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

[ToTransferOrNot]

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

1.) This is completely irrelevant to someone who (i)is already in repayment or (ii) is going to finish taking out loans before the change kicks in in 2012.
2.) The amount in question is so small in the grand scheme that it's basically irrelevant.
3.) You do know that subsidized loans are no longer subsidized once you enter repayment, except for 3 (?) years if you fall under certain IBR threshholds, right?

Also: WTF @ hiring a maid?

Also #2: How, exactly, do you think you can refinance student loans? Are you just talking about consolidating and going on a longer repayment plan without changing the underlying interest terms? If you're talking about refinancing and putting $100k of 6.8/7.9% loans on a 25-year repayment, that's incredibly silly.

[Aston2412]

1.) This is completely irrelevant to someone who (i)is already in repayment or (ii) is going to finish taking out loans before the change kicks in in 2012.

I'd say it's pretty relevant for all the incoming 1Ls who are only able to attend because of their loans. It might be small overall, but if you're taking out the for your 2 and 3 L year it's going to add up.

[ToTransferOrNot]

1.) This is completely irrelevant to someone who (i)is already in repayment or (ii) is going to finish taking out loans before the change kicks in in 2012.

I'd say it's pretty relevant for all the incoming 1Ls who are only able to attend because of their loans. It might be small overall, but if you're taking out the for your 2 and 3 L year it's going to add up.

The total amount is like $6k. It is not going to have any appreciable impact on how long it takes people to repay $160-200k in debt. Also, 1Ls aren't even included in the categories of people I said it was irrelevant for (and that you quoted,) so there's that?

[rayiner]

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

1.) This is completely irrelevant to someone who (i)is already in repayment or (ii) is going to finish taking out loans before the change kicks in in 2012.
2.) The amount in question is so small in the grand scheme that it's basically irrelevant.
3.) You do know that subsidized loans are no longer subsidized once you enter repayment, except for 3 (?) years if you fall under certain IBR threshholds, right?

Also: WTF @ hiring a maid?

Also #2: How, exactly, do you think you can refinance student loans? Are you just talking about consolidating and going on a longer repayment plan without changing the underlying interest terms? If you're talking about refinancing and putting $100k of 6.8/7.9% loans on a 25-year repayment, that's incredibly silly.

Bi-weekly maid service will run you $200/month in Manhattan. Compared to spending 3-4 hours cleaning every other weekend, I'd consider it well worth it.

Also, how you refinance will depend on your situation. If you put your money into a house instead of paying your loans faster, you could take out a home equity loan to refinance your student loan debt. Or you could consolidate. You don't have to take it out to 25 years. Even if you reconsolidate for an additional 10 year term you can get payments around $1000/month.

You should plan things so you'll survive in the 95th-percentile worst case, but you should optimize for median case. Plan on spending 3-4 years in big law, then lateraling to something paying ~$100k*. You can plan for these scenarios without spending your time in big law living like your next job will be making $45k as a waiter.

*) According to Robert Half's legal salary guide, the average of the 25/75 for an in-house lawyer with 1-3 years of experience is $95,000 ($116,000 in Chicago and $133,000 in New York, using their multipliers). http://www.lacitycollege.edu/academic/d ... 0Guide.pdf

[slider]

Is anyone thinking on the riskier side? Perhaps buying a property cash (nice condo or SFH) and using the money earned from renting the property to pay down student loans. This way you are creating cash flow from other sources on not being 100% dependent on your job to pay your loans.

Buy property for 80k, rent at $900/mon. This is feasible in many markets and might work out favorably (with taxes) if you can structure it properly.

[rayiner]

Is anyone thinking on the riskier side? Perhaps buying a property cash (nice condo or SFH) and using the money earned from renting the property to pay down student loans. This way you are creating cash flow from other sources on not being 100% dependent on your job to pay your loans.

Buy property for 80k, rent at $900/mon. This is feasible in many markets and might work out favorably (with taxes) if you can structure it properly.

With depressed property values and a rental market on the upswing (all those evicted folks end up renting), this would not be a bad idea if you had the capital, unless you believe home prices haven't bottomed out yet.

With interest rates as low as they are you'd be stupid to do the transaction all in cash. Get together a down payment (20%) and a fixed-rate loan and then buy a place. If you believe we're in for inflation in the future this will be the right bet.

[yellowjacket2012]

Is anyone thinking on the riskier side? Perhaps buying a property cash (nice condo or SFH) and using the money earned from renting the property to pay down student loans. This way you are creating cash flow from other sources on not being 100% dependent on your job to pay your loans.

Buy property for 80k, rent at $900/mon. This is feasible in many markets and might work out favorably (with taxes) if you can structure it properly.

If you have 80k, I'd suggest looking strong and hard at certain stocks trading at half their net cash value (cash/equivalents minus total liabilities). That's better value than real estate/rent income stream to pay off student loans, given that you really don't know what's going to be of your capital. If you go the rent route, consider the property tax/insurance/maintenance/HOA/condo fees. These things will cut into your investment. 900/mo seems really good for an 80k property, until you get hit with property taxes/condo fees/insurance. So that's your transaction cost there. Plus you have to put up with a tenant, unless you get a property manager. More costs.

But a 80k property foreclosure/short sale is kinda like a depressed bond, where the rent's like your coupon. You could make bank if you unlock its value and flip it for 120k, in addition to landing rent to pay your loans, but 7 out of 10 flippers get flipped themselves these days. Very risky game for a non-real estate person.

There are decent corporate bonds out there that will spit out 6-8% with low risk to capital. This is lesser hassle than finding a place, haggling with the foreclosure-owning bank, cleaning up the shattered windows from the bastard who got foreclosed on, finding a tenant, making sure he doesn't convert your condo into a meth lab, etc. etc.

Whatever you do, don't buy gold.

[UCLAtransfer]

Assuming that real estate prices are close to bottomed out (which obviously is just an hopeful assumption at this point), does anyone have any thoughts regarding a potential breakdown for putting money aside for a down payment on a house versus using that cash to pay off student loans more rapidly?

[Renzo]

With interest rates as low as they are you'd be stupid to do the transaction all in cash. Get together a down payment (20%) and a fixed-rate loan and then buy a place. If you believe we're in for inflation in the future this will be the right bet.

Sadly, I believe we're in for double-dip like a motherfucker, and at least another 2-3 years of stagnation despite negative real interest rates from the fed. Japan's economy is still stagnant from a recession 20 years ago, and our politicians appear to be orders of magnitude less competent. So maybe investing all your money on beer and lotto tickets is the right bet, I guess?

[luthersloan]

Really, if you have federal loans and thus are staring down the barrel of 7.9 interest rates you really should put everything you can towards paying that doubt, save some emergency fund. There is no investment available that pays better than 7.9 risk free, I mean CDs are at like 2.5 and treasuries are in the shiter. Both real estate and stocks have rates of return that are far to unstable when you have such a massive fixed liability. Just pay as much as you can.

[Julio_El_Chavo]

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.

[LawWeb]

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.

General: after taxes, paying down between 25k-45k/year is reasonable, depending if you want to have reasonable savings (20k/year savings + 25K/year loan payment) v. no savings (all 45K toward debt). After taxes, etc. 160K will be about 96K to start.

[rayiner]

Really, if you have federal loans and thus are staring down the barrel of 7.9 interest rates you really should put everything you can towards paying that doubt, save some emergency fund. There is no investment available that pays better than 7.9 risk free, I mean CDs are at like 2.5 and treasuries are in the shiter. Both real estate and stocks have rates of return that are far to unstable when you have such a massive fixed liability. Just pay as much as you can.

In your late 20s do you need all your investments to be risk free?

[delusional]

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.

Isn't there no compound interest? If that's true, there's no comparison.

[luthersloan]

The point is not that one needs all of your investment to be risk free, but rather that when one is faced with a large fixed obligation it seems unwise to invest in risky assets. I suppose that if you had sufficient funds such that neither ability to repay your loans, nor your ability to maintain a limited emergency fund would be threatened by investing in risky assets in might be wise. But in the current economic climate I do not see that many investments that beat 7.9 risk free.

[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.

Isn't there no compound interest? If that's true, there's no comparison.

There is compound interest: most student loans capitalize interest daily once you're in repayment; any amount you pay toward the principal reduces the interest you will suffer on capitalized interest. You won't see the same "magic" as you do over a 30-year positive capitalization, but that's just a function of time; assuming you catch up on your investing after you pay your loans off, you won't "lose" anything. As proof, compare the "total payoff amount" of the 10-year plan (i.e., look at how much interest you will be charged) and compare that against the amount of investment income you will generate over the same period of time - and then consider that the investment income will be fully taxable, while the "saved interest" of paying off your loans early is tax-free.

If you honestly believe you can take the extra funds and get greater than an 8.5/7.9/6.8 after-tax return over the 4-5 years it should take to repay your loan, all the power to you, and you should go for it. While there are certainly investment opportunities out there that have much higher returns, I don't think there are any investment opportunities out there that justify the additional risk. It's pretty rare to get an 8.5/7.9/6.8 100% after-tax risk-free investment, and even getting that up to, say, 9% would require taking on a huge amount of risk.

All of that said, I plugged $5k into a Roth this year, just so I had some money to play around with re: investing, hoping to "learn the ropes" before I actually have to do this with a significant amount of cash. Had I done it earlier, I would have made a ton of money, because I would have shorted the hell out of the market right before the whole debt ceiling debacle happened. But I could just as easily have been on the other side.

[IrwinM.Fletcher]

All of that said, I plugged $5k into a Roth this year, just so I had some money to play around with re: investing, hoping to "learn the ropes" before I actually have to do this with a significant amount of cash. Had I done it earlier, I would have made a ton of money, because I would have shorted the hell out of the market right before the whole debt ceiling debacle happened. But I could just as easily have been on the other side.

Putting money into a Roth is buy far the smartest thing you can do during your stub year and SA years (obviously only if you're lucky enough to snag a position that'll net you north of $20k or so for the summer). You'll never be eligible to contribute once you're in your first full year of biglawl due to income caps, and the Roth IRA is by far the sweetest gift the government ever gave to normal people who know how to save. With income tax rates headed nowhere but up for the foreseeable future, stash away as much as you can in those things.

Too bad you can't short anything or buy puts in IRAs of any sort.

[Renzo]

Really, if you have federal loans and thus are staring down the barrel of 7.9 interest rates you really should put everything you can towards paying that doubt, save some emergency fund. There is no investment available that pays better than 7.9 risk free, I mean CDs are at like 2.5 and treasuries are in the shiter. Both real estate and stocks have rates of return that are far to unstable when you have such a massive fixed liability. Just pay as much as you can.

In your late 20s do you need all your investments to be risk free?

No, but an expected rate of return of 8% is pretty good, even risk adjusted.

[westbayguy]

All of that said, I plugged $5k into a Roth this year, just so I had some money to play around with re: investing, hoping to "learn the ropes" before I actually have to do this with a significant amount of cash. Had I done it earlier, I would have made a ton of money, because I would have shorted the hell out of the market right before the whole debt ceiling debacle happened. But I could just as easily have been on the other side.

Putting money into a Roth is buy far the smartest thing you can do during your stub year and SA years (obviously only if you're lucky enough to snag a position that'll net you north of $20k or so for the summer). You'll never be eligible to contribute once you're in your first full year of biglawl due to income caps, and the Roth IRA is by far the sweetest gift the government ever gave to normal people who know how to save. With income tax rates headed nowhere but up for the foreseeable future, stash away as much as you can in those things. Too bad you can't short anything or buy puts in IRAs of any sort.

I have no idea whether this is true, but it could be a way around the income caps:

http://www.ehow.com/info_7759822_roth-i ... z1V8pJI0AmIncome Caps
• The Roth IRA income cap(s) are adjusted by the IRS, usually every year. You can find current levels at irs.gov. For 2011, if you were single or head of household, the phase-out range was $107,000 to $122,000. For taxpayers who were married filing jointly, the range was $169,000 to $179,000. If you were married but filing separately, the phase-out starts at zero and the income cap topped out if your income reached $10,000.
Calculation
• If your adjusted gross income (AGI) falls in the phase-out range, it's not hard to figure out how much you can contribute to your Roth IRA. First, subtract the lower limit from your AGI. Divide this figure by the amount of the phase-out range to find the percentage of the contribution limit that has phased out. Then reduce your contribution limit by this percentage. Suppose you are single with an AGI of $114,500. First, you can subtract $107,000, leaving $7,500. The phase-out here is $15,000 (or the result of $122,000 - $107,000 = $15,000). $15,000 divided by $7,500 is 50 percent, so you must reduce your contribution limit by 50 percent. If your nebular limit is $5,000, you can still contribute $2,500.
Considerations
• A rule that went into effect in 2010 may help investors who want to contribute to a Roth IRA but make too much. Before 2010, you could not convert a traditional IRA to a Roth IRA if your income exceeded $100,000--but that income cap is no longer in effect. Therefore, there is nothing to prevent you from contributing to a nondeductible traditional IRA and immediately rolling the assets over to a Roth IRA, thereby skirting the IRS's income limits.

[ToTransferOrNot]

All of that said, I plugged $5k into a Roth this year, just so I had some money to play around with re: investing, hoping to "learn the ropes" before I actually have to do this with a significant amount of cash. Had I done it earlier, I would have made a ton of money, because I would have shorted the hell out of the market right before the whole debt ceiling debacle happened. But I could just as easily have been on the other side.

Putting money into a Roth is buy far the smartest thing you can do during your stub year and SA years (obviously only if you're lucky enough to snag a position that'll net you north of $20k or so for the summer). You'll never be eligible to contribute once you're in your first full year of biglawl due to income caps, and the Roth IRA is by far the sweetest gift the government ever gave to normal people who know how to save. With income tax rates headed nowhere but up for the foreseeable future, stash away as much as you can in those things.

Too bad you can't short anything or buy puts in IRAs of any sort.

Bear ETFs, including 3x leveraged, basically shorts the entire market.

[Tiago Splitter]

All of that said, I plugged $5k into a Roth this year, just so I had some money to play around with re: investing, hoping to "learn the ropes" before I actually have to do this with a significant amount of cash. Had I done it earlier, I would have made a ton of money, because I would have shorted the hell out of the market right before the whole debt ceiling debacle happened. But I could just as easily have been on the other side.

Putting money into a Roth is buy far the smartest thing you can do during your stub year and SA years (obviously only if you're lucky enough to snag a position that'll net you north of $20k or so for the summer). You'll never be eligible to contribute once you're in your first full year of biglawl due to income caps, and the Roth IRA is by far the sweetest gift the government ever gave to normal people who know how to save. With income tax rates headed nowhere but up for the foreseeable future, stash away as much as you can in those things.

Too bad you can't short anything or buy puts in IRAs of any sort.

Bear ETFs, including 3x leveraged, basically shorts the entire market.

The leveraged ETFs are designed to mimic the daily performance of the underlying index, not the long term performance.

You can contribute to an IRA and then immediately convert without tax consequences if you have no other IRA, SEP, or SIMPLE assets. You can also make Roth salary deferrals to your 401(k) if the plan allows for them. Of course, on the biglaw salary, the tax deduction becomes more enticing.

/tangent

[IrwinM.Fletcher]

The leveraged ETFs are designed to mimic the daily performance of the underlying index, not the long term performance.

You can contribute to an IRA and then immediately convert without tax consequences if you have no other IRA, SEP, or SIMPLE assets. You can also make Roth salary deferrals to your 401(k) if the plan allows for them. Of course, on the biglaw salary, the tax deduction becomes more enticing.

/tangent

Credited. See the performance of SKF and DUG in 2008-09. Inverse ETFs are a nightmare for retail investors and most major firms have proprietary rules restricting them from being held in retirement accounts to limit their own liability.

[nealric]

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.

If you are working 70/hrs a week, you are getting all your dinners free from seamless (at least in NYC market).

On point, I've found that an annual rate of 40-50k a year can be done with reasonable frugality in NYC.

[Eco]

Paying it all off in three years is ridiculously stupid. Invest the money and pay a good $500-$1000 a month on your loan. Pay it off like a house, over a long period of time. If you save up and invest well you'll have more money in the long-term especially if you lose the big law job.

[Patriot1208]

Paying it all off in three years is ridiculously stupid. Invest the money and pay a good $500-$1000 a month on your loan. Pay it off like a house, over a long period of time. If you save up and invest well you'll have more money in the long-term especially if you lose the big law job.

If you pay off 1000 dollars a month you won't even be hitting the principal.