[Yesterday] morning, President Bush signed the College Cost Reduction and Access Act of 2007 (H.R. 2669), which includes two provisions that will make it much easier for law students who graduate with high educational debt to have long-term public service careers.  The bill includes a section creating an income-based repayment (IBR) plan that enables graduates to make much smaller monthly payments when their incomes are low: the IBR formula caps repayment at 15% of (AGI minus 150% of the federal poverty level).  Interest not paid because of the IBR limit is capitalized for later payment, but if any funds are still owing at the end of 25 years, that amount is forgiven by the federal government.

Even more important, if the borrower spends ten years in full-time public service while paying through IBR, the remaining debt is forgiven at the end of those 10 years rather than 25 years. The new law defines public service in terms of a long list of types of jobs, plus a catch-alls that include all government jobs and all employment by all 501(c)(3) tax-exempt organizations.  Loans that qualify for IBR payment and forgiveness include nearly all the loans that most law students use: Stafford loans and Grad PLUS loans, whether they are government-guaranteed or government-extended.  If the borrower has government-guaranteed (FFEL) loans, they must be consolidated into a federal direct consolidation loan before a repayment counts toward the ten years of IBR repayment before forgiveness occurs.  For federal direct loan recipients or those who have consolidated into federal direct consolidation loans, the ten years can start on Oct. 1, 2007, but the IBR formula doesn’t start until July 1, 2009.  Meanwhile, graduates may use income-contingent repayment (ICR), which also qualify for forgiveness.  ICR payments are higher than IBR payments but much lower than standard ten-year repayment requires.

I have written an article for the Hofstra Law Review explaining this new law in depth and criticizing two of its features.  It is posted at http://www.law.georgetown.edu/news/releases/documents/Forgiveness_000.pdf and also on SSRN at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1014622

Students and graduates may compute exactly how the law will affect them by consulting the calculators at http://www.finaid.org/calculators/ibr.phtml (IBR) and http://www.finaid.org/calculators/icr.phtml (ICR).

Philip G. Schrag

Georgetown University Law Center

schrag@law.georgetown.edu

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The New York Times recently ran an interesting article about students using private loans to pay for school. Education costs are getting more and more costly each year. Unfortunately for American students, the amount of federal financial aid stagnanted. As a result many students are turning to private lenders to fund their education.

According to the College Board, private student loans have tripled in growth in the past five years. During the 2005-06 school year, American college students borrowed $17.3 billion from private lenders. Unlike federal loans that have mandated interest rate, private loans carry rates that can reach up to 20%. Additionally, private loans don’t have limits to the amount of debt students can take on like federal loans do. Consequently, many young people are overextending themselves.

Last month, it came out that private loan companies like Sali Mae were basically paying off schools to steer students towards high interest rate loans. Many students would go to their school’s financial aid office thinking they were getting low interest federal loans. It isn’t until they graduate and start getting their bills do they realize that they actually received a high interest private loan.

Another problem with private student loans is that the rate is variable. Unlike federal loans which are locked in at a low rate, private lenders can change their rate whenever they want. Many students go into private loans thinking they’ll have one rate, but a few years down the line, they might see themselves paying more.

What Can You Do to Avoid Being Swindled?

There are few things you can do to avoid the private loan bait and switch.

• Ask what type of loans you’re getting. Don’t assume just because you fill out a federal financial aid form you’ll be getting just federal loans.
• Read the paper work clearly. Before you sign anything, make sure to read the paperwork. Make sure that you’re just receiving federal aid and not private loans. If you have any questions, ASK them.
• Take the least amount of private loans as possible. If you do have to dip into private loans, take the least amount as possible. Learn to stretch your dollar. Live frugally.

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[tags]New York Times, student loans, debt[/tags]

This week’s interview is with Austin Groothuis from the CALI’s Pre-Law Blog. Austin is a third year law student at Chicago-Kent. In addition to writing for CALI’s Pre-Law Blog, Austin is also the Communications/Marketing Coordinator for Computer Assisted Legal Instruction (CALI). (What a busy guy!)

1. How much student debt have you racked up during undergrad and law school?

I have just under $100,000 in combined school debt. I have paid for all of law school and virtually all of undergrad/graduate school plus cost of living during those times on loans/scholarships/or money I earned working while in school. I’ve had very little outside financial help so loans have really added up.

2. What action or habit do you think saved you the most money while in law school?

A lot of things combined. I buy all of my books used online at Amazon Marketplace or Half.com and then resell them at virtually the same price. It’s quite a racket the law school bookstores and casebook publishers have going on. I try not to participate in it as much as possible. I wrote about this on my blog here:

Cost of Text Books In School

Whenever I need something new I’m freakishly insistent on getting the best price through research online. Basically all of my gifts for Christmas this year were bought on deal websites and over half of them had rebates involved.

I sold my car last year to save money on maintenance, gas, random fees, and inevitable street cleaning tickets in Chicago. I just don’t need it in the city.

Although I don’t know what I’d do without my girlfriend to chauffeur me around the city at times. She has a real job and a car so, obviously, part of my advice is get to get a sugar mama (don’t worry, she never reads my stuff).

And most importantly, I opted to take a full-time job with CALI and switch to school part-time in the middle of my second semester. This extended my time in law school. But it literally cut my debt in half. That’s right, I’d be looking at upwards of 160k in debt had I not taken this CALI job. Amazing. It really saved me.

3. If you have student loan debt, when would you like to pay it off? How do you plan on reaching your goal?

It’s going to be a real long-term thing that depends on how much I make, what career path I choose to take, and what kind of family decisions I make (dual income? children? where to live?).

Optimistically, I think the best case scenario is 15 years to pay it back. But I could see using up the whole 25 or 30 years. I’ve never really sat down and thought of a schedule because I just can’t get a grasp on what my life looks like and what opportunities will be presented to me after I graduate.

4. What other personal financial goals have you set for yourself?

Don’t default on my loans and never have to ask someone for financial help.

5. What is your weakness in regards to your personal finances and how do you think you can improve it?

Eating out and the Starbucks across the street from work/school. I’m at work and school all day so it’s just too easy to not make a lunch the night before and worry about lunch the next day.

And it’s not like I’m addicted to Starbucks. But paying 4.50 for a latte once or twice a week at most really burns me just due to the fact that I’m paying infinitely more per gallon for coffee than what I paid for gas. But I really do love the mocha. It’s a bad habit but at least I don’t smoke!

6. How do you manage your finances? Is there a particular software you use to keep track of your money?

I do everything online. I don’t have to keep balances because I pay all my bills online and my bank transactions are reflected really quickly in my online checking account. I haven’t written more than 2 or 3 checks in the past 2 years.

My credit card (which I pay in full from month to month) is through the same bank and I can access that info easily and simultaneously with my checking.

I have an HSBC personal online savings account that pays 5+% and has no fees for transfers to and from other accounts and no minimum balance. Compare that to the less than one percent you might find at your local bank. It’s awesome.

7. What do you think is the biggest money mistake law students make?

Not understanding the way law school and legal jobs work. I think a lot of future students rely on the average salary of a school or become star struck by the numerous law firms paying 150k+ salaries and sending out press releases every time they increase starting salary. So students think they can go to any law school and rack up a ton of debt because they will be able to pay it off in 5 years with a $160,000/year salary.

But go to a non-elite school and at most only 10-20% of students even have a shot at big paying jobs. And nearly all non-big firm jobs with opportunities for graduates pay an amount much less than $100,000, let alone $160,000. I’ve written about this several times on the Pre-Law Blog including here:

The Chances of a Six-Figure Salary Out of Law School

and here:

Another Post On The Cost of Law School

and here:

How High Associate Starting Salaries Affect Law Schools…

8. Do you have any suggestions to other law students regarding their personal finances?

Besides the sugar mama thing, huh? Don’t carry credit card debt. Don’t spend more than what you can pay in a month on a credit card bill.

Read The Frugal Law Student blog. No joke. There are also several other money saving tips sort of blogs out there that are good to read.

Not so much for law students, but those thinking about law school, understand the risks involved in choosing certain schools and in choosing to go to law school at all. Read some of what I’ve written about this above for a start. Make sure you weigh the risks vs. the benefits before you decide to go to school/ where to go to school.

Good luck!

Thanks, Austin, for that awesome interview! Head on over to CALI’s Pre-Law Blog. Austin has supplied some great information for those interested in attending law school and those who are already in law school. Make sure to sign up for his RSS feed as well.

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[tags]CALI, Austin Groothuis, law school, debt, personal finance[/tags]

Let’s face it. Education costs have gone out the roof. Consequently, most students are forced to take out student loans or receive some other type of financial assistance during college.

I’ve been taking on financial aid since undergrad and overall the experience has been good. Signing up for financial aid is very easy with FAFSA. It takes about 30 minutes of your time. Whenever I did have a question, I was able to quickly find an answer on their webpage or by visiting the financial aid officer at my school.

In addition to student loans, I’ve also received grants from the government and tuition waivers from school. My only beef with government grants is that they don’t give money to graduate students. It’s in the best interest of the country to help doctors, lawyers, and other graduate students pay for their education, especially when such students plan on working in the public sector.

Part of my plan to pay back my student loans is to consolidate them. I’ve already consolidated my undergrad loans with the student loan consolidation program. I went with Nelnet because they sent me the most mail. Another student loan consolidation program is with financialaid.com. Make sure to shop around different companies to find the best student loan consolidation program for you. But make sure to consolidate. It makes paying back much easier and you can often get a reduced rate.