paying back loans Forum

[Anonymous User]

Seems like employment forum is the right place, but feel free to move:
Interested in a discussion about how to pay off loans assuming biglaw salary. Pay down just minimums or try for 5K/month?
Basic info:
-200k debt
-market pay (160)
-COL = SF/SV/LA/NYC
-anticipated household income ~250k
-no kids atm
All loans fed, none private.
Not sure whether to start saving for down payment on a house, or just pay off loans as quickly as possible...

[Anonymous User]

Seems like employment forum is the right place, but feel free to move:
Interested in a discussion about how to pay off loans assuming biglaw salary. Pay down just minimums or try for 5K/month?
Basic info:
-200k debt
-market pay (160)
-COL = SF/SV/LA/NYC
-anticipated household income ~250k
-no kids atm
All loans fed, none private.
Not sure whether to start saving for down payment on a house, or just pay off loans as quickly as possible...

Don't pay the minimums. Try for 5K/month. You may not have kids now, but in 3 years if you do and hate biglaw, you'll be glad to be rid of those loans.

[lionelmessi]

Seems like employment forum is the right place, but feel free to move:
Interested in a discussion about how to pay off loans assuming biglaw salary. Pay down just minimums or try for 5K/month?
Basic info:
-200k debt
-market pay (160)
-COL = SF/SV/LA/NYC
-anticipated household income ~250k
-no kids atm
All loans fed, none private.
Not sure whether to start saving for down payment on a house, or just pay off loans as quickly as possible...

I am a little bit older (early 30's) and have made some $$$ and lost some $$$.

My advice to everyone on this subject is to pay the smallest minimum you can until you have a real cash nest egg. I'm thinking 100k+. Or more. Or way more. And that's not $ for a house or investments, that is just your cash, your get out of jail free card. Then focus on debt, saving for a house, or whatever other financial goal you have. You can always use cash to pay down debt, but once you don't have cash, you just don't have it.

Best case scenario is no debt and lots of cash.

Next best is debt but lots of cash.

Second worst case is no debt but no cash.

Worst case is lots of debt and no cash.

Just my two cents, but it is informed from my own experience as well as working with many multi-milllionaire investors in my work the last few years. Many of them have seven figures in zero interest checking accounts and have various debts as well as investments, but always keep "their zero" as high above zero as possible.

[Anonymous User]

Seems like employment forum is the right place, but feel free to move:
Interested in a discussion about how to pay off loans assuming biglaw salary. Pay down just minimums or try for 5K/month?
Basic info:
-200k debt
-market pay (160)
-COL = SF/SV/LA/NYC
-anticipated household income ~250k
-no kids atm
All loans fed, none private.
Not sure whether to start saving for down payment on a house, or just pay off loans as quickly as possible...

I am a little bit older (early 30's) and have made some $$$ and lost some $$$.

My advice to everyone on this subject is to pay the smallest minimum you can until you have a real cash nest egg. I'm thinking 100k+. Or more. Or way more. And that's not $ for a house or investments, that is just your cash, your get out of jail free card. Then focus on debt, saving for a house, or whatever other financial goal you have. You can always use cash to pay down debt, but once you don't have cash, you just don't have it.

Best case scenario is no debt and lots of cash.

Next best is debt but lots of cash.

Second worst case is no debt but no cash.

Worst case is lots of debt and no cash.

Just my two cents, but it is informed from my own experience as well as working with many multi-milllionaire investors in my work the last few years. Many of them have seven figures in zero interest checking accounts and have various debts as well as investments, but always keep "their zero" as high above zero as possible.

This

[gulcregret]

Pay minimums (IBR) for a few years, buy foreclosed house with existing equity. Roll over student debt into HELOC and/or refinance into 5% mortgage payment. Save as much cash as possible.

[IrwinM.Fletcher]

Seems like employment forum is the right place, but feel free to move:
Interested in a discussion about how to pay off loans assuming biglaw salary. Pay down just minimums or try for 5K/month?
Basic info:
-200k debt
-market pay (160)
-COL = SF/SV/LA/NYC
-anticipated household income ~250k
-no kids atm
All loans fed, none private.
Not sure whether to start saving for down payment on a house, or just pay off loans as quickly as possible...

I am a little bit older (early 30's) and have made some $$$ and lost some $$$.

My advice to everyone on this subject is to pay the smallest minimum you can until you have a real cash nest egg. I'm thinking 100k+. Or more. Or way more. And that's not $ for a house or investments, that is just your cash, your get out of jail free card. Then focus on debt, saving for a house, or whatever other financial goal you have. You can always use cash to pay down debt, but once you don't have cash, you just don't have it.

Best case scenario is no debt and lots of cash.

Next best is debt but lots of cash.

Second worst case is no debt but no cash.

Worst case is lots of debt and no cash.

Just my two cents, but it is informed from my own experience as well as working with many multi-milllionaire investors in my work the last few years. Many of them have seven figures in zero interest checking accounts and have various debts as well as investments, but always keep "their zero" as high above zero as possible.

Totally correct.

(1) Hoard cash for a rainy day; then

(2) Save up the absolute minimum to make a down payment on a residence if you're gonna stick around that market for the foreseeable future (the risk-free RoR of paying down your SL debt is negated by the shitty negative RoR of renting); then

(3) Max out your tax-deferred/tax-free retirement investments (esp those involving employer matches); then

(4) Pay off debt like a mother-fucker.

[ToTransferOrNot]

Paying off ~$160k in student loans in 5 years vs. 10 years at a blended 7.5% rate (which is a realistic estimate) results in a savings of about $36k in interest. If other options with your money are more attractive to you, then by all means, take those other options.

[Glock]

There are some tax advantages to putting it into a house. I'm still making a plan, but I intend to put some into a house and draw from the equity to pay debt. Should be an effective roundabout way to get deductions on student loan interest. I'm not sure if it is legal or if it will even work, so I will have to look into that. I have a few years.

[IrwinM.Fletcher]

Rent rates relative to ownership costs are approaching all-time highs. Renting in the current market is an absolute sucker's bet- RE prices could actually continue to decline slightly and you'd still come out ahead as an owner vs. a renter (this is why REIT's in even some slumping markets have continued to appreciate).

ETA- I'm not saying real estate is a good investment- it's probably dead money for the foreseeable future. But renting is a RIDICULOUSLY bad deal in the current environment. Enough to overcome the RoR of paying down SL with that down payment (and then some).

Oversimplified example #1:

You rent at $2000/mo. You can buy a comparable apartment condo/apartment with an outlay of $1600/mo. This represents a net savings of 20% (ignoring the additional benefit of building equity through gradually accelerating repayment of principal). This scenario is actually pretty conservative given the gap between rent rates in most urban markets right now.

Compare- you pay off your SL, thus netting a 7.5% RoR. This is equivalent to earning about a 10.35% pre-tax RoR on an investment at a 160k tax bracket.

Here, the savings of ownership v. rent is nearly double the RoR of paying off SL debt. Of course I'm ignoring a shit-ton of other factors, but the logic's pretty sound.

[Anonymous User]

buying or renting in NYC as a first-year associate?

[lionelmessi]

Paying off ~$160k in student loans in 5 years vs. 10 years at a blended 7.5% rate (which is a realistic estimate) results in a savings of about $36k in interest. If other options with your money are more attractive to you, then by all means, take those other options.

The arithmetic of saved interest is inarguable.

My point is that those interest savings (or interest gains from putting the cash into any one of a million potential investments) is secondary to saving yourself from being SOL because you have no cash.

Cash first, ten year IRR's second.

[c3pO4]

Pay minimums (IBR) for a few years, buy foreclosed house with existing equity. Roll over student debt into HELOC and/or refinance into 5% mortgage payment. Save as much cash as possible.

What are all these acronyms?

[lawschoolgrapedme]

This is better than my corporations class...I love when you poli sci guys start trying to talk finance.

[dixiecupdrinking]

There is a not-insignificant chance that after you leave BigLaw, you will find yourself in a poor position to pay the minimums every month on $200k debt. My first priority would be to get your monthly payments down to where you can handle them if you had to take a 50% paycut. YMMV.

[c3pO4]

There is a not-insignificant chance that after you leave BigLaw, you will find yourself in a poor position to pay the minimums every month on $200k debt. My first priority would be to get your monthly payments down to where you can handle them if you had to take a 50% paycut. YMMV.

Don't understand---isn't there a cap on payments when your salary falls below a certain level? Also, does your minimum payment go down at all if you pay the minimums, or do you have to pay above them for a while to reduce it?

[dixiecupdrinking]

There is a not-insignificant chance that after you leave BigLaw, you will find yourself in a poor position to pay the minimums every month on $200k debt. My first priority would be to get your monthly payments down to where you can handle them if you had to take a 50% paycut. YMMV.

Don't understand---isn't there a cap on payments when your salary falls below a certain level? Also, does your minimum payment go down at all if you pay the minimums, or do you have to pay above them for a while to reduce it?

If you pay down principle up front, then your remaining payments should be lower.
IBR will cap your monthly payment but meanwhile you will be making a small dent in your loan principle, or it could even be growing, depending on what your salary is. Then you have your loans hanging over you for 25 years. Then when they're forgiven, you get hit with an enormous tax bill (unless they have changed this, I believe the entire amount of your forgiven debt counts as taxable income in the year that it is forgiven; something like that). If you're in BigLaw, it is really silly to intend ever to use IBR.

[A'nold]

Saving up for a down payment on a house or condo and paying the minimums on your 200k student loan debt might be one of the stupidist things you could ever do in your life. Pay off the debt, THEN do all the other stuff you want to do.

Edit: I don't think people can fully appreciate the doom someone can feel when they still have 150k in debt and hate (I mean HATE) his/her job and be a slave to it. In reverse, the freedom that one can feel having a big firm on his/her resume and the ability to choose from many rewarding and personally fulfilling jobs while being fully comfortable financially would be unbelievable. You never know if you are going to lose your job. Could you imagine being fazed out when you still have 2k a month loan payments in addition to like a 2k mortgage payment? Why put yourself through that? Time and time again it has been shown that owning a house does not make you that much money. Investing the money you would put towards your house through the years could easily make you the same percentage or more and you wouldn't be a slave to your mortgage. THEN, when you have your loans paid off, you can buy an even nicer house without all the stress and anxiety that comes with paying extremely large payments (and interest).

[bdubs]

Seems like employment forum is the right place, but feel free to move:
Interested in a discussion about how to pay off loans assuming biglaw salary. Pay down just minimums or try for 5K/month?
Basic info:
-200k debt
-market pay (160)
-COL = SF/SV/LA/NYC
-anticipated household income ~250k
-no kids atm
All loans fed, none private.
Not sure whether to start saving for down payment on a house, or just pay off loans as quickly as possible...

I am a little bit older (early 30's) and have made some $$$ and lost some $$$.

My advice to everyone on this subject is to pay the smallest minimum you can until you have a real cash nest egg. I'm thinking 100k+. Or more. Or way more. And that's not $ for a house or investments, that is just your cash, your get out of jail free card. Then focus on debt, saving for a house, or whatever other financial goal you have. You can always use cash to pay down debt, but once you don't have cash, you just don't have it.

Best case scenario is no debt and lots of cash.

Next best is debt but lots of cash.

Second worst case is no debt but no cash.

Worst case is lots of debt and no cash.

Just my two cents, but it is informed from my own experience as well as working with many multi-milllionaire investors in my work the last few years. Many of them have seven figures in zero interest checking accounts and have various debts as well as investments, but always keep "their zero" as high above zero as possible.

The opportunity costs of illiquidity are fairly small for most people. I agree that paying literally all of your available funds toward loans is a bad idea, but keeping $100,000 in a checking account is probably an even worse idea for most junior associate level employees (especially ones with loans).

Unless you already have a house which you can mortgage to repay some or all of your student loans, it is not a practical means of converting non-dischargeable in to dischargeable debt. The additional interest you pay on an 8% federal loan will almost always trump the marginal benefit of modestly reducing your risk if you move jobs or lose your current job.

PS - The reason why a lot of "rich investors" and similarly situated people keep cash on hand is so that they can take advantage of business or investment opportunities that require immediately liquid capital, not because they are worried about losing their jobs.

[MBeezy11]

Seems like employment forum is the right place, but feel free to move:
Interested in a discussion about how to pay off loans assuming biglaw salary. Pay down just minimums or try for 5K/month?
Basic info:
-200k debt
-market pay (160)
-COL = SF/SV/LA/NYC
-anticipated household income ~250k
-no kids atm
All loans fed, none private.
Not sure whether to start saving for down payment on a house, or just pay off loans as quickly as possible...

I am a little bit older (early 30's) and have made some $$$ and lost some $$$.

My advice to everyone on this subject is to pay the smallest minimum you can until you have a real cash nest egg. I'm thinking 100k+. Or more. Or way more. And that's not $ for a house or investments, that is just your cash, your get out of jail free card. Then focus on debt, saving for a house, or whatever other financial goal you have. You can always use cash to pay down debt, but once you don't have cash, you just don't have it.

Best case scenario is no debt and lots of cash.

Next best is debt but lots of cash.

Second worst case is no debt but no cash.

Worst case is lots of debt and no cash.

Just my two cents, but it is informed from my own experience as well as working with many multi-milllionaire investors in my work the last few years. Many of them have seven figures in zero interest checking accounts and have various debts as well as investments, but always keep "their zero" as high above zero as possible.

Totally correct.

(1) Hoard cash for a rainy day; then

(2) Save up the absolute minimum to make a down payment on a residence if you're gonna stick around that market for the foreseeable future (the risk-free RoR of paying down your SL debt is negated by the shitty negative RoR of renting); then

(3) Max out your tax-deferred/tax-free retirement investments (esp those involving employer matches); then

(4) Pay off debt like a mother-fucker.

Thoughts:
(1) Hoard cash for a rainy day; then ( Suze Orman suggests having enough in savings to support at least 8 months of fixed living expenses. This should be your goal before tackling any debt repayment. With this approach you have the peace of mind that if something does happen you can survive for at least a half year without making major changes in your life.)

(2) Save up the absolute minimum to make a down payment on a residence if you're gonna stick around that market for the foreseeable future (the risk-free RoR of paying down your SL debt is negated by the shitty negative RoR of renting); then (Interests rates will be low for at least the next two years and housing prices will not increase significantly over the next two to three years. Rent a reasonable place and pay down the loans.

(3) Max out your tax-deferred/tax-free retirement investments (esp those involving employer matches); then (Most of BIGLAW does not provide a 401k match. Unless your portfolio is generating a return that exceeds your student loan interest rates pay down the loans.

(4) Pay off debt like a mother-fucker.[/quote] (This is one of those lifestyle questions. Pay the loans off in 3 years, 7, or 10.) Three means living like a student while 10 might mean a lot of fun trips and cool things but no huge nest egg or home to show for all your hard work suffering in BIGLAW.

[A'nold]

Seems like employment forum is the right place, but feel free to move:
Interested in a discussion about how to pay off loans assuming biglaw salary. Pay down just minimums or try for 5K/month?
Basic info:
-200k debt
-market pay (160)
-COL = SF/SV/LA/NYC
-anticipated household income ~250k
-no kids atm
All loans fed, none private.
Not sure whether to start saving for down payment on a house, or just pay off loans as quickly as possible...

I am a little bit older (early 30's) and have made some $$$ and lost some $$$.

My advice to everyone on this subject is to pay the smallest minimum you can until you have a real cash nest egg. I'm thinking 100k+. Or more. Or way more. And that's not $ for a house or investments, that is just your cash, your get out of jail free card. Then focus on debt, saving for a house, or whatever other financial goal you have. You can always use cash to pay down debt, but once you don't have cash, you just don't have it.

Best case scenario is no debt and lots of cash.

Next best is debt but lots of cash.

Second worst case is no debt but no cash.

Worst case is lots of debt and no cash.

Just my two cents, but it is informed from my own experience as well as working with many multi-milllionaire investors in my work the last few years. Many of them have seven figures in zero interest checking accounts and have various debts as well as investments, but always keep "their zero" as high above zero as possible.

Totally correct.

(1) Hoard cash for a rainy day; then

(2) Save up the absolute minimum to make a down payment on a residence if you're gonna stick around that market for the foreseeable future (the risk-free RoR of paying down your SL debt is negated by the shitty negative RoR of renting); then

(3) Max out your tax-deferred/tax-free retirement investments (esp those involving employer matches); then

(4) Pay off debt like a mother-fucker.

Thoughts:
(1) Hoard cash for a rainy day; then ( Suze Orman suggests having enough in savings to support at least 8 months of fixed living expenses. This should be your goal before tackling any debt repayment. With this approach you have the peace of mind that if something does happen you can survive for at least a half year without making major changes in your life.)

(2) Save up the absolute minimum to make a down payment on a residence if you're gonna stick around that market for the foreseeable future (the risk-free RoR of paying down your SL debt is negated by the shitty negative RoR of renting); then (Interests rates will be low for at least the next two years and housing prices will not increase significantly over the next two to three years. Rent a reasonable place and pay down the loans.

(3) Max out your tax-deferred/tax-free retirement investments (esp those involving employer matches); then (Most of BIGLAW does not provide a 401k match. Unless your portfolio is generating a return that exceeds your student loan interest rates pay down the loans.

(4) Pay off debt like a mother-fucker.

(This is one of those lifestyle questions. Pay the loans off in 3 years, 7, or 10.) Three means living like a student while 10 might mean a lot of fun trips and cool things but no huge nest egg or home to show for all your hard work suffering in BIGLAW.[/quote]

This is much sounder advice than the earlier stuff. Dave Ramsey would say much the same thing.

Edit: Plus, as MBeezy sort of suggested above, living like a student for 3 years might be the difference b/w retiring at the age of 50 or retiring at 65 or 70.

[IAFG]

There are several "right" ways to do this that are going to vary case-by-case. The important thing is to take your own nuanced situation into account rather than signing onto some one-size-fits-all Ramsay or Orman program.

[A'nold]

There are several "right" ways to do this that are going to vary case-by-case. The important thing is to take your own nuanced situation into account rather than signing onto some one-size-fits-all Ramsay or Orman program.

Thing is, you don't have to "buy into" anything that is one size fits all. Their advice holds true in almost all financial situations. The only difference is where you place your priorities.

Also, I am not some kind of sheep where I buy into all of it. For example, I don't agree with Ramsay's idea of attacking the "debt snowball" to such an extreme that you stop contributing to your 401k and abandon getting the match. He also seems to ignore some very cool things that you can do with compound interest. However, his advice not to buy things on credit and to pay down things that you are paying interest on before going into more debt is 100% sound, all of the time. Unless, of course, you had some kind of inside information on an investment, which of course you would leverage any way you could....but then get arrested.

[legends159]

Rent rates relative to ownership costs are approaching all-time highs. Renting in the current market is an absolute sucker's bet- RE prices could actually continue to decline slightly and you'd still come out ahead as an owner vs. a renter (this is why REIT's in even some slumping markets have continued to appreciate).

ETA- I'm not saying real estate is a good investment- it's probably dead money for the foreseeable future. But renting is a RIDICULOUSLY bad deal in the current environment. Enough to overcome the RoR of paying down SL with that down payment (and then some).

Oversimplified example #1:

You rent at $2000/mo. You can buy a comparable apartment condo/apartment with an outlay of $1600/mo. This represents a net savings of 20% (ignoring the additional benefit of building equity through gradually accelerating repayment of principal). This scenario is actually pretty conservative given the gap between rent rates in most urban markets right now.

Compare- you pay off your SL, thus netting a 7.5% RoR. This is equivalent to earning about a 10.35% pre-tax RoR on an investment at a 160k tax bracket.

Here, the savings of ownership v. rent is nearly double the RoR of paying off SL debt. Of course I'm ignoring a shit-ton of other factors, but the logic's pretty sound.

I don't think buying is such a good idea given OP's geographic locations: NY/LA/SF/SV. RE in those areas are way overpriced and most places in such locations are well over $1MM.

See the nytimes interactive algorithm to see if buying or renting makes sense: http://www.nytimes.com/interactive/busi ... lator.html

See: http://www.nytimes.com/2011/05/11/busin ... hardt.html for an argument that it doesn't make sense to buy in NY and most parts of CA, which are places OP plans to live.

[cattleprod]

I agree that paying literally all of your available funds toward loans is a bad idea, but keeping $100,000 in a checking account is probably an even worse idea for most junior associate level employees (especially ones with loans).

Nobody keeps $100,000 in a checking account. Keep one month of bill money in checking, put the rest in a bond fund at Fidelity or somewhere similar. You can get your money out within a week if you need it.

[IrwinM.Fletcher]

I don't think buying is such a good idea given OP's geographic locations: NY/LA/SF/SV. RE in those areas are way overpriced and most places in such locations are well over $1MM.

See the nytimes interactive algorithm to see if buying or renting makes sense: http://www.nytimes.com/interactive/busi ... lator.html

See: http://www.nytimes.com/2011/05/11/busin ... hardt.html for an argument that it doesn't make sense to buy in NY and most parts of CA, which are places OP plans to live.

Yeah, it definitely depends on the market you're in. Maybe not as feasible in NY, but LA has actually cratered to the point where buying is very favorable vs. renting. Even the article you linked suggests as much. Also, by focusing on things like raw cost outlay, the calculations in that article and online calculators ignore VERY important factors like the deductibility of mortgage interest (especially with tax rates on biglaw salaries set to go from six to midnight around the time we graduate).