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Debt Reduction

In addition to the kind of repayment plan you select for your law school loans, you will also need to decide your basic approach to paying off the loans. Some loan settings, such as the 10% IBR and PSLF program, require you to make 120 on-time payments. With the 10-year repayment and extended 25-year repayment programs (and some other plans), you may be able to adopt three strategies to reduce the time it takes to repay your loans and the total amount of money you pay on the loans. We retire a debt when we repay it in full.

The most popular approach to early retirement of debt is the rollover method. As each smaller debt is paid off, the freed-up payment amount is then applied to (rolled over into the payment of) the next larger debt, and so on until all debts are paid off. In other words, most people will take the money used to make the payment of the smallest debt (and thus usually retired first) and add it to the payment being made on the new smallest loan debt.

Another technique – that can be used in concert with the rollover method – reduces the amount of interest that accrues by paying an additional amount beyond the required payment. That extra amount will (generally) be applied to the principal of the loan, and thus correspondingly reduce the amount of interest that can accrue.

Table of Additional Payments to 10-Year Repayment Plan


Loan Debt

Payment

Total Interest

Estimated Total  To Be Paid

Ten Years / # Payments

$61,500

$708

$23,416.18

$84,929

120

Extra

New Payment

Interest Saved

New Total Paid

# Payments Reduced

Approximate Time Reduced

$10

$718

$504.31

$84,424.69

2

2 months

$25

$733

$1,220.86

$83,708.14

5

1/2 year

$50

$758

$2,317.82

$82,611.18

11

 1 year

$100

$808

$4,208.04

$80,720.96

20

1 2/3 years

$125

$833

$5,028.80

$79,900.20

24

2 years

A final option is to make a lump sum payment. Often times, recent graduates starting at larger law firms receive a signing bonus; the lump sum payment may significantly reduce or even eliminate the interest accrued on your loans during law school.  Likewise, a bonus or a large gift received after you’ve been working for a while may also be used to reduce the principal (and thus accruing interest), as well as the time until the debt is retired. You may also make a lump sum payment when you near the end of repaying a loan.

Here are two websites that help illuminate the impact of your additional amount payments – whether by rollover and/or additional amount payment.

Ultimately, you need to make the individual choices for repayment that best suit your situation – personal, career, and financial.