How to Cover Law School Costs When Federal Loans Aren’t Enough

Key Takeaways

If federal student loans and scholarships do not fully cover the cost of law school, students may need to consider alternative funding sources. This article explores other options:

1. HELOCs and closed-end home equity loans can be flexible, but payments generally begin during enrollment and the home is on the line.
2. Retirement withdrawals and 401(k) loans can shrink future savings and create taxes, penalties, or new payment obligations.
3. Non-retirement investments are accessible, but taxes, financial aid effects, liquidity, cost basis, and lost future growth all matter.
4. Family funding works best when the tax rules, repayment terms, and everyone's responsibilities are clear from the start.

With the implementation of the One Big Beautiful Bill Act, students are taking a more active role in planning how they will finance law school. Coaching conversations have focused on understanding changes to federal borrowing options, including the end of Federal Direct Graduate PLUS Loan eligibility for new borrowers beginning July 1, 2026 and revised Federal Direct Unsubsidized Loan limits. New professional students may now generally borrow up to $50,000 annually in Direct Unsubsidized Loans, subject to aggregate lifetime limits, and proration requirements for part-time students.

As students assess how to bridge potential funding gaps, they are exploring a wider range of financing strategies than in prior years. 

In addition to private student loans, borrowers and their families are asking about home equity, retirement and non-retirement investments, and family support. These conversations focus not only on covering educational costs today, but also on understanding the long-term financial tradeoffs associated with each option and choosing an approach that supports their goals during law school and beyond.

Using Home Equity to Pay for Law School

Many prospective non-traditional law students have asked about using home equity to help finance law school. The two common options are a home equity line of credit (HELOC) and a closed-end home equity loan. If the home already has a first mortgage, either product is commonly considered a second mortgage. These options may offer lower interest rates, flexible access to funds, and borrowing amounts that are not limited by a school's cost of attendance.

A HELOC is a revolving line of credit that allows borrowers to draw funds as needed, usually at a variable rate during the draw period, typically lasting between five and 10 years. After the draw period, the HELOC enters the repayment period, during which regular monthly payments are due, much like a traditional loan. A closed-end home equity loan instead provides a lump sum that is repaid in installments. Terms vary, and payments generally begin while the student is enrolled.

Both HELOCs and closed-end home equity loans carry significant risk to the borrower. Because the loan is secured by the equity in the home, failure to make required payments could result in foreclosure. Families should compare rates and repayment requirements and ensure they can manage the payments while the student is enrolled.

Can You Use Retirement Savings to Pay for Law School?

Many students pursuing professional degrees wonder whether retirement savings can be used to cover educational expenses. Before making an early withdrawal, it is important to consider the long-term impact of reducing funds that could otherwise continue to grow, as well as any taxes, penalties, or new payment obligations.

Qualified higher education expenses do not qualify for an exception to the 10% additional tax on early 401(k) or 403(b) distributions. In addition, some or all of the withdrawal may be taxable.

If the plan allows, a participant may take a 401(k) loan without triggering an immediate taxable distribution or requiring a credit check, with principal and interest repaid to the account. The federal maximum is generally the lesser of $50,000 or the greater of $10,000 or 50% of the vested balance, although plan rules and prior loans may lower the available amount. Loans generally require substantially level payments at least quarterly and repayment within five years, resulting in payments during school and reducing invested funds. Leaving the employer may accelerate repayment, and an unpaid balance treated as a distribution can trigger income tax and a potential 10% additional tax.

Qualified higher education expenses do qualify for an exception to the 10% additional tax on early IRA distributions, although traditional IRA withdrawals generally remain taxable. Regular Roth IRA contributions generally come out before earnings and can ordinarily be withdrawn tax- and penalty-free; conversions and earnings are subject to more complex rules.

Using Investment Accounts to Fund Law School

Using funds from a non-retirement investment account to pay for educational expenses is generally simpler than withdrawing from retirement accounts, but selling investments can create a tax bill. Interest and ordinary dividends are generally taxed as ordinary income, while qualified dividends may receive preferential rates. Capital gains are considered short-term when assets are held for one year or less and long-term when held for more than one year; net long-term gains may qualify for lower rates, including a 0% rate depending on taxable income and filing status. The kiddie tax may also apply to certain full-time students under age 24 who do not provide more than half of their own support, potentially taxing unearned income at the parent's rate.

Students should also consider investment basis, liquidity, financial aid effects, and the future growth they may forgo by withdrawing funds.

Learn more: Six Financial Accounts to Understand Throughout Your Legal Career

Family Assistance and Intrafamily Loans for Law School

Families often help students finance higher education through direct tuition payments, intrafamily loans, or student loan repayment assistance. Each approach comes with its own ground rules.

Direct tuition payments can be made by anyone without gift tax concerns, provided the funds are paid directly to a qualifying educational institution. This exclusion applies only to tuition and not housing, meals, books, supplies, or other expenses.

Intrafamily loans can provide students with a lower-cost financing option while keeping repayment arrangements within the family. However, the arrangement should be treated like a real loan, with the terms and repayment schedule in writing and an interest rate at least equal to the applicable federal rate. Otherwise, the arrangement may create imputed-interest or gift-tax consequences.

Family members may also choose to help repay student loans. These payments are generally treated as gifts to the student, even when paid directly to the lender. If a donor's total gifts to the student exceed the annual exclusion for that year, the donor may need to file IRS Form 709. Filing the form does not necessarily mean gift tax is due because the donor's available lifetime exemption may apply.

Regardless of the funding method, clear communication is essential. Families should establish expectations around the amount, timing, repayment terms, and each person's responsibilities up front. A clear conversation can prevent misunderstandings and help everyone decide whether the arrangement is workable.

You don’t have to navigate law school financing alone. Through AccessConnex by AccessLex℠, you can speak one-on-one with an Accredited Financial Counselor^® to get your questions answered and better understand your options.