paying back loans

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Anonymous User
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Re: paying back loans

Postby Anonymous User » Mon Oct 24, 2011 5:42 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.


60k is so little if you are single and taking home ~$100k after taxes. You should be able to live on less than $70k post-taxes in any market, even if it means living like a student for a while, and pay off your loans in 2 years. Then invest, or switch jobs, or whatever. 2 years isn't going to make or break your retirement plans but being debt free will be amazingly freeing.

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A'nold
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Re: paying back loans

Postby A'nold » Mon Oct 24, 2011 6:00 pm

Anonymous User wrote:
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.


60k is so little if you are single and taking home ~$100k after taxes. You should be able to live on less than $70k post-taxes in any market, even if it means living like a student for a while, and pay off your loans in 2 years. Then invest, or switch jobs, or whatever. 2 years isn't going to make or break your retirement plans but being debt free will be amazingly freeing.

+ a billion.

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Bronte
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Re: paying back loans

Postby Bronte » Mon Oct 24, 2011 6:37 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 don't think anyone's disputing anymore (even quakeroats and the guy that wants to put his money under the mattress) that you should only divert resources into other investments besides paying down your debt if you can get better than the interest rate on that debt. I think you should also take into account that that's tax free and risk free, but whatever. The point is, if you have something that you or a trusted adviser thinks is better, do that, but otherwise pay off your debt. With $60k, you can pay it down easily on a big law salary. If it were me, I would pay it off in 2-3 years because I think that's the best risk-adjusted rate in the market.

c3pO4
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Re: paying back loans

Postby c3pO4 » Mon Oct 24, 2011 6:39 pm

Does this advice change after Obama forgives all our loans on Wednesday?

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birdlaw117
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Re: paying back loans

Postby birdlaw117 » Mon Oct 24, 2011 6:45 pm

Bronte wrote:
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 don't think anyone's disputing anymore (even quakeroats and the guy that wants to put his money under the mattress) that you should only divert resources into other investments besides paying down your debt if you can get better than the interest rate on that debt. I think you should also take into account that that's tax free and risk free, but whatever. The point is, if you have something that you or a trusted adviser thinks is better, do that, but otherwise pay off your debt. With $60k, you can pay it down easily on a big law salary. If it were me, I would pay it off in 2-3 years because I think that's the best risk-adjusted rate in the market.

The only other argument I can think of is a diversification argument for putting money into some other investments. But, since paying loans is inherently very low-risk, I don't think it makes much sense.

Oh, I guess there is the whole limited contributions thing as well. Meaning you might not be able to make your best investments with all your $$ down the road, but you could actually put a greater amount of principal into potentially better investments by making high contributions early. I actually do think there is something to this argument, but it can definitely be at least somewhat combined with your rainy day fund.

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Bronte
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Re: paying back loans

Postby Bronte » Mon Oct 24, 2011 6:46 pm

gulcregret wrote: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.


First, I'm curious in what way you think the spreadsheet is not compounding interest properly? It's definitely compounding interest. It's compounding it annually, whereas your debt will compound monthly, and this is just for simplicity. This will only increase the extent to which paying down debt is a better investment. Otherwise it's just using simple annual compounding for simplicity. I think the simple annual compounding is done correctly.

Second, it's easy to pick investments that had high returns in hindsight. That's how Madoff pretended he was making 20% a year for his investors. I can also show you some funds that sustained huge losses. It doesn't prove anything.

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birdlaw117
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Re: paying back loans

Postby birdlaw117 » Mon Oct 24, 2011 6:52 pm

Bronte wrote:
gulcregret wrote: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.


First, I'm curious in what way you think the spreadsheet is not compounding interest properly? It's definitely compounding interest. It's compounding it annually, whereas your debt will compound monthly, and this is just for simplicity. This will only increase the extent to which paying down debt is a better investment. Otherwise it's just using simple annual compounding for simplicity. I think the simple annual compounding is done correctly.

Second, it's easy to pick investments that had high returns in hindsight. That's how Madoff pretended he was making 20% a year for his investors. I can also show you some funds that sustained huge losses. It doesn't prove anything.

I was going to make that same point way back when, but I assumed it was intentional.

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Bronte
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Re: paying back loans

Postby Bronte » Mon Oct 24, 2011 7:08 pm

birdlaw117 wrote:I was going to make that same point way back when, but I assumed it was intentional.


Yeah, I figured it was understood. The point of the spreadsheet is just to illustrate the principle, which is only strengthened by monthly compounding on your debt. It means the rate you earn on debt bearing 7.9% APR monthly is actually closer to 8.2% as an effective annual rate ((1+.079/12)^12-1=.0819).

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birdlaw117
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Re: paying back loans

Postby birdlaw117 » Mon Oct 24, 2011 7:12 pm

Bronte wrote:
birdlaw117 wrote:I was going to make that same point way back when, but I assumed it was intentional.


Yeah, I figured it was understood. The point of the spreadsheet is just to illustrate the principle, which is only strengthened by monthly compounding on your debt. It means the rate you earn on debt bearing 7.9% APR monthly is actually closer to 8.2% as an effective annual rate ((1+.079/12)^12-1=.0819).

Plus, it's theoretically possible to find investments with similar terms (although obviously less likely). It's a pretty insignificant difference to make note of/dwell on.

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Re: paying back loans

Postby Brassica7 » Wed Oct 26, 2011 11:51 am

gulcregret wrote: 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.


No, this is not the way the math works out. Paying down debt (which has interest working against you) is the same as investing (where the interest works for you). The only issue is whether you think you can get higher returns on your investments than the interest you pay on the student loans. If you can beat the student loan interest rate and its tax advantage (as Quakeroats argues is sufficiently likely), then it makes sense to invest first and pay down debt later. If you think that beating tax free 7.9% interest is unlikely (as Bronte and myself have argued), then it makes sense to pay off debt first and invest later. This is a matter of opinion.

Whether you are optimistic or pessimistic about the expected returns on the stock market, it is important to understand that "it makes more sense to invest [now instead of pay off debt] because you can never make make up for the years you lose out from not investing" is mathematically wrong.

One caveat I should mention is that if you do not invest at all for retirement at the beginning, you may miss out on the opportunity to contribute to IRAs/401k accounts for those early years--as mentioned earlier, there are yearly limits on how much you can contribute to these accounts (5k for IRA, I believe about 15.5k for 401k).

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Re: paying back loans

Postby Anonymous User » Wed Oct 26, 2011 7:21 pm

I'll be working in biglaw this summer and trying to figure out whether there's a difference in putting most of the salary toward repaying loans or paying for future semesters (or some third option of which I'm not aware) I'll have around 110k of loans when I'm done assuming no repayment during law school and should have about 20k of usable income from the summer. Any advice/suggestions would be greatly appreciated!

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Re: paying back loans

Postby Anonymous User » Wed Oct 26, 2011 7:24 pm

Anonymous User wrote:I'll be working in biglaw this summer and trying to figure out whether there's a difference in putting most of the salary toward repaying loans or paying for future semesters (or some third option of which I'm not aware) I'll have around 110k of loans when I'm done assuming no repayment during law school and should have about 20k of usable income from the summer. Any advice/suggestions would be greatly appreciated!


Interested in this as well. Was going to try to pay 2nd semester 3L year from whatever I have saved up from the biglaw summer / this coming year.

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Big Shrimpin
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Re: paying back loans

Postby Big Shrimpin » Wed Oct 26, 2011 7:28 pm

Anonymous User wrote:should have about 20k of usable income from the summer.


Not if you're working in NYC (unless you're living on a cardboard box and eating cup noodles three meals a day down by the Occupy Wall Street protests - assuming they're still going on in some capacity by that time...which wouldn't be surprising). :wink:

That said, I just ended up taking like 10K less in loans this summer (e.g. for my 3L year). I felt better doing that than saving it for later to pay loans.

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Bronte
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Re: paying back loans

Postby Bronte » Wed Oct 26, 2011 7:49 pm

I plan to save what I make over the summer to start building a liquidity cushion. Once it gets to about $30k I plan to put everything toward loans.

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Re: paying back loans

Postby Anonymous User » Wed Oct 26, 2011 8:18 pm

Bronte wrote:I plan to save what I make over the summer to start building a liquidity cushion. Once it gets to about $30k I plan to put everything toward loans.


Hadn't considered liquidity cushion. This seems like TCR over taking less loans.

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Re: paying back loans

Postby ToTransferOrNot » Wed Oct 26, 2011 9:53 pm

What in god's name do you need a liquidity cushion while you're in school for?

Worst case scenario, you amend your loan request, but seriously, what the hell do you need liquidity in law school for? It's not like you're going to get laid off.

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birdlaw117
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Re: paying back loans

Postby birdlaw117 » Wed Oct 26, 2011 10:03 pm

ToTransferOrNot wrote:What in god's name do you need a liquidity cushion while you're in school for?

Worst case scenario, you amend your loan request, but seriously, what the hell do you need liquidity in law school for? It's not like you're going to get laid off.

I think he means trying to build a liquidity cushion so that he has one when he finishes school.

ToTransferOrNot
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Re: paying back loans

Postby ToTransferOrNot » Wed Oct 26, 2011 10:08 pm

birdlaw117 wrote:
ToTransferOrNot wrote:What in god's name do you need a liquidity cushion while you're in school for?

Worst case scenario, you amend your loan request, but seriously, what the hell do you need liquidity in law school for? It's not like you're going to get laid off.

I think he means trying to build a liquidity cushion so that he has one when he finishes school.


This is so incredibly hyper-cautious... are you trying to protect against getting offer-rescinded or something? Otherwise this makes zero sense; the interest on $20k of GradPLUS for a year is almost $2000, to protect against a ridiculously small liklihood event?

I understand the need for a liquidity cushion, but there's absolutely no need to build it before you actually start working.

(Not to mention origination fees and the like, though I'm not sure if those still even exist)

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snailio
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Re: paying back loans

Postby snailio » Wed Oct 26, 2011 10:13 pm

Focus on the Debt first, it's your best investment ITE, then start a small cushion fund, nothing dramatic. forget housing for now.

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Re: paying back loans

Postby ToTransferOrNot » Wed Oct 26, 2011 10:16 pm

snailio wrote:Focus on the Debt first, it's your best investment ITE, then start a small cushion fund, nothing dramatic. forget housing for now.


The more I research the possibility of buying a house, the more I think that the bolded is really market-and-situation-specific. Chicago, for example, has a really, really high cost of rent vs. cost to own ratio, at the moment, and even considering the opportunity cost of putting down a down payment instead of paying off loans with the downpayment amount, house ownership would make sense for me if I knew I was going to be here for 5 years.

Even though I don't know whether I'll be here that long, it's still awfully tempting, but I'm not sure I'm ready to have to deal with renting the place out long-distance if I end up having to relocate.

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Re: paying back loans

Postby bdubs » Wed Oct 26, 2011 10:22 pm

ToTransferOrNot wrote:
snailio wrote:Focus on the Debt first, it's your best investment ITE, then start a small cushion fund, nothing dramatic. forget housing for now.


The more I research the possibility of buying a house, the more I think that the bolded is really market-and-situation-specific. Chicago, for example, has a really, really high cost of rent vs. cost to own ratio, at the moment, and even considering the opportunity cost of putting down a down payment instead of paying off loans with the downpayment amount, house ownership would make sense for me if I knew I was going to be here for 5 years.

Even though I don't know whether I'll be here that long, it's still awfully tempting, but I'm not sure I'm ready to have to deal with renting the place out long-distance if I end up having to relocate.


TCR in Chicago is to buy if you're in a rentable neighborhood. If you don't know how long you will be in the city and you're in an area that is really only desirable for purchase then you should be more cautious (transaction costs in real estate are a huge money sink).

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snailio
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Re: paying back loans

Postby snailio » Wed Oct 26, 2011 10:31 pm

ToTransferOrNot wrote:
snailio wrote:Focus on the Debt first, it's your best investment ITE, then start a small cushion fund, nothing dramatic. forget housing for now.


The more I research the possibility of buying a house, the more I think that the bolded is really market-and-situation-specific. Chicago, for example, has a really, really high cost of rent vs. cost to own ratio, at the moment, and even considering the opportunity cost of putting down a down payment instead of paying off loans with the downpayment amount, house ownership would make sense for me if I knew I was going to be here for 5 years.

Even though I don't know whether I'll be here that long, it's still awfully tempting, but I'm not sure I'm ready to have to deal with renting the place out long-distance if I end up having to relocate.



You have some ifs in that statement, generally debt, cushion, house ITE. Naturally there will situations where you have a more nuanced approach. Typically you should want some appreciation in your real estate transactions, for now that's not a big driver in this market. Owning a home is a pain in the ass, there's more associated costs then you would think, you can afford to wait.

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Re: paying back loans

Postby ToTransferOrNot » Wed Oct 26, 2011 10:40 pm

bdubs wrote:
ToTransferOrNot wrote:
snailio wrote:Focus on the Debt first, it's your best investment ITE, then start a small cushion fund, nothing dramatic. forget housing for now.


The more I research the possibility of buying a house, the more I think that the bolded is really market-and-situation-specific. Chicago, for example, has a really, really high cost of rent vs. cost to own ratio, at the moment, and even considering the opportunity cost of putting down a down payment instead of paying off loans with the downpayment amount, house ownership would make sense for me if I knew I was going to be here for 5 years.

Even though I don't know whether I'll be here that long, it's still awfully tempting, but I'm not sure I'm ready to have to deal with renting the place out long-distance if I end up having to relocate.


TCR in Chicago is to buy if you're in a rentable neighborhood. If you don't know how long you will be in the city and you're in an area that is really only desirable for purchase then you should be more cautious (transaction costs in real estate are a huge money sink).


Yeah, I'm looking at getting a south-loop condo. And with respect to transaction costs: true, but I'd be working at a bit of a discount since I have a family member who is a real estate person in Chicago.

With respect to being able to afford to wait: of course. But if owning is literally cheaper than renting on a year-to-year basis, after you account for the deductibility of mortgage interests, property taxes and the like, some of the tinkering I have been doing on the NYT calculator seems to indicate that, even presuming *no* appreciation in the home's value, and assuming no yearly increases in rent (bad assumption in Chicago right now), I'm coming out at "all-in, buying is cheaper than renting if you own the place for 4 years". "All-in" is accounting for: opportunity cost on the down payment (at a rate of 9.8% to try to account for how the calculator treats investment "income" - basically, it works out to be 8.5%. That, of course, is too high, since my highest-rate loan is 8% after auto-pay is considered, and I would kill that loan with the down-payment); condo association fees of 150 a month; lost utilities contribution of $150 a month (too high for most Chicago places); a bearish assumption about yearly upkeep costs and such; and rent of $1800 (which is on the lowish side for the kind of places in the south loop that my fiance and I will be considering).

So yeah. It's not a dead-simple calculation. I used to think it was - my plan, until recently, was all-out loan repayment - but I'm really starting to waver on it.

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snailio
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Re: paying back loans

Postby snailio » Wed Oct 26, 2011 11:12 pm

Have you calculated the possibility of depreciation? I'm not familiar with Chicago real estate specifically.
And considered the fact that the student loan will still be there with that interest rate hanging over you, when circumstances may have changed? You for one at least are researching this and that's a good thing and the fact that you have a fiance makes the calculation even more interesting 8) . GL

MBeezy11
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Re: paying back loans

Postby MBeezy11 » Wed Oct 26, 2011 11:32 pm

birdlaw117 wrote:
ToTransferOrNot wrote:What in god's name do you need a liquidity cushion while you're in school for?

Worst case scenario, you amend your loan request, but seriously, what the hell do you need liquidity in law school for? It's not like you're going to get laid off.

I think he means trying to build a liquidity cushion so that he has one when he finishes school.


As a recent grad I can give you multiple reasons why you need and should have a liquidity cushion.

Health insurance - not all firms start in September and school health insurance per month after graduation can be $500
Broker fees & security deposit- if you live in NYC and accept an offer at a NYC firm they will not pay the brokers fee for your post grad apartment nor for your moving expenses
Bar trip - could easily cost a few thousand
Actual first paycheck - in some instances you won't get paid until 3 weeks after you have started to work. At the same time, rent is still due and if you take a salary advance your salary will already reduced.

I could think of tons of other expenses that will arise after graduation and before works start. The fact of the matter is you need to be prepared for things will almost certainly arise. Too many people on this board advocate paying loans and not considering how much it sucks to live with the anxiety associated with not having enough money to make ends meet. Plus at 25/26 who wants to live like a broke undergrad. Use your summer money for that cushion. The de minimis amount you will save in interest will not be worth the stress of being broke until you mythical start date which can be as late as December.




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