A New Law Student’s Guide to Federal and Private Loans

Congratulations! You have been accepted to law school.

After thinking you’ve escaped those impossible, time-pressed logical questions on LSAT about school bus seating plans, you’ve done it!

Now comes a real world job.

You probably need loans, which means you need to decide which type is best for you: federal or private.

Read on for a guide to making the right decision for your specific situation.

The Largesses of Uncle Sam

According to Juno’s handy Complete Guide to Student Loans for Law School, most students pursuing a JD, LL or LL who choose to borrow from the federal government get direct unsubsidized loans or Direct PLUS loans – also known as Grad PLUS loans – or a combination. both.

Direct unsubsidized loans have no credit score requirement, and the requirement for PLUS loans is low. Most applicants are eligible.

These loans are available to US citizens as well as some eligible non-citizens, and interest rates may vary. The rates are set on the basis of the 10-year Treasury bill rate in mid-May and take effect for loans disbursed after July 1 of each year. So, when your studies are finished, you are likely to have several federal loans with different interest rates. To learn more about federal loan interest rates, click here.

Of the two types of loans, direct unsubsidized loans are more affordable, with lower interest rates and origination fees than PLUS. However, you can only use these loans for your first $ 20,500 loan for a given academic year, so if you have secured admission to any of these top private institutions, you will likely need to supplement with Direct PLUS. which has a higher interest rate and higher origination fees.

You should also keep in mind that both Direct Unsubsidized Loans and Direct PLUS Loans are “unsubsidized,” meaning the federal government does not pay the interest while you are in school. Interest accrues immediately and will capitalize – be added to your capital unless interest is paid.

This distinguishes these loans from the government loans obtained by most undergraduates, for which the federal government pays subsidized interest for up to six months after graduation or until they fall below. part-time college enrollment.

Don’t make the mistake of thinking that your law school loans will have the same balance on the day you graduate as the day you got them, unless you make those interest payments.

The private sector

You can also choose to borrow from private banks and lenders. Each source will have its own application process and credit requirements. You can also use a free service like Juno (formerly LeverEdge), which compares and researches loans for you, and works with a wide variety of lenders.

These services use collective purchasing power to negotiate interest rates significantly lower than what you could get on your own.

Private loans can be used to fund law school up front or from year to year, but many newly formed lawyers are also looking to the private sector to refinance their frightening debt. total loan once they get their first job.

With pay stubs in hand – you usually need about three of them – such a refinance can earn you a considerably lower interest rate, depending on what’s going on in the world, of course.

As you would expect, each private lender has their own underwriting process and standards for student loan applicants that help them decide whether to give a loan to a person and at what interest rate. All private lenders require a credit check to assess your repayment capacity. If your credit score is in the 600s, you are likely to qualify. In general, the higher your score, the lower your interest rate.

In addition to keeping your credit rating high by making timely payments on all of your debts, you can lower your rate even further by adding a co-signer, often a parent. You don’t need a co-signer to get a loan, especially if you have a good credit rating, but it’s a good option if you’re young and haven’t had time to develop a lot of credit. credit history.

Once you have submitted your application, with or without a co-signer, and your private student loan is approved, you will be asked to choose between a variable or fixed interest rate and to select a repayment term. A variable rate is often lower initially, but it is possible that it increases depending on the interest rates in effect in general. If you opt for a fixed rate, it will not change during the term of your loan.

Make sure interest rates, fees and incidentals are well explained to you.

The pros and cons

If you’re still having trouble deciding between federal and private loans, consider the pros and cons of each. (And check Juno’s student loan calculator when you want to run certain numbers.)

As for the federal government, one advantage is that these loans are easy to obtain.

Additionally, federal loans offer protection if you find yourself in a low paying job because you can apply for an income-based repayment plan. Additionally, if you choose to enter the less lucrative public service sector – such as working for legal aid or the public defender’s office – your loans may be canceled after a certain period. See Juno guide for more details on this sort of thing.

The scam? Higher interest rates, mainly due to less stringent credit reviews. If you don’t qualify for an income-based repayment program or civil service rebate, you could end up paying a lot more over the life of your loan.

When it comes to loans from private lenders, flip the coin. Their normally lower interest rates will often result in lower monthly payments and a lower total amount payable over the life of the loan. If you are considering looking for a job of the more lucrative variety – say commercial litigation in Biglaw – private loans can be particularly beneficial. You will likely never qualify for federal income-oriented programs designed to keep payments manageable. You won’t get your debt canceled either.

As for private student loans, be aware that not everyone will be eligible. Banks and other private lenders will check your credit score and assess your financial situation.

So if you are still reeling from your undergraduate loans, you should probably stick with Uncle Sam.

Julio V. Miller

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