Studen Loans - Still in School - Pay or Borrow?

[funkybass]

Hi all,

Currently I am in my second year of law school. I've accumulated the princely sum of $125,000 in student loan debt plus $8,000 in accrued interest thus far, with one year to go. The loans are a combination of Federal Unsubsidized Loans at 6.8% and Direct/Grad Plus loans at 7.9%. This debt is only from law school and I have no undergrad debt; therefore, the amount is only accruing interest over a two year period. I'm not sure if the interest has been capitalized into the principal yet, or if that only happens after I graduate.

This summer, I am working overseas and will make about $50,000. Since it's overseas work, US taxes are not deducted and I am trying to figure out what the best long and short term plan is to (1) reduce my tax burden this year, and (2) keep my loans as low as possible.

I was wondering what the best approach to these objectives would be, and so far I have come up with two options, but I'm not sure which is better or if there are better alternatives.

Scenario 1: Pay $2,500 towards the interest of the loan to take advantage of the interest deduction. Pay the rest of the money (after tax amount) towards tuition & books, which would leave me having to borrow approximately $5,000-10,000 to make up the difference (for tuition, living expenses, etc.).

Scenario 2: Pay the entirety of my salary towards the loan principal/interest, take the $2,500 deduction, and then borrow the amount needed for tuition/living (approx. $50,000).

Thank you for your help and advice!

[bjl584]

The answer sort of depends on your ability to pay back the loans once you graduate and find a job. What is the starting salary for someone in your field?

I've always like the idea of taking on the least amount of debt as possible, so that would lean me toward option 1.

[funkybass]

Hmm the legal job market is pretty ****ty right now, so there are no guarantees on anything; however, I think I'll be in a position to make $120,000-$200,000 after I graduate based on my current job prospects.

So I'll (theoretically) be in a good position to pay back loans. I tend to agree with you that option 1 is probably better, or at the very least, simpler. If I paid off loans and then just reborrowed a similar amount, it may save me money in the amount of interest that gets capitalized into the principal (since loans are dispersed in August and January), but at most I think it would amount to less than $500 savings.

[bjl584]

The savings might be minimal , but option 2 will raise your debt to income ratio. Maybe enough to impeed your ability to secure financing. (Not that you should be financing a bunch of stuff when you have 175K of SL debt anyway, but it is something to keep in mind.)