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Tips for Young Lawyers

Handling Student Loans
By: Chris A. Szalay, Maverick Financial Group, LLC

There’s no denying the burden of student loans. Just ten years ago student loans stood at $240 billion, and now—over $1 trillion of student loans outstanding. As the last article I wrote discussed building a foundation for financial planning for young lawyers, it is fitting that a follow-up article is on student loans. For a majority of my young-lawyer clients, student loans are the largest item on their balance sheets and the largest expense they have. As a recent graduate from law school, consider yourself lucky if you don’t have any law-school student loans. If you do find yourself with multiple law-school loans with a staggering balance, I can provide some ideas that can be useful in your financial planning.

The growth in student loans is eerily similar to subprime lending in the early-to-mid 2000s. No, I am not saying that you personally are not worthy of a strong credit rating. But with balances so large; interest rates of 6%, 7%, 8% or greater; and a tough economic environment for finding high-paying jobs, many are choosing to default on their student loans. Has this thought ever crossed your mind? I hope not (but I wouldn’t be surprised, either). This article is built around the presumption you have already found a job that gives you at least the potential to pay for your student loans, even if the payment is burdensome.

Options for handling your student loans.
Option 1: Debt consolidation. Unfortunately, unless you work as a teacher or in public service, there aren’t many options for student-loan forgiveness. One of the better options, especially considering currently low interest rates, is debt consolidation. Most student loans are for ten years and the payment is based on paying off the balance in that period. If that payment is larger than your cash flow can withstand, consolidation can help by extending your loan’s repayment term beyond the standard ten years. For federal student loans, consolidation is a fixed-rate refinancing program that combines all of your loans into one new loan. The primary benefit of this combining is payment relief, where you can lengthen the term to up to 30 years, depending on the balance. With a lower monthly payment, you will have more cash flow. Debt consolidation isn’t entirely beneficial, though, as extending the payments over a longer period will result in higher total payments.

Option 2: Home-equity loans. For those who have a mix of private and federal student loans, in general, you cannot consolidate them together. Nevertheless, there are options for refinancing private student loans. For example, if your private student loan has a variable rate, as private education loans are similar in rates to home-equity loans, it may be beneficial to consider used a fixed-rate home-equity loan, thus locking in the interest rate. Although I follow interest rates daily, neither I nor a Nobel prize winner know where interest rates will be a year from now. However, if it were to guess, I would be surprised if they went lower. Locking in a low fixed rate, in general, is an obvious decision.

Option 3: Deferment. During a deferment, you do not need to make payments on your student loans. Unfortunately, most deferment plans are meant for current students. Still, if you are unemployed or cannot find full-time employment, deferment is available for Direct, FFEL, and Perkins Loans for up to 3 years. If this situation is similar to yours, I recommend contacting your loan servicer or your law school’s financial-aid office.

Option 4: Forbearance. Similar to deferment, the situation needed to qualify for forbearance is undesirable. Under forbearance, you may be able to stop making payments or reduce your monthly payment for up to 12 months. There are two types of forbearance, discretionary and mandatory. You can request a discretionary forbearance due to financial hardship or illness, and the forbearance is decided on by your lender. You may qualify for a mandatory forbearance if the total amount you owe each month for all student loans is 20% or more of your total monthly gross income. If you are eligible for forbearance, it can temporarily ease your payment burden—for up to 12 months.

Student loan interest deduction

Though the monthly loan payments are high, most young lawyers will be able to deduct interest paid on a qualified student loan (Topic 456 IRS). Generally speaking, the amount you may deduct is the lesser of $2,500 or the amount of interest paid.

Although it may seem obvious, intelligent financial planning is done through simply spending less than you make and budgeting to save money for future goals. I am hopeful you have at least gathered your financial documents and are aware of your monthly expenses and spending. As with almost anything out of our comfort level, the hardest thing to do is start. Almost all lawyers work long, stressful hours, and there seems to be little time available for financial planning. I urge you to get your financial house in order now so you don’t wonder in your 50s if you will ever be able to retire because of a lack of assets saved over your many years of hard work.

Chris Szalay is President of Maverick Financial Group, LLC, an investment-management and financial-planning firm in The Woodlands. He is the firm’s portfolio manager and a graduate of Rice University.