbers from the hypothetical example 1 I posed:
Example 1: LIBOR + 3.5% = 4.5% (assume LIBOR is 1% at the moment)

I already know LIBOR varies. My concern is that if the 3.5% varied as well, then I would be much less certain of how much interest I would be paying.

I found out that in this example, LIBOR is called the base rate (AKA index). The index varies.

The 3.5% is called the "margin". It does NOT vary. This means the only factor that determines whether my interest rate will very is the index. If I choose a loan with LIBOR as the index, then my interest rate will depend on the LIBOR. If I choose a loan with PRIME as the index, then my interest rate will depend on the PRIME.

This is basic knowledge for people who have already gone through the loan process, but prior to reading this guide, I knew almost nothing about loans, so even this information was new to me.

Source: http://www.finaid.org/loans/prime_libor.phtml


Oops yeah I missed answering that part of your question (sorry lost it among all the others you asked)... But yes that's definitely correct. Good luck on choosing your loans!

sophistical
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Joined: Fri Mar 23, 2012 2:03 pm

Re: The Guide to Law School Loans

Postby sophistical » Tue May 08, 2012 8:39 pm

I just came up with another question: What are all the different types of fees?

I took a look at the list of private lenders here: http://www.finaid.org/loans/privatestudentloans.phtml

For example, some of them claim "No disbursement or repayment fees". This begs the question: These are only the fees they don't charge; what kinds of fees do they charge?

I went through the list and I found the following types of fees. Please correct me if I'm missing any:

1. Disbursement fees
2. Repayment fees
3. Application fees
4. Origination fees
5. Reserve fees
6. Supplemental/cosigner fees (the fee is lower if you have a cosigner)

What exactly are these types of fees? Is finaid.org's claim (on that same page) that "A good rule of thumb is that 3% to 4% in fees is about the same as a 1% higher interest rate" accurate? If so, which of the 6 types of fees (and types I may not have listed) does the rule of thumb apply to?




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