Pursuing a legal education is an ambitious and intellectually rewarding endeavor. However, for many law school graduates and new lawyers, the substantial debt accumulated during law school can be a major financial burden.
I graduated with about $200,000 in law school debt and had no income. I was hurting, so I feel your pain. But I can tell you that with the right approach and some discipline you can be debt free sooner than you think, which is imperative if you want to achieve financial freedom.
Assess Your Debt and Focus Your Payments
First, list all your loans by account number, principal amount and the applicable interest rate. List the loans with the highest interest rate first, then the loans with lower interest rates in descending order. Now you can see the whole picture and know what you are dealing with rather than waiting to get a bunch of different loan statements from the lenders. You will notice very quickly that if you make the minimum payments over a 10 year term, you will end up paying tens of thousands of dollars in interest alone. Therefore, you will want to pay off the debt as soon as possible.
Next, I suggest deferring all loans and requesting that they be put on “interest only payments” for as long as possible. This may sound crazy but stay with me. Since you will be required to pay only the interest on the loans, you can use the money you save from not paying principal on all the loans and redirect all that money to pay down the principal on the loan with the highest interest rate. This effectively concentrates your repayment of principal on the loan with the highest interest rate first. It also feels good to kill off each loan and will motivate you to continue to work toward killing off all of them.
If you cannot defer all your loans or get the lender to agree to interest only payments, then make the minimum payments on the lowest interest loans, and make additional payments on the highest interest loans until the highest interest loans are paid off first.
Repeat this process of paying additional principal on the highest interest loans first, one by one, until all loans are paid off.
Alternatively, you might consider consolidating your loans if you can get a lower overall interest rate. But be careful and take into consideration not just the average interest rate, but also the weighted average since many loans will have different amounts of principal. In addition, there are usually fees and costs associated with this approach and in the end it may cost you more and limit your ability to manage the loans on an individual basis.
Explore Repayment Options and Forgiveness
Federal loans offer several repayment plans, such as Income-Driven Repayment (IDR) plans, which calculate payments based on your income. These plans can be a great relief, especially in the early stages of your career when your income might be lower.
Many law jobs in public service provide a pathway to loan forgiveness. This is due to the lower salaries for these kinds of jobs and the government trying to incentivize lawyers to serve the public. If you are interested in working in public service, research loan forgiveness and include that in your calculation of whether a public service law job is right for you.
Some private employers may offer repayment programs too. The key to these programs is to have the employer prepay part or all of your student loans. Usually the employer will expect you to work for them for a certain number of years to justify doing so, and they may require you to pay them back if you do not remain employed for the entire term of the agreement.
Budgeting and Expense Management
You’re not going to like this section. Especially if you became a lawyer to “get rich.” But I can tell you from direct experience that you only get rich if you can master your budget and manage your expenses.
If you are a new lawyer and you have student debt, that means you’re broke. I don’t care how much Big Law is paying you, you have to get serious about directing all available cash to paying off your student loans as if it’s a financial emergency because it is.
Let’s assume your average interest rate on your debt is 8%. That means every time you spend a dollar on anything other than your student loan principal, it is actually costing you $1.08. Start adding up the lattes, shoes, clothes, drinks with friends, leases on a nicer car or apartment, etc. and you are probably costing yourself hundreds of dollars a month in interest alone that could go toward paying off your student debt.
Try living like you are still in law school for as long as you can or until your debt is paid off. I recommend living on no more than half of your take home income (after taxes) and using the other half to pay off your debt. Not only will this accelerate paying off your debt and save you thousands of dollars in interest payments, but it will also teach you how to live small and invest big, which will serve you well later in life.
Increase Your Income
Look for opportunities to boost your income. As you gain experience, consider negotiating a raise or exploring higher-paying job opportunities. Most firms offer bonuses, so get laser focused on figuring out how to earn that bonus. Work more hours if you have to, take on more demanding cases. Do whatever you can to make more money. Then use that extra income to pay down your debt.
Many of you know that working as hard as possible to make the most money is not an idea that I subscribe to, but when you are starting out and have debt, you don’t have much of a choice. Once you are debt free, that is when you start having more choices.
Paying off a $200,000 law school debt might seem daunting, but by using some, or all of these strategies, it’s possible to manage and pay off your debt. Planning, persistence and discipline will help you become debt-free sooner.