paying back loans

(On Campus Interviews, Summer Associate positions, Firm Reviews, Tips, ...)
Forum rules
Anonymous Posting

Anonymous posting is only appropriate when you are revealing sensitive employment related information about a firm, job, etc. You may anonymously respond on topic to these threads. Unacceptable uses include: harassing another user, joking around, testing the feature, or other things that are more appropriate in the lounge.

Failure to follow these rules will get you outed, warned, or banned.
Anonymous User
Posts: 273582
Joined: Tue Aug 11, 2009 9:32 am

Re: paying back loans

Postby Anonymous User » Sun Oct 23, 2011 10:08 pm

Bronte wrote:We have one poster who thinks he's gonna earn Bernie Madoff returns in the stock market and another who thinks the governments going to seize his assets. We gotta find middle ground people.


Err on the side of caution.

mrloblaw
Posts: 534
Joined: Fri Jul 22, 2011 3:00 pm

Re: paying back loans

Postby mrloblaw » Sun Oct 23, 2011 10:09 pm

quakeroats wrote:It isn't risk free. There's political risk (perhaps Congress does something about student loans over the next 10 years that would benefit people with active balances) and risk from fewer liquid assets. Also, some of that money is going to be sheltered from taxation (some type of retirement account), and for the assets in a taxable account, you don't pay taxes until you have a taxable event (dividend/cap gain/etc.).


Considering that we should see Republican gains in 2012, debtor relief on the horizon is about as likely as me winning a Gold in London 2012.

User avatar
birdlaw117
Posts: 2167
Joined: Thu Sep 16, 2010 12:19 am

Re: paying back loans

Postby birdlaw117 » Sun Oct 23, 2011 10:15 pm

mrloblaw wrote:
quakeroats wrote:It isn't risk free. There's political risk (perhaps Congress does something about student loans over the next 10 years that would benefit people with active balances) and risk from fewer liquid assets. Also, some of that money is going to be sheltered from taxation (some type of retirement account), and for the assets in a taxable account, you don't pay taxes until you have a taxable event (dividend/cap gain/etc.).


Considering that we should see Republican gains in 2012, debtor relief on the horizon is about as likely as me winning a Gold in London 2012.

So you're telling me Usain Bolt's student loans will probably be forgiven?

Anonymous User
Posts: 273582
Joined: Tue Aug 11, 2009 9:32 am

Re: paying back loans

Postby Anonymous User » Sun Oct 23, 2011 10:16 pm

mrloblaw wrote:
quakeroats wrote:It isn't risk free. There's political risk (perhaps Congress does something about student loans over the next 10 years that would benefit people with active balances) and risk from fewer liquid assets. Also, some of that money is going to be sheltered from taxation (some type of retirement account), and for the assets in a taxable account, you don't pay taxes until you have a taxable event (dividend/cap gain/etc.).


Considering that we should see Republican gains in 2012, debtor relief on the horizon is about as likely as me winning a Gold in London 2012.


How would our government, which is already in massive debt, provide for loan relief? Drastically increase taxes on producers? Borrow more money from China? Print more money? More than likely it would be a combo of all three. Considering most biglaw associates earn $160k (making us "the rich"), we would still be screwed by having to make up the difference in higher taxes and inflation.

Cut spending? What a novel and unlikely concept.

http://www.humanevents.com/article.php?id=46958

User avatar
Bronte
Posts: 2128
Joined: Sun Jan 04, 2009 10:44 pm

Re: paying back loans

Postby Bronte » Sun Oct 23, 2011 11:41 pm

quakeroats wrote:It isn't risk free. There's political risk (perhaps Congress does something about student loans over the next 10 years that would benefit people with active balances) and risk from fewer liquid assets. Also, some of that money is going to be sheltered from taxation (some type of retirement account), and for the assets in a taxable account, you don't pay taxes until you have a taxable event (dividend/cap gain/etc.).


Paying down debt is as close to a risk free investment as exists in the market. There's some vague political risk that Congress will institute some type of loan forgiveness program, but they already have one in place and the real concern is that they'll retract that one, not that they'll expand it. As to the liquidity risk, as I've already said, building a liquidity cushion--something like enough to live and make minimum debt payments for 6-8 months--is good. However, there's also liquidity risk in not paying down debt: that's the risk that you won't be able to service the higher debt payments that you have hanging over your head when you don't pay it down.

Sure, there will be some tax sheltering on your investments. I don't know much about the details of that. I do know, however, that 7.9% (virtually) risk free and purely tax free investment is the best investment available in today's market. That's over 400 basis points over the 30-year Treasury rate, before adjusting for taxes. (And the political risk on treasuries is probably higher than the political risk on paying down loans. But of course both are negligible, as you're well aware.)

Ultimately, your 10-12% expected return on investments is ludicrous. Anyone will tell you that. Most financiers use a risk premium of 4-8% over the risk free rate to calculate the expected return on equity. Paying down your loans, you're getting somewhere close to that rate risk free. A rationale investor just can't pass that up, especially given the prevailing market conditions.

Regardless, I think this thread has come to the conclusion that you should only defer loan payments in favor of other investments (excepting the accumulation of a reasonable cash balance as a liquidity cushion) to the extent that you believe you can make a return greater than 7.9% after taxes and after adjusting for risk. There's very few investors in the market who believe that, but it appears you're one of them.

bdubs
Posts: 3729
Joined: Sat Feb 06, 2010 2:23 pm

Re: paying back loans

Postby bdubs » Mon Oct 24, 2011 12:24 am

How is this thread on page 8? The arguments have been going in circles since page 1.

The tldr version is:
1) About 10% of people are either overly paranoid, or overly optimistic and don't want to pay down their loans quickly
2) About 70% of people are telling the 10% that they have stupid ideas
3) The other 20% are hopelessly lost in a conversation about things that are way over their heads because their poli-sci degree didn't involve any math.

User avatar
birdlaw117
Posts: 2167
Joined: Thu Sep 16, 2010 12:19 am

Re: paying back loans

Postby birdlaw117 » Mon Oct 24, 2011 12:27 am

bdubs wrote:How is this thread on page 8? The arguments have been going in circles since page 1.

The tldr version is:
1) About 10% of people are either overly paranoid, or overly optimistic and don't want to pay down their loans quickly
2) About 70% of people are telling the 10% that they have stupid ideas
3) The other 20% are hopelessly lost in a conversation about things that are way over their heads because their poli-sci degree didn't involve any math.

This is hilariously accurate.

mrloblaw
Posts: 534
Joined: Fri Jul 22, 2011 3:00 pm

Re: paying back loans

Postby mrloblaw » Mon Oct 24, 2011 12:30 am

birdlaw117 wrote:
bdubs wrote:How is this thread on page 8? The arguments have been going in circles since page 1.

The tldr version is:
1) About 10% of people are either overly paranoid, or overly optimistic and don't want to pay down their loans quickly
2) About 70% of people are telling the 10% that they have stupid ideas
3) The other 20% are hopelessly lost in a conversation about things that are way over their heads because their poli-sci degree didn't involve any math.

This is hilariously accurate.


I was personally hoping no one would mention it, since I wanted to see how much longer this could go on.

User avatar
Bronte
Posts: 2128
Joined: Sun Jan 04, 2009 10:44 pm

Re: paying back loans

Postby Bronte » Mon Oct 24, 2011 12:32 am

birdlaw117 wrote:
bdubs wrote:How is this thread on page 8? The arguments have been going in circles since page 1.

The tldr version is:
1) About 10% of people are either overly paranoid, or overly optimistic and don't want to pay down their loans quickly
2) About 70% of people are telling the 10% that they have stupid ideas
3) The other 20% are hopelessly lost in a conversation about things that are way over their heads because their poli-sci degree didn't involve any math.

This is hilariously accurate.


I think some pretty good stuff has come out of the thread. The longterm spreadsheet that your questioning encouraged me to make really solidified the nature of the predicament in my mind. And the solution.

User avatar
birdlaw117
Posts: 2167
Joined: Thu Sep 16, 2010 12:19 am

Re: paying back loans

Postby birdlaw117 » Mon Oct 24, 2011 12:38 am

Bronte wrote:
birdlaw117 wrote:
bdubs wrote:How is this thread on page 8? The arguments have been going in circles since page 1.

The tldr version is:
1) About 10% of people are either overly paranoid, or overly optimistic and don't want to pay down their loans quickly
2) About 70% of people are telling the 10% that they have stupid ideas
3) The other 20% are hopelessly lost in a conversation about things that are way over their heads because their poli-sci degree didn't involve any math.

This is hilariously accurate.


I think some pretty good stuff has come out of the thread. The longterm spreadsheet that your questioning encouraged me to make really solidified the nature of the predicament in my mind. And the solution.

Definitely. That's something that has been tossed around before, but it hasn't actually been shown. It really does simplify the decision process to interest rate on the loan vs. post-tax earnings on investment.

Obviously there is the whole how much $$ do you want in your rainy day fund, but that is a matter of personal risk appetite.

User avatar
quakeroats
Posts: 1399
Joined: Mon Oct 26, 2009 8:34 am

Re: paying back loans

Postby quakeroats » Mon Oct 24, 2011 12:38 am

Bronte wrote:Regardless, I think this thread has come to the conclusion that you should only defer loan payments in favor of other investments (excepting the accumulation of a reasonable cash balance as a liquidity cushion) to the extent that you believe you can make a return greater than 7.9% after taxes and after adjusting for risk. There's very few investors in the market who believe that, but it appears you're one of them.


Plenty of investors believe they can achieve quite a bit more than 7.9%. This includes most pension funds, and university endowments, not to mention asset managers. Over the last few decades, 8% was on the high side of what people who invest exclusively in fixed income expected. 10-12% was more in line with equity returns. But there are entire industries dedicated to the proposition that anything under 15% is a shitty return, so I wouldn't take 8% as the zenith of investment performance. Institutional investors certainly don't.

User avatar
birdlaw117
Posts: 2167
Joined: Thu Sep 16, 2010 12:19 am

Re: paying back loans

Postby birdlaw117 » Mon Oct 24, 2011 12:47 am

quakeroats wrote:
Bronte wrote:Regardless, I think this thread has come to the conclusion that you should only defer loan payments in favor of other investments (excepting the accumulation of a reasonable cash balance as a liquidity cushion) to the extent that you believe you can make a return greater than 7.9% after taxes and after adjusting for risk. There's very few investors in the market who believe that, but it appears you're one of them.


Plenty of investors believe they can achieve quite a bit more than 7.9%. This includes most pension funds, and university endowments, not to mention asset managers. Over the last few decades, 8% was on the high side of what people who invest exclusively in fixed income expected. 10-12% was more in line with equity returns. But there are entire industries dedicated to the proposition that anything under 15% is a shitty return, so I wouldn't take 8% as the zenith of investment performance. Institutional investors certainly don't.

I'm going to know you know roughly the same about how to calculate an average as you do about investing. So, given that we are talking about an average return it is true that there will be people that earn a higher return. However, there will be an offsetting amount of investors that make less than the average (I know, crazy right?!?!?).

User avatar
Bronte
Posts: 2128
Joined: Sun Jan 04, 2009 10:44 pm

Re: paying back loans

Postby Bronte » Mon Oct 24, 2011 1:14 am

quakeroats wrote:
Bronte wrote:Regardless, I think this thread has come to the conclusion that you should only defer loan payments in favor of other investments (excepting the accumulation of a reasonable cash balance as a liquidity cushion) to the extent that you believe you can make a return greater than 7.9% after taxes and after adjusting for risk. There's very few investors in the market who believe that, but it appears you're one of them.


Plenty of investors believe they can achieve quite a bit more than 7.9%. This includes most pension funds, and university endowments, not to mention asset managers. Over the last few decades, 8% was on the high side of what people who invest exclusively in fixed income expected. 10-12% was more in line with equity returns. But there are entire industries dedicated to the proposition that anything under 15% is a shitty return, so I wouldn't take 8% as the zenith of investment performance. Institutional investors certainly don't.


First, as I've said over and over, you need to gross the return up for the fact that it's tax free. Then, you have to recognize that it's virtually riskless. When you come to terms with this, you can compare it to other investments. In the current economic climate, that's as good as it gets based on my market expectations. 10-12% may have been in line with what investors expected in equity returns over the past decade, but they got 3.5% before taxes. http://w4.stern.nyu.edu/~adamodar/New_H ... stret.html. I wouldn't expect to get much more than that over the next decade. If you want to put your money in one of those industries dedicated to getting 15% returns (presumably, the hedge fund industry), good luck. Here's a look at how this industry has been doing: http://www.hedgefund.net/hfn_public/mar ... ltime.html.

But like I said, it's fine. Now that we've recognized that it only makes sense if you think you can make more than a risk and tax adjusted 7.9%, it's just a matter of your outlook and the market and your risk tolerance. My outlook is pretty negative and my risk tolerance is fairly low, so I'm gonna take my 600 basis points of alpha and run.

shmoo597
Posts: 301
Joined: Sat Dec 13, 2008 10:31 pm

Re: paying back loans

Postby shmoo597 » Mon Oct 24, 2011 8:22 am

Stop arguing with quakeroats. He can't be helped and is living in a fantasy land where rational argument doesn't apply. Let him continue to think that he, the great quakeroats, has the ability to outperform the market in the long run (something which, according to the new york times, only .6% of money mangers can do in the long run http://www.nytimes.com/2008/07/13/busin ... ei=5087%0A).

Back to the relevant issue: is there ANY course of action (converted IRA, unmatched 401k, etc) that makes more sense then paying down loans, due to tax implications? I think the answer is no.

My take from all of this is what I thought initially - save up 3 months of expsneses and then spend every last penny paying down loans.

ToTransferOrNot
Posts: 1928
Joined: Thu Jan 22, 2009 12:45 am

Re: paying back loans

Postby ToTransferOrNot » Mon Oct 24, 2011 9:03 am

Anyone know if banks will give you a HELOC on the amount you put on a down-payment? I assume no, but if they will, that makes buying a house make even more sense for me (put the down payment in, take HELOC on downpayment and put it into loans, have now converted non-deductible high rate of interest into a deductible low rate of interest).

Of course, I can't imagine a bank would give you a HELOC into downpayment equity.

User avatar
chem
Posts: 867
Joined: Thu Mar 03, 2011 8:14 pm

Re: paying back loans

Postby chem » Mon Oct 24, 2011 9:25 am

tagging for when I have to pay back loans

transferguy
Posts: 48
Joined: Tue Feb 10, 2009 10:19 pm

Re: paying back loans

Postby transferguy » Mon Oct 24, 2011 10:31 am

This thread has been very helpful. Quick question. If I have Stafford loans @ 6.8% and Plus loans at 8.5%, is it possible to get a lower monthly minimum payment (by changing my repayment plan from 10 years to like 25 years) on the Staffords so that I can dedicate more money towards the Plus loans? Is this something I should be doing?

bdubs
Posts: 3729
Joined: Sat Feb 06, 2010 2:23 pm

Re: paying back loans

Postby bdubs » Mon Oct 24, 2011 11:25 am

ToTransferOrNot wrote:Anyone know if banks will give you a HELOC on the amount you put on a down-payment? I assume no, but if they will, that makes buying a house make even more sense for me (put the down payment in, take HELOC on downpayment and put it into loans, have now converted non-deductible high rate of interest into a deductible low rate of interest).

Of course, I can't imagine a bank would give you a HELOC into downpayment equity.


There are equity requirements for HELOC loans. If you buy a place with 20% down, then basically no bank will give you a HELOC. If you put down more than 20% then you should just use the extra cash to pay down your other debts.

The only exception is if you buy something that is a really "good deal" and then it appraises for significantly more than you bought it for. In that case you can take out a HELOC loan up to the equity threshold of the bank (20% or more, its usually some kind of sliding scale with worse rates as you approach minimum equity). I think that most banks have a waiting period between purchasing a property and being able to borrow against the appraised amount though (probably 1 year).

ToTransferOrNot
Posts: 1928
Joined: Thu Jan 22, 2009 12:45 am

Re: paying back loans

Postby ToTransferOrNot » Mon Oct 24, 2011 12:03 pm

bdubs wrote:
ToTransferOrNot wrote:Anyone know if banks will give you a HELOC on the amount you put on a down-payment? I assume no, but if they will, that makes buying a house make even more sense for me (put the down payment in, take HELOC on downpayment and put it into loans, have now converted non-deductible high rate of interest into a deductible low rate of interest).

Of course, I can't imagine a bank would give you a HELOC into downpayment equity.


There are equity requirements for HELOC loans. If you buy a place with 20% down, then basically no bank will give you a HELOC. If you put down more than 20% then you should just use the extra cash to pay down your other debts.

The only exception is if you buy something that is a really "good deal" and then it appraises for significantly more than you bought it for. In that case you can take out a HELOC loan up to the equity threshold of the bank (20% or more, its usually some kind of sliding scale with worse rates as you approach minimum equity). I think that most banks have a waiting period between purchasing a property and being able to borrow against the appraised amount though (probably 1 year).


Thanks much - that's what I figured.

User avatar
A'nold
Posts: 3622
Joined: Sat Oct 04, 2008 9:07 pm

Re: paying back loans

Postby A'nold » Mon Oct 24, 2011 12:39 pm

I will say that Quaker's breakdown on average percentage gain over time is pretty accurate. Also, one thing the market has proven over time is that gigantic swings of paranoia or optimism result in market corrections and, over time, it is unlikely that this situation will be the exception. People are far too pessimistic about the market going forward. Our generation has seen the greatest bull run in history as well as one of the biggest market crashes and recession in history. Hopefully we now know enough not to think this situation is different.

User avatar
Bronte
Posts: 2128
Joined: Sun Jan 04, 2009 10:44 pm

Re: paying back loans

Postby Bronte » Mon Oct 24, 2011 12:50 pm

A'nold wrote:I will say that Quaker's breakdown on average percentage gain over time is pretty accurate. Also, one thing the market has proven over time is that gigantic swings of paranoia or optimism result in market corrections and, over time, it is unlikely that this situation will be the exception. People are far too pessimistic about the market going forward. Our generation has seen the greatest bull run in history as well as one of the biggest market crashes and recession in history. Hopefully we now know enough not to think this situation is different.


Capitalist economies naturally mature and reach a point where rapid growth is no longer possible. We're arguably close to that point. Regardless, let's assume 11% is absolutely the correct return to expect of the stock market. That's 9.35% after the capital gains tax. Compare that to your 7.9% risk free rate. The question is whether you think 145 basis points is an acceptable risk premium for the stock market. The average investor, historically, has demanded 400 to 800 basis points. http://w4.stern.nyu.edu/~adamodar/New_H ... stret.html. But take the sucker bet if you want it.

User avatar
A'nold
Posts: 3622
Joined: Sat Oct 04, 2008 9:07 pm

Re: paying back loans

Postby A'nold » Mon Oct 24, 2011 12:55 pm

Bronte wrote:
A'nold wrote:I will say that Quaker's breakdown on average percentage gain over time is pretty accurate. Also, one thing the market has proven over time is that gigantic swings of paranoia or optimism result in market corrections and, over time, it is unlikely that this situation will be the exception. People are far too pessimistic about the market going forward. Our generation has seen the greatest bull run in history as well as one of the biggest market crashes and recession in history. Hopefully we now know enough not to think this situation is different.


Capitalist economies naturally mature and reach a point where rapid growth is no longer possible. We're arguably close to that point. Regardless, let's assume 11% is absolutely the correct return to expect of the stock market. That's 9.35% after the capital gains tax. Compare that to your 7.9% risk free rate. The question is whether you think 145 basis points is an acceptable risk premium for the stock market. The average investor, historically, has demanded 400 to 800 basis points. http://w4.stern.nyu.edu/~adamodar/New_H ... stret.html. But take the sucker bet if you want it.

Don't get me wrong, I agree with paying the loans first. I was just commenting on the percentages he gave above. I basically disagree with most of the conclusions he comes to off of those numbers, but the numbers appear accurate.

gulcregret
Posts: 115
Joined: Mon Aug 30, 2010 11:08 pm

Re: paying back loans

Postby gulcregret » Mon Oct 24, 2011 3:10 pm

It could be my math is off, but it looks like that spreadsheet is not compounding interest properly, and for simplification reasons I understand why it's not.

There are plenty of vanguard funds that have returned over 15% in any given 10 year spread. For example, the emerging markets fund returned roughly 17% on average over any ten year spread. Capitalizing interest on that rate well get you well over $1 million for the amount invested.

There are too many personal assumptions to make this discussion worthwhile. Economically, all things equal, if you assume you have $100k after expenses for ten years to either invest or pay off debt, it makes more sense to invest because you can never make up for the years you lose out from not investing. But you have to be proactive and consistent in investing because it is really hard to have $1 million dollars in an account and not want to use it, or at least it would be very hard for me.

Also, assuming one will leave biglaw after four years, it makes far more sense have cash and other investments than to minimize debt because the uncertainty of the adjusted salary from a new career will not allow you to invest as much. If leaving biglaw after four years, you should absolutely invest as much as possible and pay as little as possible because you will probably never make that much money ever again. In house jobs pay less, gov't jobs pay less, most all jobs you will get as an attorney after biglaw will pay less. Meaning you will not have nearly as much, if any, disposable income to invest.

Why would you want to pay all your loans off and then make $150k in house, by that time, have more fixed expenses because of a family and a mortgage, and have barely any money to invest? You will absolutely never be able to keep throwing $85k into investments every year if you leave biglaw. Maybe 5-10% (?) of those who got biglaw will make partner and/or have $100k of disposable income for a full ten years. But for those five years one does stay, that person should definitely maximize savings and investments to allow the investment to grow over the course of 30 years and have interest capitalized each year.

Sorry for the long post, I wanted to read and respond to the whole thread.

gibby
Posts: 21
Joined: Mon Sep 27, 2010 10:46 pm

Re: paying back loans

Postby gibby » Mon Oct 24, 2011 4:01 pm

What's the best way to pay off 60k debt on biglaw salary? I am of the mindset that it's best to pay it off quickly, but after reading so much conflicting thoughts in this thread, I have no idea.

User avatar
birdlaw117
Posts: 2167
Joined: Thu Sep 16, 2010 12:19 am

Re: paying back loans

Postby birdlaw117 » Mon Oct 24, 2011 4:10 pm

gibby wrote:What's the best way to pay off 60k debt on biglaw salary? I am of the mindset that it's best to pay it off quickly, but after reading so much conflicting thoughts in this thread, I have no idea.

I'd probably try and pay it off over like 4 or 5 years? It really depends on if you have a spouse making money, kids, what your expenses are, what market you're in. Definitely need more info to be more specific.




Return to “Legal Employment”

Who is online

The online users are hidden on this forum.