How best to finance law school

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stt1
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How best to finance law school

Postby stt1 » Thu Feb 26, 2015 9:54 pm

I will likely be attending one of HYS for full-price, as I am not applying for need based grant aid. I am currently deciding whether to apply for loans (my own income and wealth being non-existent, I imagine I could get nearly the full cost of attendance in loans). Alternatively, my parents have offered to give me a low interest loan to cover all or part of the amount (but I'd definitely need to pay it back within 10 years, as it would come out of their retirement savings).

I am trying to decide which is the better option between these two, and was hoping for advice. Here is how I see it so far:

1) The interest rates for government loans are rather high, above 6%. Since this is essentially a near risk-free loan from my own and my parents perspective, I could pay them 2% and they would be doing better than any risk-free investment available right now, so using the government loans seems to be losing a good deal of money, at least 4% a year. Even taking into account student loan interest deduction there still seems to be around a 3% loss. Also, origination and other fees would of course also be saved.

2) On the downside, I would lose the benefit of any forgiveness programs. This factor would of course be dispositive if I was intending to pursue public interest law, but assuming that I plan to go to a firm, is the value of potential access to PAYE and other such programs sufficient in monetary effect in likely forgiven interest and such (assuming for argument no partnership and thus not the very high-end of ending salaries) to cancel out the higher interest rate?

3) On another downside, my parents are of course not protected should I die or be disabled (whereas loan forgiveness might kick in if using official loans), which is why it isn't a totally risk-free loan from their perspective. However, I think this risk is small and can be covered through disability insurance and life insurance, though that would of course also cost money, maybe further weakening this option.

Anything I am not seeing, or any thoughts on how these factors play out in making this decision?

Thanks so much for your advice!

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RareExports
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Re: How best to finance law school

Postby RareExports » Thu Feb 26, 2015 10:05 pm

Interesting choices. You seem to understand the costs and benefits of both options. Follow your heart

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DCfilterDC
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Re: How best to finance law school

Postby DCfilterDC » Thu Feb 26, 2015 10:10 pm

Honest suggestion,

HYS sounds like a good three to sticker if you're going to sticker anywhere.

I would suggest considering doing the interest-free loan from your parents (pay inflation? peg to a 20-year T-bill?) and then take out a term life insurance policy for the amount of the loan for a term of 10-15 years. If you're young and healthy, this will be a minor expense.

I know it sounds morbid, but actually it's a pretty smart financial decision IF you're going to get that interest-free loan from your parents.

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4LTsPointingNorth
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Re: How best to finance law school

Postby 4LTsPointingNorth » Thu Feb 26, 2015 10:11 pm

A 2% interest rate loan from your parents would be great if your parents can truly afford it or if you don't mind unduly burdening them with financial risk. If your parents' circumstances change a year after you finish law school and they suddenly need money that you won't have yet earned back, it could severely strain your relationship unless your parents have sufficient savings that they can hold out for a few years while you grind away at BigLaw.

So I guess the question for you is just, is a 4% interest savings worth the perceived potential risk? Much depends on your parents' financial situation and your relationship with them. From an emotional perspective, I doubt your parents are taking the possibility of your potential for premature death or permanent disability in their risk calculus.

Even with a 2% interest rate, paying back sticker + cost of living of three years of law school means you'll be sending your parents checks for thousands of dollars a month for 10 years post graduation. Make sure to keep in mind how that might make you feel month after month 5, 10 years from now.

Overall, if they're for it, and can afford it, it's obviously a very favorable deal for you though.

audacious
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Re: How best to finance law school

Postby audacious » Thu Feb 26, 2015 10:13 pm

I think it would depend on how bullish or bearish you feel about your parents' opportunity cost. If they expect a return greater than the interest on the student loans (plus origination fees), then I would probably take on the debt, and ask my parents to contribute interest only payments every month (or whatever).

Also, if you charge yourself a nominal rate on the interest payments, you'll have retained the financial risk on the principal amount, but gotten the benefit of a lower interest rate by transferring the risk of the accumulated interest payments to your parents.
Last edited by audacious on Thu Feb 26, 2015 10:43 pm, edited 1 time in total.

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bearsfan23
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Re: How best to finance law school

Postby bearsfan23 » Thu Feb 26, 2015 10:29 pm

Point number 3 alone should be enough to convince you NOT to borrow from your parents (or at the very least to borrow only part of the money from them).

I was in a similar position to you OP, ultimately I decided to take all my loans from the Government. Not only does this keep the PAYE/IBR options open, but it won't fuck your parents over if god forbid something happens to you.

Ultimately, you and your parents should decide if your okay with the worse case scenario - You go through three years of school, something terrible happens, and you can't pay them back. I wasn't comfortable with that so I went the Gov route, but its you need to decide that for yourself obvi

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banjo
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Re: How best to finance law school

Postby banjo » Thu Feb 26, 2015 10:34 pm

What are your other options? Did you get $$$ anywhere?

stt1
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Re: How best to finance law school

Postby stt1 » Thu Feb 26, 2015 11:15 pm

Thank you to everyone who has replied so far, and I will be making full use of all the excellent advice. To reply to some specific points:

1) I will definitely be purchasing life and long-term disability if I go this route. Thank you for all the advice driving home how important this is.

2) The vast majority of parent's retirement, outside of home equity, is in risk-free, extremely low interest savings. This won't cause any opportunity costs in terms of forgoing higher risk/reward options for them. They also will have no short-term need given that they are still working for several more years and are also covered by insurance.

3) I will keep the emotional perspective in mind, thank you for pointing it out.

4) I do have some full-scholarship offers, and I am separately still considering that decision. In making that decision, I am taking full advantage of the extensive discussions of that issue available in past TLS topics, but I didn't think there was any need for another "Yale vs Hamilton/Rubenstein" thread. I really appreciate the desire to ensure I am aware of the dynamics of the scholarship decision though, and please know that I am separately taking steps to make a fully informed decision.

Follow-up question:

Is anyone informed enough about PAYE or other programs to have an idea about the potential interest that might end up being forgiven or other financial advantages for someone who, say, ends up with a salary hovering around 200k? For example, would it be likely that over half the interest might end up forgiven over the lifetime of the loan? If so, then maybe it makes sense to take a partially tax deductible 6% rate over the 2%? Or are there other benefits to these programs worth considering?

BNA
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Re: How best to finance law school

Postby BNA » Thu Feb 26, 2015 11:43 pm

Do NOT borrow a quarter of a million dollars from your parents life savings unless one of two things- you hate your parents and don't care if you can't pay them back, or 250k is only a very small portion of their retirement fund. You don't know what the world will bring. You could be expelled for something unavoidable. You could be drafted into the fucking Army. Those are pretty extreme examples, but is it worth the risk ruining the comfortable years they've worked all their lives for?

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esq
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Re: How best to finance law school

Postby esq » Fri Feb 27, 2015 12:14 am

Since wealth is clearly existent, go with the wealth + 2% (word on the street is there's a parent based repayment plan that forgives in three years with that option).

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ChemEng1642
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Re: How best to finance law school

Postby ChemEng1642 » Fri Feb 27, 2015 12:44 am

DCfilterDC wrote:I would suggest considering doing the interest-free loan from your parents (pay inflation? peg to a 20-year T-bill?) and then take out a term life insurance policy for the amount of the loan for a term of 10-15 years.


This is what my parents want me to do!

edit: Except with re-mortgaging their house not retirement
Last edited by ChemEng1642 on Fri Feb 27, 2015 10:24 am, edited 1 time in total.

fluffythepenguin
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Re: How best to finance law school

Postby fluffythepenguin » Fri Feb 27, 2015 12:50 am

Have them co-sign a private loan. Assuming they have good credit, variable interest rates are around 3.5%. This way you have the benefit of low interest rates and you do not lose the chance of the loan repayment program. I'm pretty sure private loans are eligible for HYS repayment programs.

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Mack.Hambleton
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Re: How best to finance law school

Postby Mack.Hambleton » Fri Feb 27, 2015 1:00 am

Why has no one said go T14 Full ride yet...

very little difference in outcomes, and a quarter of a million dollars difference in price

YibanRen
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Re: How best to finance law school

Postby YibanRen » Fri Feb 27, 2015 1:24 am

Mack.Hambleton wrote:Why has no one said go T14 Full ride yet...

very little difference in outcomes, and a quarter of a million dollars difference in price


This isn't true. One option leaves you with certain employment, the other does not. Upper end opportunities are much better too.

AspiringAcademic
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Re: How best to finance law school

Postby AspiringAcademic » Fri Feb 27, 2015 1:38 am

I would encourage you to calculate the exact cost of each option both as a monthly payment and over the life of the loan. Include origination fees and even price in the life insurance policy, though I suspect that will be a comparatively trivial factor. It'll be a lot easier for you to do the CBA if you've quantified the quantifiable and are only left trying to estimate the intangibles.

My rough guess is that it'll save you about five to six hundred a month, every month, for ten years. For me, that would be enough.

stt1
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Re: How best to finance law school

Postby stt1 » Fri Feb 27, 2015 1:43 am

Mack.Hambleton wrote:Why has no one said go T14 Full ride yet...

very little difference in outcomes, and a quarter of a million dollars difference in price


I think they respected my statement earlier that "I am taking full advantage of the extensive discussions of that issue available in past TLS topics, but I didn't think there was any need for another "Yale vs Hamilton/Rubenstein" thread. I really appreciate the desire to ensure I am aware of the dynamics of the scholarship decision though, and please know that I am separately taking steps to make a fully informed decision."

Thanks to everyone for the continued advice--I really appreciate everyone who is taking the time to offer their thoughts!

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esq
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Re: How best to finance law school

Postby esq » Fri Feb 27, 2015 1:44 am

True, HYS is still an almost sure thing. Knew plenty of kids that came out of Virginia, even at above median, without employment...we just cover these statistics up with "Fellowships." OPs definitely got a good thing going on with admittance to the top 3 no matter how this education is financed.

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Mack.Hambleton
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Re: How best to finance law school

Postby Mack.Hambleton » Fri Feb 27, 2015 1:46 am

YibanRen wrote:
Mack.Hambleton wrote:Why has no one said go T14 Full ride yet...

very little difference in outcomes, and a quarter of a million dollars difference in price


This isn't true. One option leaves you with certain employment, the other does not. Upper end opportunities are much better too.


Between Columbia and H?? The difference is minimal..

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Mack.Hambleton
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Re: How best to finance law school

Postby Mack.Hambleton » Fri Feb 27, 2015 1:47 am

esq wrote:True, HYS is still an almost sure thing. Knew plenty of kids that came out of Virginia, even at above median, without employment...we just cover these statistics up with "Fellowships." OPs definitely got a good thing going on with admittance to the top 3 no matter how this education is financed.


What year is it

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Helioze
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Re: How best to finance law school

Postby Helioze » Fri Feb 27, 2015 2:30 am

I'd take the loan. Just be sure to take out enough insurance that both you and your parents can survive if you become incapacitated.

Also i guess it depends on how large a chunk of their retirement 300k is.

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DCfilterDC
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Re: How best to finance law school

Postby DCfilterDC » Fri Feb 27, 2015 10:19 am

ChemEng1642 wrote:
DCfilterDC wrote:I would suggest considering doing the interest-free loan from your parents (pay inflation? peg to a 20-year T-bill?) and then take out a term life insurance policy for the amount of the loan for a term of 10-15 years.


This is what my parents want me to do!


Same position. At first I thought it was ridiculous (I wanted to do private loans), but the more they pushed it the more I've come around to it.

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Winston1984
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Re: How best to finance law school

Postby Winston1984 » Fri Feb 27, 2015 10:44 am

If you have no money, wouldn't you get something in need based aid? I don't understand why you aren't applying for any.

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Tiago Splitter
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Re: How best to finance law school

Postby Tiago Splitter » Fri Feb 27, 2015 11:55 am

Winston1984 wrote:If you have no money, wouldn't you get something in need based aid? I don't understand why you aren't applying for any.

Sounds like his parents have more than enough to prevent this unless he's over age 29.

stt1 wrote:Is anyone informed enough about PAYE or other programs to have an idea about the potential interest that might end up being forgiven or other financial advantages for someone who, say, ends up with a salary hovering around 200k? For example, would it be likely that over half the interest might end up forgiven over the lifetime of the loan? If so, then maybe it makes sense to take a partially tax deductible 6% rate over the 2%? Or are there other benefits to these programs worth considering?

If you make 200k you can probably get your AGI down to around 175k, which leaves a PAYE payment of about $1300 a month, $15,600 a year, or $312000 over 20 years. The forgiven debt is then taxable but only to the extent you are solvent immediately before the forgiveness, and you may not be if your loan balance has ballooned up to around 400k. So if you do end up making 200k for 20 years but don't save too much so as to be comfortably solvent, you won't be paying much more than the principal and will effectively be getting a big interest rate discount. But there are obviously some major assumptions in all that.

Also none of the interest will be deductible with that level of income.

Paul Campos
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Re: How best to finance law school

Postby Paul Campos » Fri Feb 27, 2015 1:52 pm

Tiago Splitter wrote:
Winston1984 wrote:If you have no money, wouldn't you get something in need based aid? I don't understand why you aren't applying for any.

Sounds like his parents have more than enough to prevent this unless he's over age 29.

stt1 wrote:Is anyone informed enough about PAYE or other programs to have an idea about the potential interest that might end up being forgiven or other financial advantages for someone who, say, ends up with a salary hovering around 200k? For example, would it be likely that over half the interest might end up forgiven over the lifetime of the loan? If so, then maybe it makes sense to take a partially tax deductible 6% rate over the 2%? Or are there other benefits to these programs worth considering?

If you make 200k you can probably get your AGI down to around 175k, which leaves a PAYE payment of about $1300 a month, $15,600 a year, or $312000 over 20 years. The forgiven debt is then taxable but only to the extent you are solvent immediately before the forgiveness, and you may not be if your loan balance has ballooned up to around 400k. So if you do end up making 200k for 20 years but don't save too much so as to be comfortably solvent, you won't be paying much more than the principal and will effectively be getting a big interest rate discount. But there are obviously some major assumptions in all that.

Also none of the interest will be deductible with that level of income.


The debt is taxable to the extent the debtor is solvent after the debt forgiveness, not before.

Example: Suppose the debtor has $200,000 in net assets without regard to educational debt and $200,000 in educational debt. Before forgiveness the debtor's net worth is zero. ($200K in assets, $200K in debt). If the $200K in educational debt is forgiven, the debtor is treated is having a net worth of $200,000 for tax purposes, so it's all taxable. Now if the debtor has $100K in assets and $200K in educational debt, only $100K of the forgiven debt will be taxable, since before the forgiveness the debtor's net worth was negative $100K, and afterwards it was plus $100K, and the latter is what's taxed.

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Auxilio
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Re: How best to finance law school

Postby Auxilio » Fri Feb 27, 2015 2:19 pm

I am also in a similar position. For me it is complicated by the fact that a ~140k loan is a not insignificant chunk of their savings (although not absolutely ruinous or anything), but I also am international so it is very difficult to even acquire the funds from private loans (more than about ~70,000 USD, and even that requires them to cosign which is not much better. I am still hoping for a large enough scholarship to CCNPV to make up for this gap, but feeling less hopeful by the day.

At least Harvard offers institutional loans if I get in.




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