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September 28, 2009 5:45 AM

American Lawyer Student Edition Preview: Cutting Law School Debt

Posted by Matt Straquadine

The article below appears in the Fall 2009 issue of The American Lawyer Student Edition. The full issue will be available on September 29 at www.americanlawyerse.com.

The average law student who graduated from a private university in 2008 borrowed more than $91,500 on the way to earning that degree, according to the nonprofit Equal Justice Works.

Combine that with leftover undergraduate debt and the shrinking job market, and you've got a surefire recipe for postgrad financial fright. In a sharp departure from recent history--when students coming out of even mid-tier schools could count on commanding six-figure salaries upon graduating--law school debt is now a heavy burden.

"Graduating law students have just spent three years working very hard, and suddenly they're out on their own in very uncertain times," says Beth Kobliner, author of Get a Financial Life: Personal Finance in Your Twenties and Thirties. "It's easy to feel overwhelmed, but the best thing you can do is to educate yourself about your options."

Law school grads may have a particularly heavy burden to bear, but like other borrowers, they have several options that can help them in this regard. For those with debt worries, here are four questions to ask.

Who owns your loans?

Debt is often sold on the secondary market, with the debtor as the income stream. One loan can be sold many times, making it tricky to know who owns yours. Joe Russo, director of student financial strategies at the University of Notre Dame Law School, suggests visiting nslds.ed.gov. This U.S. Department of Education database has information on all government-backed loans (the vast majority of student debt). It's the best resource for finding out how much you owe--and to whom.

Are you ready to stretch?

Once you know who's collecting your payments, ask about loan consolidation and extension. Standard terms call for student loans to be repaid in 120 equal monthly installments over ten years. These days, there are various payment plans, especially for government-backed loans, including Stafford, Perkins, and PLUS. Those with more than $30,000 in government-backed debt from college, law school, or both can combine balances directly with the Department of Education, and extend the repayment period to 20 or even 30 years. Your monthly payments will be lower, but you'll pay more in interest over the life of the loan.

Does the new rule apply?

Find out if you qualify for income-based repayment (IBR). William Hoye, director of financial aid at Duke University Law School, says this new program for government-backed loans is one that every law grad should know about. The program offers especially attractive repayment terms for those who take public interest jobs.

How low will they go?

If you are un­­employed and unable to make any payments, ask your lender for a deferment or a forbearance. Both delay payments for a defined period of time and are relatively easy to obtain, especially if you're out of work. But Patricia Christel, a spokesman for Sallie Mae, one of the largest student loan servicers, says a deferment or forbearance should be a last resort. Your lender will tell you what the criteria for qualifying are. Beth Kobliner recommends a deferment, if possible, because the federal government will often subsidize the interest payments. With a loan forbearance, interest continues to accrue.

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