Issues to Consider Around Student Loans for Law School

Paying for law school is a significant challenge, with tuition well into the six figures no matter which school you want to attend. Unless you have acquired a scholarship or independently have BIG money (and let's be real—neither of these apply to most of us), you're going to have to go into a significant amount of debt to finance a legal education. We'll assume you've done your homework on whether or not you should go to law school in the first place, and that with the decision made, you're moving forward on exactly how to finance it. Here are a few of the issues you should really consider as you maneuver through the landscape of law school financing.

Two Types Of Loans: Federal and Private

Most of you are probably fairly familiar with federal loans, but since grad students are generally considered independents in a way undergraduates are not, there are significant differences in both that space and in the private loan space that you should be aware of as you explore your financing options.

Federal Loans in the Law School Space

Since you have finished or are about to finish your undergrad if you're about to go to law school, you're probably familiar with the basics of the federal student loan system, and while the launch point for federal loans is still the same—you will need to fill out a FAFSA, same as for an undergrad loan—there are some very important differences between the types of federal loans available for an undergraduate education vs. a graduate education like attending law school.

Direct Unsubsidized Loans: You may be familiar with subsidized direct loans from your undergraduate education, but these types of loans are not available to any class of students apart from undergrads. Direct unsubsidized loans are, however, available to law students. As of the 2023-2024 school year, the annual limit on these loans is $20,500, and the aggregate limit is $138,500, but it is important to note that this limit *includes* any direct loans you may have outstanding from your undergraduate education. The biggest difference, however, and one you really need to be aware of when planning your financial future, is that unlike subsidized loans (where interest is deferred/paid by the government while you're in school, during the grace period, and during any deferment), unsubsidized loans accrue interest from the moment they are disbursed, no matter your enrollment status. This makes them much more expensive than subsidized loans in terms of lifetime interest, because even if you get a job right out of school and immediately begin paying down, they will *already* have been accruing interest from the moment you started law school. Finally, although the interest rate for subsidized and unsubsidized loans is identical, it is important to know that the rate for graduate students is significantly higher: 7.05%, compared to the 5.5% undergraduate rate. These loans also have an origination fee attached to them; for all direct loans, subsidized or no, this fee is currently 1.057% of the total.

Grad PLUS Loans: Given that the annual direct loan limit is significantly lower than the sticker price of a year of law school tuition, you will probably have to take out some of these more expensive loans to finish financing your legal education. The biggest advantage of these loans is that there is no hard limit to how much you can borrow; the cap is your total cost of attendance. If you're wary of the private loan market (and there are good, albeit nondispositive, reasons that you should be), these loans make it possible to finance an education entirely with federal loans. However, there are some obstacles. You can't take out Grad PLUS loans with an adverse credit history, so if you have bad credit, you may be forced to turn to the private loan market (although it is also possible to find a cosigner or to document extenuating circumstances that caused your bad credit in the first place). The origination fee on these loans is much higher than direct loans, currently 4.228%. Finally, the interest rate is higher as well, 8.05% as of this writing.

Private Loans: Pros and Cons

The biggest reason to consider a private loan is that you may, as discussed above, not be able to completely finance your education with federal loans if you have bad credit. That said, many private loans do offer lower interest rates than the ones available federally, particularly for candidates with good credit scores. These two are the main reasons that, despite lacking the protections federal loans provide borrowers, some prospective students may nonetheless wish to explore the private market.

The biggest con, by far, is that private loans are not eligible for any of the alternative repayment plans offered by the federal government. This means that if you have *any* concern about your future ability to repay these loans—and you really should, as employment is never guaranteed and you never know what a market will do in the future—be very, very sure you want to go this route. If you think you may, for instance, want to work in the public sector, Public Sector Loan Forgiveness is not available for private loans. Similarly, you cannot enter income-driven repayment or the new SAVE repayment plan for private loans. Our advice is that, given the relative inflexibility of private loan repayment plans in the event of future adversity, it's probably wisest to stick with federal loans unless you have other repayment contingencies available to you that offset the risk that comes with the (possibly) lower private loan interest rates.

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Financing a legal education is difficult, and most people will incur a significant amount of debt in doing so. Be very aware of the consequences of taking on different kinds of loans before you sign, and it's already time to be thinking about the sort of career you want when making these decisions. The profession is full of people who feel trapped in a given job because they have to make a huge salary to pay down their debt on time. Consider interest rates, origination fees, and everything else that will tack on to the total price tag before you're finished. Consider as well the options you will have if you encounter adversity or simply want to take a lower-paying public service sort of legal job when deciding which type of loan to pursue.

Best of luck from all of us at Vault Law as you begin your legal education!