How Long Should it Take to Get Out of Debt on Big Law Salary

[Anonymous User]

So I just got my offer (yay!) from a major market firm that pays the lockstep salary. I've paid sticker for law school, plus I have a little debt left over from undergrad. With the interest, I'll be about $190,000 in debt once the grace period is over. I've spent hours on excel figuring out what my payments would be on the different plans, and I figure the earliest I could pay this down would be 4-5 years.

How long do most Biglaw attorney's take to pay off their debt? My lifestyle would substantially improve if I just did the standard ten year repayment plan, but I would an extra $44,000 or so in interest vs. the 5 year plan. Or should I just live like a college kid for a few years enjoy my Busch Lite?

[esq]

I would try to pay it down. If you're making 160k, try living off 60k per year and using the extra 100k to pay down your debt. Whats that? Like two years and then you're off the hook.

[Horsefeathers]

Taxes?

[Anonymous User]

OP here: Assuming Fed/Illinois taxes remain constant, my take home salary will be about $108,000 in year one, $150,000 in year 5.

[nymario]

Your income is increasing every year. The marginal utility of each additional dollar is ever-decreasing.

So lets say you are paying your $190k off at 7% interest. You can pay it at $50,000/yr in a little over 4.5 years at a total cost of around $229k

Compare that with paying the same amount down at $27,500/yr, which takes a little under 10 years. The total payments are around $269 - $40,000 more (Ignore the favorable tax implication of the higher interest load). What do you get for your $40,000?

Look at Year 1 -- Your total after-tax income is around $100,000, give or take. You're living on $50,000 vs $72,500. That is a pretty massive difference, considering you need to upgrade your wardrobe, probably move into a new place, furnish it, etc...Even if you don't buy right away, you can get a downpayment ready for a purchase in a couple years for a much nicer house that your future income WILL be able to cover.

Is it really worth it to make $400,000 instead of $372,500 in year 9? The first couple years will be the "hardest" (if you can call living on a biglaw salary hard) -- but you don't need to live like a pauper any more...

[flexityflex86]

whatever your taxes are, 108k post tax income is a lot of money. as long as you don't get fired, you're in pretty good financial shape even with the 190 in loans. you could easily live off of 40k in any american city if you're single so why can't you pay it off in 3 yrs?

[Anonymous User]

Your income is increasing every year. The marginal utility of each additional dollar is ever-decreasing.

So lets say you are paying your $190k off at 7% interest. You can pay it at $50,000/yr in a little over 4.5 years at a total cost of around $229k

Compare that with paying the same amount down at $27,500/yr, which takes a little under 10 years. The total payments are around $269 - $40,000 more (Ignore the favorable tax implication of the higher interest load). What do you get for your $40,000?

Look at Year 1 -- Your total after-tax income is around $100,000, give or take. You're living on $50,000 vs $72,500. That is a pretty massive difference, considering you need to upgrade your wardrobe, probably move into a new place, furnish it, etc...Even if you don't buy right away, you can get a downpayment ready for a purchase in a couple years for a much nicer house that your future income WILL be able to cover.

Is it really worth it to make $400,000 instead of $372,500 in year 9? The first couple years will be the "hardest" (if you can call living on a biglaw salary hard) -- but you don't need to live like a pauper any more...

OP: I agree with you on this. And in the end, I may be forced to choose the 10 year plan because of wedding, down payment, and other expenses. I guess I am wondering what most people in similar situations do.

Also, on a related question, I budgeted stashing away about $10K a year for savings. Is that too much while I am still paying down loans? I know I should have a 6 month rainy day fund, but beyond that should I really worry about investment/savings?

[ToTransferOrNot]

Keep in mind Biglaw attrition. Basing any long-term financial plan around staying in Biglaw for longer than 3-4 years doesn't make a lot of sense.

I'm going to be able to pay my $163k off by the end of 2016: One clerkship year (which ends up costing me about $33k after taxes, clerkship bonus, etc,) the stub associate year, and three years in biglaw; assuming taxes stay consistent, I don't get married, etc. Given that your extra loan burden is basically offset by my clerkship costs, you should be able to manage the same timeline: pay off in 4 years + stub.

[vanwinkle]

Keep in mind Biglaw attrition. Basing any long-term financial plan around staying in Biglaw for longer than 3-4 years doesn't make a lot of sense.

This. I was going to write something longer, but it basically said this. Whatever your plan is, it shouldn't count on making BigLaw salary forever.

[Anonymous User]

Keep in mind Biglaw attrition. Basing any long-term financial plan around staying in Biglaw for longer than 3-4 years doesn't make a lot of sense.

I'm going to be able to pay my $163k off by the end of 2016: One clerkship year (which ends up costing me about $33k after taxes, clerkship bonus, etc,) the stub associate year, and three years in biglaw; assuming taxes stay consistent, I don't get married, etc. Given that your extra loan burden is basically offset by my clerkship costs, you should be able to manage the same timeline: pay off in 4 years + stub.

My firm is a boutique, so it does not really follow the "up or out" model. Pending I don't otherwise deserve being fired, I should be able to feel reasonably confident through my sixth year.

[Anonymous User]

I would try to pay it down. If you're making 160k, try living off 60k per year and using the extra 100k to pay down your debt. Whats that? Like two years and then you're off the hook.

Good luck with that considering your take home will be closer to $100k...

[ToTransferOrNot]

Keep in mind Biglaw attrition. Basing any long-term financial plan around staying in Biglaw for longer than 3-4 years doesn't make a lot of sense.

I'm going to be able to pay my $163k off by the end of 2016: One clerkship year (which ends up costing me about $33k after taxes, clerkship bonus, etc,) the stub associate year, and three years in biglaw; assuming taxes stay consistent, I don't get married, etc. Given that your extra loan burden is basically offset by my clerkship costs, you should be able to manage the same timeline: pay off in 4 years + stub.

My firm is a boutique, so it does not really follow the "up or out" model. Pending I don't otherwise deserve being fired, I should be able to feel reasonably confident through my sixth year.

Not just talking up-or-out: there are also layoffs (probably not as big a concern at the lit boutiques, admittedly) and voluntary attrition to consider. Not sure what boutique you're going to, but all of the top Chicago lit boutiques have fairly harsh hours - not Kirkland-level, but still long hours.

Anyway, you can knock it out in four years if you choose to, and that was what I was getting at. I was basically taking issue with the "10-year-plan" approach, unless you're comfortable facing the job market while still having a loan balance.

[ToTransferOrNot]

I would try to pay it down. If you're making 160k, try living off 60k per year and using the extra 100k to pay down your debt. Whats that? Like two years and then you're off the hook.

Hi, I'm Uncle Sam. I don't believe we've met.

[TheFriendlyBarber]

I would try to pay it down. If you're making 160k, try living off 60k per year and using the extra 100k to pay down your debt. Whats that? Like two years and then you're off the hook.

Hi, I'm Uncle Sam. I don't believe we've met.

[Anonymous User]

Keep in mind Biglaw attrition. Basing any long-term financial plan around staying in Biglaw for longer than 3-4 years doesn't make a lot of sense.

I'm going to be able to pay my $163k off by the end of 2016: One clerkship year (which ends up costing me about $33k after taxes, clerkship bonus, etc,) the stub associate year, and three years in biglaw; assuming taxes stay consistent, I don't get married, etc. Given that your extra loan burden is basically offset by my clerkship costs, you should be able to manage the same timeline: pay off in 4 years + stub.

My firm is a boutique, so it does not really follow the "up or out" model. Pending I don't otherwise deserve being fired, I should be able to feel reasonably confident through my sixth year.

Not just talking up-or-out: there are also layoffs (probably not as big a concern at the lit boutiques, admittedly) and voluntary attrition to consider. Not sure what boutique you're going to, but all of the top Chicago lit boutiques have fairly harsh hours - not Kirkland-level, but still long hours.

Anyway, you can knock it out in four years if you choose to, and that was what I was getting at. I was basically taking issue with the "10-year-plan" approach, unless you're comfortable facing the job market while still having a loan balance.

OP: Yes I know what you are saying, the longer the plan the greater the risk of the plan's assumptions proving false. I am comfortable living simply, and I hate having the debt over my head. I mainly ask this because I plan on living frugally no matter what, I just would like to get a significant down payment together to buy a house, which doesn't really fit into the "live on 40K plan."

Can anyone point to some empirical data on biglaw repayment statistics?

[quakeroats]

Keep in mind Biglaw attrition. Basing any long-term financial plan around staying in Biglaw for longer than 3-4 years doesn't make a lot of sense.

I'm going to be able to pay my $163k off by the end of 2016: One clerkship year (which ends up costing me about $33k after taxes, clerkship bonus, etc,) the stub associate year, and three years in biglaw; assuming taxes stay consistent, I don't get married, etc. Given that your extra loan burden is basically offset by my clerkship costs, you should be able to manage the same timeline: pay off in 4 years + stub.

My firm is a boutique, so it does not really follow the "up or out" model. Pending I don't otherwise deserve being fired, I should be able to feel reasonably confident through my sixth year.

Not just talking up-or-out: there are also layoffs (probably not as big a concern at the lit boutiques, admittedly) and voluntary attrition to consider. Not sure what boutique you're going to, but all of the top Chicago lit boutiques have fairly harsh hours - not Kirkland-level, but still long hours.

Anyway, you can knock it out in four years if you choose to, and that was what I was getting at. I was basically taking issue with the "10-year-plan" approach, unless you're comfortable facing the job market while still having a loan balance.

OP: Yes I know what you are saying, the longer the plan the greater the risk of the plan's assumptions proving false. I am comfortable living simply, and I hate having the debt over my head. I mainly ask this because I plan on living frugally no matter what, I just would like to get a significant down payment together to buy a house, which doesn't really fit into the "live on 40K plan."

Can anyone point to some empirical data on biglaw repayment statistics?

There are no stats I'm aware of that apply only to students that go to large firms. Btw, I wouldn't worry about your debt situation. The only problem with student loans is their treatment in bankruptcy. The interest rates tend to be favorable and the payment terms are more generous than you'd get with other loans, so there's little reason to rush to pay them off. If you're worried about needing to discharge them one day, you can move the balances to other debts that are dischargeable in bankruptcy. This works especially well if the interest rate you're offered is lower elsewhere. As an example, you can pay down your student loans and put your other spending on credit cards. You can (or could I'm not sure if banks are still willing to do this) also use a mortgage to pay off your loans too. You'll want to talk to a lawyer before trying anything like this, as bankruptcy judges have the power to clawback assets if they smell any chicanery.

[LawWeb]

Related: http://www.top-law-schools.com/forums/viewtopic.php?f=15&t=162114

[straxen]

Anyway, you can knock it out in four years if you choose to, and that was what I was getting at. I was basically taking issue with the "10-year-plan" approach, unless you're comfortable facing the job market while still having a loan balance.

I would rather be facing the job market with a loan balance that can be put into IBR or 25 year repayment than find myself without a job and having sunk all my extra income into repayment of debt rather than saving, and having no emergency fund. My plan is to go on 10 year repayment and save for a down payment on a house rather than mechanically paying student loans off as quickly as possible.

[ToTransferOrNot]

Anyway, you can knock it out in four years if you choose to, and that was what I was getting at. I was basically taking issue with the "10-year-plan" approach, unless you're comfortable facing the job market while still having a loan balance.

I would rather be facing the job market with a loan balance that can be put into IBR or 25 year repayment than find myself without a job and having sunk all my extra income into repayment of debt rather than saving, and having no emergency fund. My plan is to go on 10 year repayment and save for a down payment on a house rather than mechanically paying student loans off as quickly as possible.

4-year plan assumes a few months of emergency funds.

In response to Quaker's post: I don't understand the statements from people saying that the interest rates are "favorable" - someone with $180k of federal loans is looking at ~$15kish of interest every year - in what world is that "favorable"? In particular, GradPLUS loans are awful - but even the 6.8% loans are pretty terrible. I could see paying those off ASAP and then saving up for a downpayment in hopes that you can lock in a mortgage at a fairly low rate - assuming, of course, that you're in a circumstance where owning even makes sense (owning doesn't make sense for a LOT of people). 3% loans would be "favorable." 6.8% is enough to make alternative investments questionable, and 8.5/7.9% is simply outrageous.

[LawWeb]

4-year plan assumes a few months of emergency funds.

In response to Quaker's post: I don't understand the statements from people saying that the interest rates are "favorable" - someone with $180k of federal loans is looking at ~$15kish of interest every year - in what world is that "favorable"? In particular, GradPLUS loans are awful - but even the 6.8% loans are pretty terrible. I could see paying those off ASAP and then saving up for a downpayment in hopes that you can lock in a mortgage at a fairly low rate - assuming, of course, that you're in a circumstance where owning even makes sense (owning doesn't make sense for a LOT of people). 3% loans would be "favorable." 6.8% is enough to make alternative investments questionable, and 8.5/7.9% is simply outrageous.

Wise words.

[rayiner]

I would try to pay it down. If you're making 160k, try living off 60k per year and using the extra 100k to pay down your debt. Whats that? Like two years and then you're off the hook.

LOL.

[quakeroats]

4-year plan assumes a few months of emergency funds.

In response to Quaker's post: I don't understand the statements from people saying that the interest rates are "favorable" - someone with $180k of federal loans is looking at ~$15kish of interest every year - in what world is that "favorable"? In particular, GradPLUS loans are awful - but even the 6.8% loans are pretty terrible. I could see paying those off ASAP and then saving up for a downpayment in hopes that you can lock in a mortgage at a fairly low rate - assuming, of course, that you're in a circumstance where owning even makes sense (owning doesn't make sense for a LOT of people). 3% loans would be "favorable." 6.8% is enough to make alternative investments questionable, and 8.5/7.9% is simply outrageous.

Compare 8.5% to rates on other consumer financial products, then compare it to those same rates 4 years ago when the LIBOR was around 5.25%. If a bank would write an unsecured loan for almost 200k without assets or income, I can assure you your rate would be much worse than 8.5%.

[ToTransferOrNot]

4-year plan assumes a few months of emergency funds.

In response to Quaker's post: I don't understand the statements from people saying that the interest rates are "favorable" - someone with $180k of federal loans is looking at ~$15kish of interest every year - in what world is that "favorable"? In particular, GradPLUS loans are awful - but even the 6.8% loans are pretty terrible. I could see paying those off ASAP and then saving up for a downpayment in hopes that you can lock in a mortgage at a fairly low rate - assuming, of course, that you're in a circumstance where owning even makes sense (owning doesn't make sense for a LOT of people). 3% loans would be "favorable." 6.8% is enough to make alternative investments questionable, and 8.5/7.9% is simply outrageous.

Compare 8.5% to rates on other consumer financial products, then compare it to those same rates 4 years ago when the LIBOR was around 5.25%. If a bank would write an unsecured loan for almost 200k without assets or income, I can assure you your rate would be much worse than 8.5%.

You're leaving out the non-dischargeable part, which has a significant impact.

And besides, we're talking about getting out from under the loans on a biglaw salary, which means you do have significant income. While I think banks should be willing to do private consolidation under those circumstances, they are not - which means that you should get the hell out from under them ASAP.

[Aston2412]

Don't forget, Congress nixxed the subsidized Stafford loans for grad students, so there's more interest accruing.

[rayiner]

Living frugally is a good idea, but you also have to be realistic. When you're working 40 hours a week, you can save a lot of money by cooking every meal, doing your own cleaning and laundry, etc. When you're working 70 hours a week, you'll eat out more, want to get a maid to come in, etc. You'll be under a ton of stress and there is no need to add to the misery by living more cheaply than you need to. At the end of the day this will affect your work performance.

You don't need to pay off your loans in 3 years. I'd shoot for getting them under $100k or so within that time frame. Then if you get up-or-outted and can't find a comparable job, you can refinance your loans and get your payments around $1000/month. This is quite manageable in most US cities.