Is Refinancing Student Loans a Smart Move for Recent Law School Graduates?

Graduating from law school is a significant achievement, but it often comes with a substantial financial burden in the form of student loans. For recent law school graduates, especially those entering high-paying positions in Biglaw firms, refinancing student loans may seem like an attractive option. However, the decision to refinance is complex and must be carefully considered, taking into account various factors such as income, credit score, and the potential loss of federal loan benefits.

Pros of Refinancing Student Loans

Refinancing is defined here as paying off federal student loans with one large private loan through a private lender. Refinancing student loans can offer the following advantages for recent law school graduates:

Lower Interest Rates

One of the primary benefits of refinancing is the potential to secure a lower interest rate. This can lead to significant savings over the life of the loan, reducing the total amount being repaid. Graduates with strong credit scores and stable incomes are more likely to qualify for these lower rates.

Single Monthly Payment

Refinancing also allows graduates to consolidate multiple loans into a single loan with one monthly payment. This can simplify the repayment process and make it easier to manage finances. That said, most federal loan borrowers have the same loan servicer for all their federal loans, and therefore, still only make one payment to that servicer.

Improved Loan Terms

In addition, refinancing can provide the opportunity to select new loan terms that better fit a graduate's financial situation and goals. For example, extending the loan term can lower monthly payments, while shortening the term can help repay the loan faster and save on interest.

Cons of Refinancing Student Loans

While there are clear benefits, there are also significant drawbacks to refinancing student loans:

Loss of Federal Loan Benefits

Refinancing federal student loans into private loans means forfeiting access to the benefits and protections that come with federal Direct Loans. This includes income-driven repayment (IDR) plans and the Public Service Loan Forgiveness (PSLF) Program. For graduates considering careers in public service or lower-paying legal positions, this loss can be substantial.

Credit Score Requirements

To qualify for the best refinancing rates, graduates need a strong credit score. Those with lower credit scores may not see a significant reduction in interest rates or may even struggle to qualify for refinancing at all.

Potential for Higher Payments

While refinancing can lower interest rates, it can also result in higher monthly payments if the loan term is shortened. Graduates need to carefully consider their budget and financial flexibility before committing to a refinancing plan.

Considerations for Different Career Paths

Biglaw Associates

For new associates at Biglaw firms, refinancing can be a viable financial move. Strong credit profiles along with high starting salaries can make them good candidates for lower interest rates and improved loan terms. The loss of federal loan benefits may be less of a concern, as their higher incomes can help manage loan repayments without relying on IDR plans or PSLF. Even so, borrowers in this position should crunch their specific numbers to determine if they are willing to commit to the stresses of Biglaw work long enough to pay off their loans before refinancing.

Public Service Legal Professionals

For those pursuing careers in public service, refinancing is often less advisable. These graduates benefit significantly from IDR plans and the PSLF program, which can forgive remaining loan balances after 10 years of qualifying payments. Losing these federal benefits by refinancing into a private loan can result in a much higher financial burden. Older federal loans may have to be consolidated into a new Direct Consolidation Loan in order to become eligible for IDR plans and PSLF, but this is a different process from refinancing with a new private loan.

Small to Mid-Firm Associates

Graduates working at small to mid-sized law firms need to weigh their options carefully. While they may have higher incomes than public service lawyers, they often earn less than Biglaw associates, making the loss of federal loan flexibilities more impactful. These graduates should carefully evaluate their financial stability, career trajectory, and the potential savings from refinancing before making a decision.

No One-Size-Fits-All approach

Refinancing student loans can be a smart move for some recent law school graduates, but it is not a one-size-fits-all solution. Graduates must carefully consider their individual financial situations, career paths, and the potential loss of federal loan benefits. For those in high-paying positions, the savings from lower interest rates may outweigh the cons, while those in public service or lower-paying roles should think twice before refinancing. Ultimately, thoughtful evaluation and planning are crucial to making the best decision for long-term financial health.

To discuss your refinancing questions, schedule a free call with an Accredited Financial Counselor® through  AccessConnex by AccessLex^℠.