By Kerriann Stout • February 28, 2018•Writers in Residence, Law School, Other Law School Issues, Issues, Other Issues
I would compare reading about law school loans to watching a car accident happen. You don’t really WANT to watch it, but you also can’t seem to turn away. This month, I am rewarding your curiosity with a more in depth analysis of how student loans work.
As you may recall from last month, I spent a good deal of time (almost 2 years) after graduation completely avoiding the fact that I had student loans at all. A big part of the reason I was so scared to even look at my student loan accounts after I graduated was that I didn’t understand a thing they said. Seriously, it was like reading a foreign language. After I took some time to dig in, I figured out what was going on and now I wish I would have done so way earlier (you know, like before I took out all these loans).
Today, I want to demystify some of the big, important terms for you, using my own loans and numbers as examples.
Original Loan refers to the amount of money you actually borrow in the first place. In the context of law school, this is the amount of money you take out to cover the cost of tuition and associated living expenses.
- My Original Grad Plus Loan amount: $94,662
- My Original Stafford Loan amount: $61,500
- My Total Original Loan amount: $156,162
*Grad Plus and Stafford Loans Defined Below
Interest Rates are how people (banks) make money on the loans. When you take out a student loan, the company you borrow from will set an interest rate percentage that represents what you pay them for lending you money. Some interest rates are fixed, meaning they do not change over time. Other interest rates are variable, meaning they can increase or decrease (but usually increase) over time. My interest rate compounds daily, which means they recalculate the loan amount on a daily basis and use the new, higher number to take interest out. In effect, I literally owe more money on my student loans every.single.day.
- My Stafford Loan Interest Rate: 6.55% (fixed)
- My Grad Plus Loan Interest Rate: 7.65% (fixed)
Accrued Interest is the amount of interest that has accumulated since the day you took out the loan. The day you take out a loan is usually long before the day that the loan goes into repayment. Therefore, the interest is accruing from your first day of law school.
- My Grad Plus Accrued Interest: $26,348.47
- My Stafford Accrued Interest: $11,234.77
- My Total Accrued Interest: $37,583.24
Capitalization is a fun concept. Ready? So, you’ve probably heard that student loans are great because you don’t have to start paying them back until you graduate. While that is true, the loans are accruing interest the entire time you are in school. And, unless you pay off the balance before your loan payments kick in, (if your loan terms even allow this) allllllllllll the interest you accrued gets slapped onto your original loan amount. As a result, all of the interest accrued from that point forward is on that new, bigger number.
- My Stafford Capitalization: $9,189.41
- My Grad Plus Capitalization: $24,105.09
- My Total Loan Capitalization: $33,294.53
Principal Balance is simply your original loan amount plus capitalization.
- My Stafford Principal Balance: $70,689.41
- My Grad Plus Principal Balance: $118,767.12
- My Total Principal Balance: $189.456.53
A Grad Plus Loan is a special type of federal student loan that is only given to students pursuing graduate or professional degrees. A J.D. certainly qualifies as a professional degree, so I was able to obtain 4 separate Grad Plus Loans with an original total balance of $94,662.
A Subsidized Stafford Loan is a type of federal student loan that is available to both undergraduate and professional degree candidates. It is necessary to show financial need in order to obtain a Subsidized Stafford loan. I have 2 Subsidized Stafford Loans with an original total balance of $17,000. This means that the majority of my federal student loans were not need based. This is a funny concept to me as I certainly didn’t have my tuition money chilling in a bank account somewhere.
An Unsubsidized Stafford Loan is a type of federal student loan that is also available to both undergraduate and professional degree candidates. It is not necessary to show financial need in order to obtain an Unsubsidized Stafford Loan. I have 3 Unsubsidized Stafford loans with an original total balance of $44,500.
Minimum Monthly Payment is the amount you have to pay in order to not have the federal government breathing down your neck. This does NOT mean that you are paying off your loan, or even making any real progress towards your goal. In order for that to happen, you must make monthly payments that pay off more than just accrued interest and actually reduce your principal balance (as you will see in my stats below, I am not doing that and neither are many law grads).
- My Grad Plus Minimum Monthly Payment: $167.84
- My Stafford Minimum Monthly Payment: $99.82
- My Total Minimum Monthly Payment: $267.66
A Student Loan Servicer is a company that manages your payments on your student loans. If your student loans are federal, as all of mine are, the Student Loan Servicer did not loan you the money. It is merely their job to put the fear of God into you each month. Examples of Student Loan Servicers include Great Lakes and Sally Mae, but there are tons of them out there. Frequently, loans are transferred from one Student Loan Servicer to another.
A Co-Signer is someone who can help you obtain a loan. Some students do not qualify to take out loans on their own. There are a variety of reasons this can happen, including a low credit score or a lack of credit history. In this case, a co-signer (frequently a parent) is required for the student to obtain the loan. A co-signer is “on the hook” for the loan in the event that you cannot make payments.
Repayment Plans are the different options you have for paying off your student loans. I could, and may, write a separate article entirely on this. But for now, check out this comprehensive chart for more information. I am currently on an Income Based Repayment plan.
My complete loan stats as of 2/27/18:
- Years out of law school: Almost 5
- Amount Owed: $227,039.77
- Total increase from last month: $1,018.98
- Payment Made: $267.66
- Original loan: $156,162
- Years taken off my life by looking at these numbers: 3-5
If I’m asking you to be brave and take on these important issues, I must do so as well. In the name of bravery, I commit to sharing these numbers with you monthly so that you can see the real cost of financing a legal education.
Now that I am thoroughly depressed, next month I will definitely share some tips, tricks, tools, and strategies for starting to dig out of debt. And while it may seem like you shouldn’t take advice from the girl that is $227,000 in debt, don’t dismiss me just yet. I will share the story of how my husband and I paid off over $60,000 worth of debt in 2 years. Until next time.
Thoughts on this article? Want to share your own story? Tips for this column? Or just want to connect? You can reach me at firstname.lastname@example.org or find me over on linkedin.