A Guide to Law School Loans Forum

[Nom Sawyer]

Introduction

Reposting my Guide that was a TLS talent competition winner from a while ago because it seems like there are a lot of new people looking for info on loans and they usually come to the board index without seeing the TLS info sections. I'll also try my best to answer any questions!

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.

Additional Info:

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

[MatMat]

First of all - thanks for this. There have been some related posts, but I’m hoping to get feedback on my individual situation.

I have access to a home equity line (my parents’) for up to 100k. It’s a variable, rate, but capped at 4.5%. The current rate is around 2%—significantly better than the Stafford’s 6.8%/gradplus’ 7.9%. I can use the whole amount, and my parents will cover the interest payments—basically it is an interest free 100k that I can pay back leisurely.

I have one basic doubt about using it. If I end up missing the biglaw boat, but end up with some type of (non-prestigious) PI that is LRAP/IBR qualified, I’m screwed with the private loans, which aren’t covered under LRAP. I’ll be at UChi, so it seems like the odds of this happening aren’t huge, and the potential benefit of taking 100k my debt without interest is pretty sweet. What would you do in this situation? Would it be irresponsible to put my parents on the hook for the money?

I’ve expressed to them very clearly that there is a chance that I won’t be able to pay them back—at least in a timely fashion. They’ve said that they understand and are willing to accept that risk (they wouldn’t lose the house or anything if I couldn’t pay—in their words, “this would just be 100k less for you when we die”).

Taking the money seems to be the right decision, but I just want to confirm with TLS that I haven’t missed anything in my analysis.

One other thing – if I end up clerking (which UChi LRAP covers), how would my loan payments work during that year? Would I go in-and-out of LRAP? Is there a penalty? Or would I simply have to scramble to cover Stafford/Gradplus loans on a 50-60k clerk’s salary?

A side point—is there any penalty for paying back principle on Stafford/Gradplus early?

Damn…. the more I think about it, the dumber I feel for going to school at close to sticker

[monkeywrencher]

Taking the money seems to be the right decision, but I just want to confirm with TLS that I haven’t missed anything in my analysis.

Visiting your parents is about to get a lot more anxiety ridden if you can't pay them back the 100k you borrowed. I would be very hesitant to borrow from a family member especially that much money because of how long it will take to pay back. If everything does not go as planned and your parents need the money for an unexpected expense this could become a very sore subject. No one can predict the future with certainty and if your parents were wealthy enough to know that they would be fine without the 100k I suspect that they would offer to give you the cash as a gift rather than mortgage their home.

Personally I would pay a bit more in interest now with the federal loans in your name alone. 8% interest over 3 years is a small price to pay for the insurance policy that IBR provides and you simply don't know what job you will land. Keep in mind you can always pay all of those loans off without penalty the moment you graduate using the HELOC or better yet a first mortgage cash out refinance if you land a huge biglaw salary and know that you wont need IBR. Not to mention with today's interest rates you could do a cash out refi around 3% fixed on a 15 year first mortgage.

[MatMat]

Thanks -

Keep in mind you can always pay all of those loans off without penalty the moment you graduate

Is this true of both GradPlus and Stafford? I couldn't find any trustworthy source for this online.

No one can predict the future with certainty and if your parents were wealthy enough to know that they would be fine without the 100k I suspect that they would offer to give you the cash as a gift rather than mortgage their home.

As I mentioned before,

they wouldn’t lose the house or anything if I couldn’t pay—in their words, “this would just be 100k less for you when we die”

I get your point about the awkwardness of such an situation, but I'm not worried about my family's long-term financial well being.

Since my original post, I've thought about financing 1L with Stafford/GradPlus, and then waiting until after OCI to decide whether to use the home equity line for 2L/3L. The way I calculate it, it would be something like a $4,500 insurance policy (one year's interest) on not bombing 1L or striking out at OCI. If the worst does happen, I can finance the rest of my debt with gov money and then pray for a LRAP covered job. Does this make sense?

[laxbrah420]

this is pretty outdated I guess?

[Nom Sawyer]

Thanks -

Keep in mind you can always pay all of those loans off without penalty the moment you graduate

Is this true of both GradPlus and Stafford? I couldn't find any trustworthy source for this online.

No one can predict the future with certainty and if your parents were wealthy enough to know that they would be fine without the 100k I suspect that they would offer to give you the cash as a gift rather than mortgage their home.

As I mentioned before,

they wouldn’t lose the house or anything if I couldn’t pay—in their words, “this would just be 100k less for you when we die”

I get your point about the awkwardness of such an situation, but I'm not worried about my family's long-term financial well being.

Since my original post, I've thought about financing 1L with Stafford/GradPlus, and then waiting until after OCI to decide whether to use the home equity line for 2L/3L. The way I calculate it, it would be something like a $4,500 insurance policy (one year's interest) on not bombing 1L or striking out at OCI. If the worst does happen, I can finance the rest of my debt with gov money and then pray for a LRAP covered job. Does this make sense?

Yeah I think in your situation it would make sense to borrow from your parents. The 1L gradplus loan is probably a nice compromise but you should definitely do it for 2L/3L year given the 4% difference in interest rate.

[Nom Sawyer]

this is pretty outdated I guess?

Actually I double checked the numbers part (these are quoted from 2 years ago) and everything is still the same. Gradplus loans are holding steady at 7.9% and the Libor/Prime rates haven't really changed due to the ongoing financial crisis in both the US and Europe.

Thus the information remains just as relevant for today's 0L/1Ls

[YCrevolution]

..

[utexashms]

The information and numbers in the OP are now grossly outdated. Outdated to the point of being irrelevant or useless.

There are now fixed interest rate private loans, no more Perkins loans, no more subsidized Stafford loan, variable interest rates are at 3.25% (Prime+0) for the next 2 years likely, and will only increase marginally after that......

I'm trying to find more current advice than this. Anybody have any sources?

[Nom Sawyer]

The information and numbers in the OP are now grossly outdated. Outdated to the point of being irrelevant or useless.

There are now fixed interest rate private loans, no more Perkins loans, no more subsidized Stafford loan, variable interest rates are at 3.25% (Prime+0) for the next 2 years likely, and will only increase marginally after that......

I'm trying to find more current advice than this. Anybody have any sources?

Actually if you read the article it lays out a range of loans and varying interest rates that cover everything that is currently offered. Also there have always been fixed interest rate private loans (its not like these suddenly appeared 1 year ago), its just that majority of loans offered are going to be floating.

Basically when making this decision its going to be based on GradPLUS loans because these are what are making up the VAST majority of loans if you are going to be taking out 100k+ and also are at the highest interest rates. Of course you should take advantange of unsub. Stafford loans or School loans at lower interest rates since these are better than everything else in the market... Your final decision (and the most important one financially) usually comes down to if you want to take out the majority of the balance in GradPLUS or Private and that's what the article is geared towards analyzing.

If you have specific questions about your situation, though, with numbers and different offers I would be happy to provide my opinion.

[yikes0117]

How can I check my interest rates with private lenders without actually committing? I'm on discover's website and I'm afraid to click anything because it seems like I'm selling my soul.

[laxbrah420]

How can I check my interest rates with private lenders without actually committing? I'm on discover's website and I'm afraid to click anything because it seems like I'm selling my soul.

You can't commit before they give you your rate

[UnamSanctam]

Per your BOALT/Michigan example, I'm fairly certain Michigan's LRAP does not cover private loans, as you say it does.

[Nom Sawyer]

Per your BOALT/Michigan example, I'm fairly certain Michigan's LRAP does not cover private loans, as you say it does.

Ah yeah you're correct... Michigan recently changed their Loan program, so now it only covers some instances of private debt:

"Our program has been designed to cover the vast majority of debt for the vast majority of our students. Federal loans (Stafford subsidized, Stafford unsubsidized and GradPLUS loans) taken out during your time at Michigan Law will all be eligible for coverage under the program. Private loans will not be covered unless you were ineligible for federal loans because you were on visa status while attending law school."

[laxbrah420]

Could you either fix this or delete it? Talking absolutely subsidized loans is nutso

[Nom Sawyer]

Could you either fix this or delete it? Talking absolutely subsidized loans is nutso

Umm I don't quite understand your question? Yes there are fewer subsidized loans now but some schools still offer them. Or Is the example what you're referencing? Basically the main decision remains the same... GradPlus v. private loans

[sophistical]

Nom (or anyone else who's familiar with this topic), do you know what the benefits of "loan consolidation" are? I've heard consolidation cited as a reason why government loans may be preferable to private loans, but I'm unsure as to the benefits of consolidation. I have a few specific points in mind, but if I missed any other aspects of consolidation that could affect one's decision, please add:

1. If I consolidate loans, is my interest rate reduced, and if so, how much of a reduction can I expect? Is it possible the interest rate might actually be increased? How does this work?

2. Doesn't the amount I have to repay stay the same no matter how much I consolidate? I just don't see how consolidation could be a magic wand that could just make my debt go away.

3. What other benefits or drawbacks to consolidation can you think of? All else being equal, would consolidation be enough to sway your decision to take a private loan vs a government loan?

Thanks!

[laxbrah420]

Stafford loans aren't subsidized, bro.

[YCrevolution]

..

[ToTransferOrNot]

Consolidation is an absolutely horrible idea (absent the .5 rate reduction that came with "special consolidation" but I think that's gone,), because you eliminate the ability to pay off your higher interest loans (i.e. gradplus) more quickly. TCR if you're not doing IBR is to put everything on the longest-term plan you can find (I think it's 20 or 25 years) and plug everything beyond the minimum monthly payment into the highest rate loan.

[JohnMarshall17]

tag

[defdef]

I would like to bring up the point again of someone asking about whether or not it'd be wise to take the parental tuition route. I can potentially foot my entire CoA bill without any collateral or interest, but am wondering if the above mentioned IBR "insurance" policy is worth taking or if it is possible to immediately pay back Gradplus loans through HELOC as one poster suggested.