LRAP: University of Michigan Law School

Published June 2010

Debt Management/Loan Forgiveness Program

How It Works
Graduates of the University of Michigan Law School who are enrolled in the debt management/loan forgiveness program will receive an interest-free loan to cover the difference between their expected contribution towards law school debt repayment (as calculated below) and their actual law school debt obligation. This loan is then forgiven at the end of the year.

Eligible Jobs
In order to be eligible for the program, the graduate must be employed in a full-time, paid position which requires the use of a J.D. Furthermore, the graduate must have an income “significantly below the average salary for their graduating class.” Since demand may at times outstrip resources, the Law School reserves the right to limit eligibility based on other criteria.

There does not seem to be any restriction on the type of legal employment, i.e. private practice and public service both seem to be covered if the salary is sufficiently low.

A judicial clerkship, however, is not an eligible position.

Eligible Debt
GradPLUS, Stafford, loans from the Law School, and loans from external lenders are all eligible for coverage. Computer purchase loans and bar study loans (up to $8,000) are also eligible.

Loans taken out for expenses beyond the cost of living or to replace the expected student contribution are not covered. Educational debt other than University of Michigan Law School debt is also not covered.

Calculation of Expected Participant Contribution
The income used for calculations is the higher of the participant’s income or half the joint income (if married). When determining spousal income, the yearly educational debt obligation is to be subtracted.

Added to this income figure is 12% of all assets over $15,000. Assets considered include cash, stocks, bonds, trusts, cash value of life insurance, house equity, and 75% of retirement accounts.

A $5,000 allowance is given for each dependent child along with reasonable expenses for childcare.

A longevity allowance of $2,000 per year is given for each year the loans have been in repayment up to a maximum of $20,000.

Your “annual available income” (AAI) is your income plus your asset contribution minus the above allowances and your non-law school educational debt obligation. If your AAI is below $36,000, you are not expected to contribute anything towards your law school educational debt. 35% of anything above $36,000 is to be contributed. See below for some examples.

Hypothetical Scenarios
Let’s explore a few hypothetical scenarios to see how the Debt Management/Loan Forgiveness Program might function. (On the table of contents page you will find links to websites I used to calculate federal tax burden and yearly student debt obligations. Using these, you can input your own variables. Keep in mind that the take-home income amount does not reflect state or local taxes. Treat all hypothetical scenarios and amounts as approximations.)

Scenario One
An unmarried graduate with no undergraduate debt after three years of repayment with minimal assets.
Salary: $45,000
Salary less Taxes: ($45,000 - $7,438) = $37,562
Debt: $100,000 on a ten-year repayment plan at 6.8% interest
Yearly Debt Obligation: $13,810
AAI: ($45,000 - $6,000 longevity allowance) = $39,000
Graduate’s Expected Contribution: (35% of $4,000) = $1,400
Award: ($13,810 - $1,400) = $12,410
Take-home Income: ($37,562 - $1,400) = $36,162

Scenario Two
An unmarried graduate with no undergraduate debt after seven years of repayment. $45,000 in total assets.
Salary: $65,000
Salary less Taxes: ($65,000 - $12,431) = $52,569
Debt: $100,000 on a ten-year repayment plan at 6.8% interest
Yearly Debt Obligation: $13,810
AAI: ($65,000 + 12% of assets above $15,000 or $3,600 - $14,000 longevity allowance) = $54,600
Graduate’s Expected Contribution: (35% of $18,600) = $6,510
Award: ($13,810 - $6,510) = $7,300
Take-home Income: ($52,569 - $6,510) = $46,059

Scenario Three
A married graduate with no undergraduate debt seven years after entering repayment. The graduate’s spouse has $12,000 in educational debt obligation per year. The couple has two children and $65,000 in assets.
Graduate’s Salary: $70,000
Graduate’s Salary less Taxes: ($70,000 - $13,688) = $56,312
Spouse’s Salary: $85,000
Income used for calculations: ($70,000 + $85,000 - $12,000)/2 = $71,500
AAI: ($71,500 + 12% of assets above $15,000 or $6,000 - $10,000 for dependent allowances - $14,000 for longevity allowance) = $53,500
Graduate’s Debt: $100,000 on a ten-year repayment plan at 6.8% interest
Graduate’s Yearly Debt Obligation: $13,810
Graduate’s Expected Contribution: (35% of $17,500) = $6,125
Award: ($13,810 - $6,125) = $7,685
Graduate’s Take-home Income: ($56,312 - $6,125) = $50,187

Scenario Four
An unmarried graduate with $25,000 in undergraduate debt seven years into repayment with minimal assets.
Salary: $100,000
Salary less Taxes: ($100,000 - $21,720) = $78,280
Total Eligible Debt: $100,000 on a ten-year repayment plan at 6.8% interest
Total Yearly Eligible Debt Obligation: $13,810
AAI: ($100,000 - $14,000 longevity allowance - $3,500 in undergrad loan payments) = $82,500
Graduate’s Expected Contribution: (35% of $46,500) = $16,275
Award: $0
Graduate’s Take-home Income: ($78,280 - $13,810 - $3,500) = $60,970

Final Thoughts on the University of Michigan Debt Management/Loan Forgiveness Program
While there is no explicitly stated income cap, it is entirely possible that when funding is scarce a $90,000 yearly income would not be considered “significantly below the average salary” of the graduating class. For this reason and others, potential students should ask financial aid officers tough questions about the amount of funding and the percentage of those who applied for funding who actually received it.

Students should keep in mind that the University of Michigan Law School is investigating ways to integrate their program with the new income-based repayment option (IBR). Visit the University of Michigan Law School’s website for the most up-to-date information.