An Extra $3,600 per Year: Many Law School Borrowers Will Need to Find It Right out of Law School
Last week’s deal to increase the national debt ceiling (i.e., Congress deciding that it was still willing to pay debts it had itself incurred) involved some heavy costs for beneficiaries of many government programs.
One of those groups is graduate students, including law students, who will no longer have access to federally subsidized loans. What difference does that make for law school borrowers? About $300 per month. That’s how much more a borrower will pay, every month, for the repayment term of a maximum (for law students) of about $26,500 available through the soon-to-be-unsubsidized program. The changes go into effect in July of 2012, just in time for next year’s entering law class.
What was a subsidized loan? It was a loan in which the government paid the interest on a loan while the borrower was still in school, and for several months after graduation. Now, that interest will simply accrue. Students won’t have to pay it while they’re in school, but if they don’t, that just increases the amount of the monthly payment that will be due during the loan repayment period. CNN calculates that number at about $207 a month. I’m not sure how CNN got to that figure—when I calculate the numbers, it’s very close to $300 (assuming a $26,500 loan amount and no change in the interest rates for federal loans), or $3,600 per year.
For debt-laden law students whose law school debt load has increased significantly over the last several years, to say nothing of any undergraduate debt that students were already carrying into their legal careers, $3,600 is not chump change. Considering the current average debt load and the state of the legal market, most law students won’t be taking that $300 out of “surplus” after graduation. It will have to come from somewhere, either larding on yet more debt (in that case, probably high-interest consumer debt) or out of consumption, savings or investment, or some combination of all of those.
And what else could you do with $3,600 per year? You could buy decent health insurance, repair damage from that burst pipe, pay for unexpected dental expenses, lease a pretty nice car, take a nice vacation, upgrade your wardrobe substantially, etc., etc.
Every law student borrowing after the change kicks in and anyone thinking about going to law school in 2012 or after should work this change in law into their financial spreadsheets, or have a trusted advisor do it. I do that kind of work for any Advise-In admissions and application client who wants me to, and we integrate their debt profile into several post-law school income scenarios.
The loss of the “grace period” is also difficult, since many students will need to pay for their bar review course (often taking out even more debt in the process) and will likely have significant wardrobe and other expenditures related to getting (or looking for) a professional job. The grace period was one way to help bridge that period. But it’s gone, R.I.P. That should also be thrown into the spreadsheet scenario cauldron.
None of this factors in a likely result of the debt ceiling crisis—whether next week or next year, at some point, if as a country we continue to say that repayment of our debts is optional, the cost of borrowing is likely to increase. It may not happen right away because a lot of alternatives (European national debt, for example) are a little scary at the moment. But it’s hard to see how, over the next several years, interest rates can stay at their current low level, so potential borrowers should be factoring in an increase of some basis points for loans that they’ll need for their second and third years of law school. Now, if inflation increases, and if current borrowers won’t need to borrow more at those inflationary rates, some of that impact could be mitigated. Increasingly, however, many borrowers seem to be repaying debt by taking out more debt. That simply can’t end well.
The bottom line is that unless you’re able to pay your debt out of surplus after law school, every dollar of debt adversely affects your well-being by several dollars. At some point, for many the debt becomes unmanageable, affecting not only financial well-being but also psychological health and relationships. The loss of federal subsidies may or may not have been a wise choice in setting our national priorities. Irrespective of that, law and other graduate students will have to deal with it. The option that Congress apparently thinks it has—maybe we’ll pay our debts and maybe we won’t—isn’t a choice it will give student borrowers.