The Debt Wizard models estimated monthly payments under the six methods used by the overwhelming majority of our students who take on law school debt:
Please note: All of these repayment methods have varying requirements for loan eligibility, interest rate, loan duration, program criteria, and more. What follows is a basic overview of the most significant differences between them.
- The 10-year repayment plan treats education debt like a business investment: a relatively short-term loan for the long-term "pay-off" of a career. The basic principles of this plan remain fairly constant over time. The structure of this repayment plan focuses strictly on the amount borrowed, and does not take into account the borrower's earnings. The standard monthly payments include both principal and interest, and unless the borrower is in default or forbearance, there is no accumulation of unpaid interest from month to month.
- The 25-year repayment plan is for a borrower with higher education debt and the corresponding need to manage the debt over a longer period. It is more like a mortgage investment than a business investment, and generally offers a lower monthly payment in exchange for the longer payback period, which results in a considerably larger total sum to be repaid as the longer period allows for greater accumulation of interest. As with the 10-year plan, the interest rate and debt limit are the elements that may change depending on the year the plan is entered into; likewise, as with the 10-year plan, if the borrower keeps current with monthly payments, unpaid interest does not accumulate from month to month.
- The federal IBR plan (as well as individual school plans based on the federal IBR) regulates participation, and not all people with law school educational debt will qualify. While the plan is not limited by career type, for those with loans who engage in qualifying employment (such as a public interest legal position), loan forgiveness occurs at 10 years (currently, a non-taxable event) when all criteria are met; otherwise, forgiveness occurs at 20 or 25 years (currently, a taxable event). The government has made continuing efforts to adjust its income-related payment programs, and participation requires annual submissions and monitoring (in contrast to the standard 10-year and 25-year repayment methods). We recommend this helpful FAQ.
- One of the biggest stress inducers of the federal IBR program (and some school-specific LRAP programs based on it) is the specter of the accumulating unpaid interest. That is, in order to integrate the financial situation of the borrower with the repayment model, the borrower pays only a set percentage of his/her monthly income (as opposed to a pre-set monthly amount under the 10- and 25-year plans). That affordable monthly payment means that, in some cases, the borrower is not even covering the amount of the monthly interest accumulating on the principal of the loan. The result is that, not only is interest accruing on the principal of the loan (as is usual with a loan), but, under certain circumstances when exiting the program, this accumulated unpaid interest may be added to the current principal (i.e., capitalized) resulting in a new, larger principal used as the basis for future interest calculations. The technical term for this process is “negative amortization,” and we discuss this in more detail below.
- Michigan Law's LRAP, the Income-Based Debt Management Program, requires participation in the federal IBR program (either 10% or 15% IBR), but the financial benefit is supplemented by Michigan Law, and only Michigan Law graduates can participate. While our repayment model inevitably results in the lowest cost among the possibilities, note that, when compared to standard repayment plans or the government's IBR program, our program (and school-specific LRAPs in general):
- has more conditions on entry (criteria for eligibility),
- requires greater engagement (i.e., forms and communication with the Law School), and
- includes additional terms for departure from or re-entry to the LRAP.
- Michigan Law's LRAP addresses the accumulating interest-upon-interest scenario (negative amortization) described above by, for qualifying income levels, placing an amount equal to the unpaid interest, or portion thereof, into a reserve account that vests after two full years in the program. If you leave the program, the amount that is being held for you is used to pay the accumulated interest (one time only). Our research suggests this aspect of our LRAP is unusual among law school programs predicated on the federal IBR.