A law degree and student loans
Manhattan Federal Courthouse
Question: I have both private and federal student loans from undergrad and law school. I borrowed to finance about a year of undergrad for a private 4 year college and borrowed to finance the bulk of law school, to give you an idea of the size of my student loan debt. My private loans make up the bulk of my debt unfortunately, and there don't seem to be the kind of options out there for private loan consolidation that there used to be.
I was wondering if you have any advice as to how best to manage this debt? I'm 28 and single so my financial obligations are otherwise relatively minimal for now, but due to my debt-to-income ratio, I've been unable to really lay away much in the way of personal savings in the 3+ years I've been out of school, let alone start saving for retirement. I'd really appreciate any advice you might be able to give to someone in my situation. Thank you! Kira, New York, NY
Answer: Sad to say, there's no easy formula for dealing with your debt because of the inflexibility of private student loans (which are really ordinary consumer loans with a different label.) I have a couple of suggestions, recognizing that it’s going to take time and discipline to get out from under your debts.
I would look into lowering the monthly payment on your federal student loans as much as possible. I would investigate the income-based repayment plan, contingent income, extended repayment and graduated repayment and see if one of them works well for you. The descriptions of the repayment options and repayment plan calculators are here.
I would then take any savings from your restructured federal loans and put it toward emergency savings. Perhaps you'll be able to also scrounge together some other money from a tax refund, a bonus at work, cutting back on expenses and the like. You want a financial cushion before concentrating on the debt. A standard rule of thumb is that you should have at least $1,000 set aside or whatever might be your minimum cushion considering your expenses. (This is a different approach than the usual goal of an emergency savings pot that covers 6 months to 1 year of expenses. You want to set aside a smaller sum when dealing with a large debt burden.)
Once that's done (and you may have already done it) I would target the private student loan debt. It's the best way to strengthen your finances. It will take time.
As for retirement, if your firm offers a 401(k) or comparable retirement savings plan I would at least put in enough to take full advantage of the match. If there isn’t a match I would still put in a small amount of money every month. You'll increase later on when you’re out from under your debt.
However, there is a bigger point and it's a more optimistic story. You made a huge investment in your career. You’re a lawyer. The degree should pay out over a lifetime. So, if you focus on getting rid of the debt and keeping expenses under control you should be in fine financial shape later on--including retirement. One advantage of being a lawyer is its the kind of career that you can do well into the traditional retirement years so long as your health holds up. Earning a paycheck when your older is key part to any retirement plan.