Debt Relief and the Public Sector – How to Follow Your Heart and Still Afford Law School

student loans piggy bank

Considering the economic climate and present job market, current and future law school students should be aware of the financial benefits of working in the public sector after graduation.  Three federal loan options currently available for law students are eligible for the Public Service Loan Forgiveness (PLSF) program and Income Based Repayment (IBR) plan, both of which were established by the College Cost Reduction and Access Act of 2007.  This article will summarize the eligible federal loans for law students, loan eligibility, and the existing programs for students interested in pursuing public service after graduation.

Federal Loan Options

Federal Stafford Loans (unsubsidized)

Federal student aid has helped many afford law school.

Federal student aid has helped many afford law school.

Federal Stafford Loans (unsubsidized) 1are federal loans borrowed directly from the US Department of Education, and currently have a fixed interest rate of 6.8%.  These loans are not based on financial need and consistently charge interest, even when a student is in school.  However, no payment is expected on the loan while the student is enrolled, either full or part time.  In fact, repayment does not begin until the expiration of a six-month grace period, beginning when the student graduates.  Students who are eligible for Federal Stafford Loans can apply for as much as $20,500 per year, but again, the full amount of the loan will accrue interest while students are in school.  In addition to the interest borrowers pay for this loan, there is also a 1% loan fee that is deducted from each loan disbursement.  In order to be eligible for a Federal Stafford Loan, students must (1) complete the Free Application for Federal Student Aid (FAFSA), (2) demonstrate financial need, (3) be a U.S. citizen or eligible noncitizen, and (4) be enrolled in an eligible program at an undergraduate or graduate institution.  

Direct PLUS Loans

Direct PLUS Loans are federal loans specifically designed for students seeking a graduate or professional degrees, and currently have a fixed interest rate of 7.9%.  This type of loan is different than the Federal Stafford Loan in that it requires the borrower to have a good credit history, and is also available for parents of dependent students.  The maximum loan amount also exceeds that of the Federal Stafford Loans, as students can borrow the entire cost of attendance, minus other financial aid offered for that student.  Direct PLUS Loans are placed in deferment while students are enrolled at their institution, and repayment does not begin until six months after graduation.  However, interest does accumulate on loans during deferment, meaning that loans will accrue interest while the student obtains their degree.  On top of the interest accrued on this loan, there is also a 4% origination fee deducted from each Direct PLUS Loan disbursement.   In order to be eligible for PLUS loans, applicants must (1) complete the Free Application for Federal Student Aid (FAFSA), (2) be a US citizen or eligible noncitizen, and (3) be able to demonstrate good credit history without previously defaulting on any federal education loan.  If an applicant is not able to demonstrate good credit, a cosigner with good credit can endorse their application, making them eligible for the loan.

Federal Perkins Loan

Students might also be eligible for the Federal Perkins Loan, a need based student loan offered by the US Department of Education with a low, fixed interest rate of 5%.  The Federal Perkins Loan has a nine-month grace period, so borrowers are not required to repay their loan until the tenth month after graduation.  As a federally subsidized loan, interest does not accrue on this loan until after the borrower begins to repay the loan.  For students obtaining graduate or professional degrees, the annual limit is $8,000, with a lifetime limit of $60,000, including undergraduate Perkins loans.  Because not all schools participate in the Federal Perkins Loan Program, it is important to check with each institution before applying.  In order to be eligible for this loan, students must (1) fill out the Free Application for Federal Student Aid (FAFSA), (2) demonstrate exceptional financial need through your FAFSA application, (4) be enrolled as a full-time or part-time student, and attend a school that participates in the program.

Now, what do these loans have to do with public service and eventual debt relief?

At this point, all I’ve done is validate concerns about the amount of debt a student will acquire in law school.  But fear not; I have some good news!  As mentioned previously, in 2007, the 110th Congress passed the College Cost Reduction and Access Act, establishing both the Public Service Loan Forgiveness program and Income Based Repayment plan, both of which aimed to encourage individuals to enter into full-time public service careers despite large amounts of debt acquired in undergraduate or graduate school. 

Income Based Repayment (IBR)

Income-based repayment helps graduates repay their loans and manage daily expenses.

Income-based repayment helps graduates repay their loans and manage daily expenses.

Two years after the College Cost Reduction and Access Act was passed, Income Based Repayment became a valid repayment option for federal loans.  In order to be eligible for Income Based Repayment, a borrower must demonstrate “partial financial hardship,” 2 meaning that a student has acquired enough debt relative to income to qualify for lower payments. 

IBR uses the federal poverty line and a borrower’s income to determine how much monthly loan payments will be.  For example, if you earn below 150% of the poverty line (corresponding to your state and family size), then your required loan payment will be zero dollars.  If you earn more than 150% of the poverty line, then your loan payment will be 15% of whatever that difference is.  To determine what amount you will pay under this program, the US Department of Education has created an IBR calculator -http://studentaid.ed.gov/repay-loans/understand/plans/income-based/calculator.  Based on the current data on IBR, most borrowers’ loan payments will end up being about 10% of a their total income.  By capping the monthly payments at that 15% line, and by not basing repayment amounts on the entire sum of the loan, IBR makes public service a viable option for most individuals with large amounts of debt.  If a borrower makes payments under IBR for 25 years, the remainder of the loan will be forgiven.  And for students who are full-time public service employees, and make 120 monthly payments under IBR, they may be eligible for forgiveness under the Public Service Loan Forgiveness Program.

While Income Based Repayment sounds like a great repayment option for low-income individuals, there a few things students should know before signing up.  Because the monthly payments will be reduced relative to your income, you will have to make more payments for a longer period of time.  Therefore, borrowers will be paying more interest over the life of the loan.  Additionally, for any portion of the loan that is eventually forgiven or canceled under IBR, a borrower may have to pay taxes on that amount.

Public Service Loan Forgiveness (PLSF)

Under the Public Service Loan Forgiveness program, students may qualify for forgiveness on federal direct loans after ten years of full-time public service work and after 120 on time, full payments have been made towards their loans. 3

The notice defines “public service jobs” as the following:

“A full-time job in emergency management, government, military service, public safety, law enforcement, public health, public education (including early childhood education), social work in a public child or family service agency, public interest law services (including prosecution or public defense or legal advocacy in low-income communities at a nonprofit organization) public child care, public service for individuals with disabilities, public service for the elderly, public library sciences, school-based library sciences and other school-based services, or at an organization that is described in section 501(c)(3) of the Internal Revenue Code of 1986 and exempt from taxation under section 501(a) of such Code; or Teaching as a full-time faculty member at a Tribal College or University as defined in section 316(b) and other faculty teaching in high-needs areas, as determined by the Secretary.” 4

Eligibility for this program requires the borrower not be in default on any of the loans for which forgiveness is requested.  The 120 payments must also meet the PSLF requirements; meaning full payments were made on time, and equal to or exceeding the amount required by your repayment plan.  As mentioned above, a borrower may be eligible for an Income Based Repayment plan in conjunction with the Public Service Loan Forgiveness program.  In order for a payment to count towards the required 120-payment threshold, you must be employed in an eligible public service job; if you do not fulfill the 120 months in a public service job, then none of your requested loans will be forgiven under this program.

Loan Repayment Assistance Program (LRAP)

According to US News and World Report, most students graduating from a top-14 law school will enter the workforce with over $100,000 in student loans.  Due to this staggering amount, many law schools have created Loan Repayment Assistance Programs to make public interest jobs a viable option for their graduates.  Federal and state governments, foundations, and state bar associations also administer LRAPs – each offering varying levels of support for graduates.  Regardless of the institution offering the program, each offers loan repayment or forgiveness options for graduates entering public service.  Twenty-four states offer LRAP programs, either through state bar associations or nonprofit organizations and at least 100 law schools also offer programs.  To see if your school offers LRAP, check this current list: http://www.equaljusticeworks.org/resources/student-debt-relief/law-school-lraps/list-law-school-lraps compiled by Equal Justice Works.

In sum, while we know that public service jobs are infamous for lower salaries than those of the private sector, options are available to lessen the burden for those interested in that path.  In addition to the options outlined above, some law schools offer additional scholarships or fellowships to students interested in pursuing public sector work; many schools are incentivizing students to consider public service through competitive scholarship programs.

 

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Notes:

  1. The Budget Control Act of 2011 effectively eliminated subsidized Stafford loans for graduate and professional students, starting July 1, 2012.
  2. http://studentaid.ed.gov/repay-loans/understand/plans/income-based
  3. Federal Perkins Loans are not eligible for Public Service Loan Forgiveness.
  4. http://projectonstudentdebt.org/2669_forgiveness.vp.html
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Courtney Weisman

Contributing Editor at Blueprint JD
Courtney Weisman currently works for the US Government, working on one of the Administration’s education reform initiatives. She recently graduated from the University of Florida, where she specialized in civil rights and education policy, earning a degree in Political Science. Courtney is specifically interested in access and equity in higher education, and will pursue that interest at NYU Law next fall.

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