A New Law Student’s Guide To Federal And Private Loans

Congratulations! You’ve been accepted into law school.

After thinking you’d flubbed those impossible time-pressured logic questions on the LSAT about the seating charts for the school bus, you actually made it!

Now comes some real-world work.

You probably need loans, and that 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 Largesse of Uncle Sam 

According to Juno’s handy Complete Guide to Student Loans for Law School, most students pursuing a Juris Doctor, Master of Laws, or Master of Studies in Law who choose to borrow from the federal government obtain either Direct Unsubsidized Loans or Direct PLUS loans — also known as the Grad PLUS loans — or a combination of both.

Direct Unsubsidized Loans don’t have a credit-score requirement, and the requirement for the PLUS loans is low. Most applicants qualify.

These loans are available to U.S. citizens as well as certain eligible non-citizens, and interest rates can vary. The rates are set based on the 10-Year Treasury Note rate in mid-May and go into effect for loans disbursed after July 1 of each year — so when your schooling is over you are liable to have several federal loans with different interest rates. To take a deeper dive into federal-loan interest rates, click here.

Of the two types of loans, Direct Unsubsidized are more affordable, with lower interest rates and origination fees than PLUS. However, you can use these loans for only your first $20,500 in borrowing for a given academic year, so if you snagged an admission to one of those top-tier, private institutions, you’ll likely have to supplement with Direct PLUS which has a higher interest rate and higher origination fee.

You also need to bear in mind that both the Direct Unsubsidized Loans and Direct PLUS Loans are “unsubsidized,” which means the federal government does not pay the interest while you are in school. The interest immediately accrues and will capitalize — be added to your principal — unless interest payments are made.

This distinguishes these loans from the government loans obtained by most undergraduate students, for whom the federal government makes subsidized interest payments until six months after they graduate or until they drop below half-time enrollment in college.

Do not make the mistake of thinking your law school loans will have the same balance the day you graduate as the day you got them unless you make those interest payments.

The Private Sector

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

Such services use collective buying power to negotiate significantly lower interest rates than you could obtain by yourself.

Private loans can be used to fund law school upfront or year-by-year, but many newly minted attorneys also turn to the private sector to refinance their scary, can’t-believe-I’m-so-deep-in-debt loan total once they get their first job.

With pay stubs in hand — you usually need about three — such refinancing can get you a significantly lower interest rate, depending on what’s been going on in the world, of course.

As you would expect, every private lender has its own underwriting process and standards for student loan applicants that help it decide whether to give a person a loan and at what interest rate. All private lenders require a credit check to evaluate your ability to repay. If your credit score is in the high 600s, you are likely to qualify. In general, the higher your score, the lower your interest rate.

In addition to keeping your credit score high by making timely payments on all your debts, you can lower your rate even more 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 score — but it’s a good option if you’re young and haven’t had time to develop much of a credit history.

After you submit your application, with or without a co-signer, and you’re approved for your private student loan, you’ll 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 there’s a chance it will rise based on prevailing interest rates in general. If you opt for a fixed rate, it will not change over the life of your loan.

Make sure the interest rates, plus any fees and incidental costs are thoroughly explained to you.

The Pros and Cons

If you’re still having trouble choosing between federal and private loans, give some thought to the advantages and disadvantages of each. (And check out Juno’s graduate student loan calculator when you want to run some numbers.)

As for federal, one pro is that these loans are easy to get.

Also, federal loans offer protection if you wind up in a low-paying job, because you can apply for an income-based repayment plan. Plus, 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 can be forgiven after a certain period. See Juno’s guide for great details on this kind of thing.

The con? Higher interest rates, mostly because of the less-strict scrutiny of creditworthiness. If you don’t qualify for an income-based repayment program or public-service forgiveness, you could wind up paying a lot more over the life of your loan.

As for private-lender loans, flip the coin. Their normally lower interest rates will often result in lower monthly payments and lower total money paid over the life of the loan. If you plan to seek employment of the more lucrative variety — say commercial litigation in Biglaw — private loans may be especially advantageous. You’ll probably never qualify for the income-driven federal programs meant to keep payments manageable. Nor will you get your debt forgiven.

On the con side of private student loans, be aware that not everyone will qualify. Banks and other private lenders will check your credit score and assess your financial situation.

So if you’re still reeling from your undergrad loans — you should likely stick with Uncle Sam.