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How to leverage public loan forgiveness while balancing financial priorities in a public interest career

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The time has come to embark on your legal career and you may have decided during (or even before) law school that you want to practice law to help people, to further the public good and to try and maintain a reasonable work-life balance while you’re at it.

Whether it’s representing or advising government agencies and officials or working on behalf of organizations, causes or individuals through legal services groups, you’re called to public service.

You may already be engaging in work that’s interesting, personally meaningful and focused on helping others – which are shown to be some of the main drivers for lawyers leading a happier life.

There are financial realities to consider in any career path – and public sector legal work is no exception, especially since public service attorney salaries remain considerably lower than private sector salaries.

With median entry-level salaries for legal services attorneys, public defenders and lawyers at public interest organizations hovering between $57,500 to $63,200, many public interest lawyers are caught in the balancing act of keeping debt-to-income ratios in a manageable range, servicing student loans and saving for the future.

Here are a few strategies that can help:

Use income-driven repayment plans to decrease debt-to-income ratios

Debt-to-income or DTI, ratios reflect how much of your monthly pay goes toward debt payments. There are variations of these ratios but the idea is to add all your debt payments for the month and divide by your gross (before tax) monthly pay. The higher your DTI ratio, the tighter your budget becomes. At higher levels (around 40% or more), it can even be difficult to qualify for a mortgage if home ownership is part of your plan, not to mention the stress that comes with little-to-no cashflow flexibility month-to-month.

Student loans are the largest debt for many lawyers starting out and can be overwhelming – especially for those making lower starting salaries. For example – a student borrowing $170,000 in federal student loans for law school at an average 6% interest rate would be facing a ten-year standard payment of $1,887 a month.

If that same borrower is making $60,000 out of law school, taking home around $3,600 a month after taxes (varying by state), that would mean a student loan payment demanding 50% of their take-home pay. Fortunately, applying for income-driven repayment every year allows borrowers to have federal loan payments set based on their discretionary income.

This can substantially lower your monthly payment, which in turn lowers your DTI ratios to more reasonable levels. The borrower with $170,000 in student loans could pay closer to $330 a month based on their $60,000 salary, for example – almost $1,600 less than they would be asked to pay on a ten-year standard plan.

Leverage public service loan forgiveness

In addition to increasing cashflow flexibility, income-driven repayment plans are also the type of plans that borrowers pursuing Public Service Loan Forgiveness are encouraged to use. Public Service Loan Forgiveness (PSLF) is a program that allows borrowers to apply for forgiveness on the remaining balance of their Direct Loans after working full-time for qualified government and/or non-profit employers, making scheduled payments on income-driven (or the ten-year standard) plans, for 120 months.

It’s a smart idea to submit the PSLF Form every year to certify your payments with the national servicer for the program, MOHELA.

You can crunch the numbers to see what achieving Public Service Loan Forgiveness could mean for you using the PSLF feature on the AccessLex Student Loan Calculator.

It’s important to remember that private student loans are not eligible for income-driven repayment and Public Service Loan Forgiveness, so refinancing is not a good option for those looking to pursue PSLF.

Putting discretionary income to work

Of course, minimizing your student loan payments and getting on track for forgiveness is only one important piece of the puzzle. You’ll also have other financial priorities, like saving an emergency fund, investing in your 403(b) or 457 plan through work or paying off consumer debt. Funding these goals on a tighter budget means prioritizing and systematically chipping away over time and as resources allow.

When your discretionary income (what’s left after taxes and expenses) is limited, you can deploy the money strategically by cascading your way through your biggest priorities. This approach usually flows through a list of steps which could start with just investing up to your employer match at work while quickly saving a minimum emergency fund, then paying off high-interest consumer debt and finally circling back to invest and save more.

Focusing the bulk of your discretionary income on one goal at a time can provide faster results and help you gain momentum and motivation as you work your way through the list.

To support your plan, you can build your budget and lifestyle using generally recommended budgeting percentages for your area or a more broad 50/30/20 approach. Remember, budget frameworks exist as guidelines and your situation might demand you adjust the percentages to reasonable ranges if you’re working with a lower starting salary – maybe a 70/20/10 split. The more realistic and relevant a budget is, the higher the likelihood you’ll stick to it.

Now back to our example of the new public interest lawyer bringing home $3,600 a month. Using a 70/20/10 budget approach, $2,520 (70%) would go toward needs like housing, utilities, groceries, transportation and minimum debt payments, $720 (20%) would go toward wants like recreation, eating out, subscriptions, memberships, etc. and $360 (10%) would be left for saving, investing or paying down debt quicker.

If that lawyer has already saved an emergency fund and cleared any credit card balances, they could circle back to invest the $360 in their work-sponsored retirement plan – usually a 403(b), 457 or Thrift Savings Plan (TSP) for public sector employees.

Investing $360 per month (and assuming an average return of 7% growth per year) would yield about $442,000 after 30 years. And that’s not accounting for the employer match or for you increasing your contributions as your pay increases.

As an added benefit, pre-tax contributions to your employer-sponsored retirement plan can also lower your student loan payments by lowering your adjusted gross income – the amount loan servicers use to determine your monthly payments on IDR plans. That said, if you want to forgo the tax deduction now for tax-free income in retirement, you can choose to code your contributions as Roth through most current plans.

The point is that even if maxing out your retirement plan through work each year is out of your budget’s reach, that doesn’t mean you can’t build wealth while at the same time working your way toward loan forgiveness – all while doing work that matters to you and our society.

Disclaimer
Examples provided in this article are for informational purposes only and are not intended as investment, tax or legal advice. You should consider whether the information is appropriate for your unique needs and where applicable, seek individualized advice from a professional advisor.

Derek Brainard

Derek Brainard

Derek Brainard is the National Director of Financial Education at nonprofit AccessLex Institute® serving thousands of law students across the country through MAX by AccessLex® – the free personal finance program for law students. Derek is an Accredited Financial Counselor®, a Chartered Retirement Planning Counselor®, and his financial writing and commentary have been featured via the Wall Street Journal, U.S. News & World Report, Forbes, and USA Today.

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