For many, law school is a slog. In taking on such a high-pressure, high-stress degree path with an extremely heavy workload, it's not surprising that many would-be law school graduates eye their commencement with a mixture of relief and excitement.
But unfortunately, the slog doesn't always end with the course load. For many, the end of law school is just the beginning of an entirely new and unwanted challenge – paying off their student loan debt.
Law school debt tends to be pricier than most other degrees, and even typically substantial starting salaries are not enough to allow most new lawyers to pay back their debt and live comfortably at the same time.
Thankfully, law school graduates have the option to refinance their student loans. This debt re-structuring process can save thousands of dollars over the lifetime of a loan, and allow young lawyers to focus on their careers instead of their dwindling bank accounts.
What Does Refinancing Mean?
Refinancing your law school loans means that you are transferring your current loans to a new provider. Most people refinance their loans because they're paying a high interest rate and see that the current interest rates available are lower.
Various lenders offer refinance services. You should choose a company based on the interest rate they can offer, as well as the terms. Refinancing student loans has become more common and there are many lenders willing to work with young graduates.
Some lenders will offer you a variable rate loan and a fixed rate loan. A variable rate will have a range of rates that you may pay over the life of a loan. The rates will change based on the economy and other factors. This means that your monthly payment could change from month to month.
A variable rate loan may be preferable because it has a lower initial rate than a fixed rate loan, so you'll pay less interest at first. But some people cannot afford the higher payments when the interest rates inevitably go up, which can cause them to miss payments or default.
Law school graduates may be good candidates for variable rate loans because of the typically high salaries they tend to earn after a short time. While gambling on a future salary is never a great idea, highly-motivated lawyers are at less of a risk to run into problems affording their increased payments in later years.
How to Prepare for a Refinance
Before starting the refinance process, you need to check your credit report for any errors and negative marks. Credit reports will show a record of all your debts and revolving lines of credit, and whether or not you paid them on time and in full.
You can check your credit report for free by going to annualcreditreport.com, where you can see your credit report from each of the three credit bureaus – Experian, Equifax and TransUnion. Each credit bureau may have some discrepancies since not all companies report your credit accounts to all three bureaus, so it's important to check all three before refinancing.
Many experts recommend having a credit score of at least 680 to be a good candidate for a refinance. You'll want a score of 700 or higher to get the best available interest rates.
You can find your credit score on the same website as the report, where you'll have to pay a small fee. Some bank and credit card companies include your credit score for free on your monthly statement. You can also view your credit score for free on LendingTree.
According to CFP Aaron Hatch of Woven Capital, the lender you start the refinance process with will need access to various financial documents, including "your most recent tax returns, pay stubs, statements from all of your student loans, and statements from your bank and investment accounts. You may also need to provide mortgage, credit card and other debt statements as well."
Why Should Law School Students Refinance?
The most common reason that graduates refinance is to lower their interest rate and save money while repaying their loans. But some also seek lower payments, and refinancing can extend the terms of your loan in order to free up cash flow for your budget. Some also try to consolidate and refinance their loans, so they only make one loan payment instead of multiple.
Even though the refinance process can be annoying and complicated, Hatch said it's often worth it.
"The average law school debt in 2015 was roughly $110,000," he said. "If you had $110,000 of debt that you were paying off over, let's say, 20 years, refinancing your loan to an interest rate 2% lower could save you $10,000s over the lifetime of the loan."
The tens of thousands of dollars you could save by refinancing could pay for a down payment on a home, a wedding or a luxurious trip abroad. They could also help you start saving for retirement or your child's college education.
In many ways, the benefits of refinancing mirror the process of obtaining a law degree. Although it's usually a tedious and complicated process, it's often worth doing in the name of building a better future for yourself.
What Are the Downsides to Refinancing?
Although refinancing can be a financial lifesaver for many, those interested in the process should approach cautiously. Depending on your current financial situation, refinancing could potentially be more harmful than helpful.
Hatch said graduates with federal loans should consider the pros and cons before they refinance. Because the federal government currently does not have a refinance program, refinancing your federal loans means selling them to a private company.
"If you are refinancing federal loans to private loans, it is possible that you may lose some of the protections like forbearance, income-based repayment, public service loan forgiveness and loan cancellation," he said.
Law school graduates who are working for the government or a nonprofit may be eligible for the public service loan forgiveness program. That program requires that they work for a qualified employer and make 10 years' worth of payments before having the remainder of their loans forgiven. If you are interested in the this program, know that refinancing your loans would cause you to lose your eligibility.