This story was originally published on Biglaw Investor.
I didnʼt want to write this article.
Ever since I paid off my student loans, Iʼve been focused on the future. But a part of me has always wondered: just how much interest did I pay while eliminating my student loans? What if I had been able to refinance my student loans? How much interest would I have saved and what would that have been worth had I invested it in the markets?
Hereʼs my loan story.
I graduated law school in 2009 in the midst of the Great Recession. Luckily for me, my firm deferred us a few months until mid-January 2010 rather than revoking our offers. When I started working in 2010, I had $191,985 in student debt: six different loans with interest rates ranging from 6% to 8%. At that time, the student loan refinancing companies didnʼt exist. You were stuck paying a higher interest rate than Greece. Sure, you could consolidate your loans, but consolidation bundles your loans into one to simplify your payments (and typically rounds up your interest rate by 1/8 of a percent).
With no other option, I focused almost exclusively on paying off my student loans, averaging payments of $2,878 per month from my first day on the job until paying off the last loan.
It took me seven years and a lot of interest along the way (although I hit “net worth zero” significantly earlier since you should also be funding your retirement accounts while paying off debt).
I kept good records during this awful time. In my first year of working, I paid $12,278.06 in interest alone. I kept such good records because the sheer anger made me want to preserve the number as some future war story I imagined telling (am telling?!).
Thatʼs more than $1,000 a month in interest payments. At a marginal tax rate of near 40%, you need to earn about $1,665 (or $20,000 a year) to tread water by covering the interest payments.
By the time I paid off my loans, I had paid a sickening $49,837 in interest alone! This doesnʼt even touch the $191,985 of actual debt. The $50,000 is merely a “thanks for letting me borrow all this money” tip left on a nearly $200,000 bill.
So hereʼs the math Iʼve never done before: what if I had been able to refinance? I could have escaped the brutal 6% to 8% rates. That would have meant less interest overall. It also means that more of my payments would have gone toward the principal from the very beginning.
Refinancing makes a lot of sense once you know that youʼre going to repay your loans (i.e., you arenʼt pursuing any forgiveness program). By my third year in law school – after having secured an offer from an AmLaw 200 firm – I know that I would be repaying those loans. So, ideally, the best time to refinance would have been as soon as I borrowed the full amount for my 3L year.
Iʼll save you the suspense. I would have saved about $22,000 in interest.
How did I get to that number?
First, in 2019, the amount of debt I graduated with would have been a bit smaller, since the balance would have accrued less interest during my 3L year. When prospective law students are calculating their total cost of attendance, they often forget that those loans will be accruing interest while youʼre in school.
If I had refinanced during my 3L year, I would have graduated with $187,769 in debt (thatʼs a savings of more than $4,000 right there.)
Over the life of that loan – assuming I would have made the same average payments of $2,878 a month – I would have shelled out $27,967 in interest.
$49,837 (what I really paid) – $27,967 (what I could have paid with a 3L refi) = $21,967 in interest savings.
What does paying $22,000 less in interest mean?
Letʼs lay out some possible knock-on consequences. I finished paying off my loans at the end of 2016. So if I had refinanced as a 3L, in January of 2017, I would have had $22,000 more to invest. At a pretty reasonable 7% rate of return (which factors in inflation), after 30 years that $22,000 would have been worth $178,556.
And what if I could get an 8% rate of return? That would mean $241,010 in 2047.
Letʼs split the difference and call it $200,000 in inflation-adjusted dollars. Thatʼs one-fifth of a million dollars wiped off my balance sheet thanks to a ridiculous government program gauging me on interest rates.
What would I have done with $200,000 in 2047?
I have no idea. Iʼm not 66 yet. But hereʼs what the younger version of myself thinks $200,000 could mean:
- Four fewer years of working (if youʼre saving $50,000 a year)
- A vacation condo close to the beach in Florida
- Opening up an artisanal taqueria just for fun
- Paying for college
- Starting 529s for the grandkids
- Multiple around-the-world trips
- A Tesla
- $8,000 in extra annual retirement spending indefinitely
The point is, you can do a helluva lot with $200,000. Thatʼs why I didnʼt want to write this article. Itʼs too late for me. Iʼve already paid the interest.
Itʼs (Probably) Not Too Late for You
For several months, Iʼve been telling the folks over at CommonBond that they should figure out a way to get comfortable lending money to law students with an offer letter in hand. Without even doing the math, I know that itʼd be an excellent deal for future-millionaire-lawyers-in-the-making looking to pay less interest and to pay off their student loans a little sooner.
Well, Iʼm happy to announce that CommonBond realized this was a win-win scenario and, starting now, you can now jump-start your refinancing plan a year early, based on the strength of your job offer. CommonBondʼs offer of loan refinancing for third-year law students is a first in this business. Now, your accepted job offer is proof enough that youʼre a safe bet.
Thatʼs huge because every year that you can reduce interest will mean substantial savings (in my case, I would have saved $4,000 during my 3L year alone).
And no, when you refinance during your 3L year, you donʼt have to start making payments right away. You still get a six-month grace period after graduating before you begin repayments.
Still not convinced? Refinancing now also allows you to lock in interest rates if youʼre worried theyʼre going to continue to rise. CommonBond calculates your interest rate based on the income in the offer letter, so you should expect the same rate that youʼd get if you were refinancing your loans during the first few months of starting a job.
This is an exceptional opportunity offered by a lending team that is paying attention to the market and crafting niche products to benefit you. I canʼt think of anything more specific than an offer pitched to 3Ls!
You guys have it lucky.
I want my $200,000 back.