Savings and law school - use it or lose it? Forum

[LawCurious]

Hi all,

I've been out of college for two years and am applying this Fall to start next year. I'm blessed not to have any debt (yet) and have been working a job since college that has allowed me to save a moderate-sized chunk of change... Not enough to seriously defray the 180k+ likely cost of law school but enough to live off comfortably for a little while. I'm also unmarried and have no financial responsibilities other than myself.

I've been getting advice from people who say that since all this money I've saved will disappear pretty quickly once I get to law school, I should just spend it beforehand either on something like a car or else just having a great last year before law school starts... Quitting my job, traveling, etc. The massive loans will finance my student lifestyle while I'm in law school, goes this line of reasoning, and there might not be an appreciable difference between 180k in debt and, say, 150k or 140k in debt if I am reasonably confident I can pay it off post-law school. This is also my last opportunity to do something like take six months off from the world probably until well after law school, so maybe I should balance that versus the slight reduction in debt or slight increase in quality of life that will come from saving this money for school.

What do you think? Is this "use it or lose it" attitude silly or is there something to it?

Thanks!

[TheBigMediocre]

Situation A:
Loan Balance: $190,000.00
Adjusted Loan Balance: $190,000.00
Loan Interest Rate: 6.80%
Loan Fees: 0.00%
Loan Term: 15 years

Monthly Loan Payment: $1,686.60
Number of Payments: 180

Cumulative Payments: $303,587.83
Total Interest Paid: $113,587.83

Situation B:
Loan Balance: $140,000.00
Adjusted Loan Balance: $140,000.00
Loan Interest Rate: 6.80%
Loan Fees: 0.00%
Loan Term: 15 years

Monthly Loan Payment: $1,242.76
Number of Payments: 180

Cumulative Payments: $223,696.02
Total Interest Paid: $83,696.02

[Bert]

I was merely going to say that the advice is horrible, but thanks BigMediocre for running the numbers -- they are definitely sobering.

[Sauer Grapes]

The numbers say it all.

[blue5385]

OP, why would the money disappear pretty quickly once you get to law school? Most law students will be in a financial situation similar to yours (relying on loans and savings to cover COL), so it's not like you'll be pressured to keep up with the lavish lifestyles of your classmates. Just live within your means and avoid extra loans.

[LawCurious]

Situation A:
Loan Balance: $190,000.00
Adjusted Loan Balance: $190,000.00
Loan Interest Rate: 6.80%
Loan Fees: 0.00%
Loan Term: 15 years

Monthly Loan Payment: $1,686.60
Number of Payments: 180

Cumulative Payments: $303,587.83
Total Interest Paid: $113,587.83

Situation B:
Loan Balance: $140,000.00
Adjusted Loan Balance: $140,000.00
Loan Interest Rate: 6.80%
Loan Fees: 0.00%
Loan Term: 15 years

Monthly Loan Payment: $1,242.76
Number of Payments: 180

Cumulative Payments: $223,696.02
Total Interest Paid: $83,696.02

Yes, it could theoretically come out to a good amount of money, but that's assuming that it would take 15 years to pay off. If I paid it off much more quickly, the difference in the cost would be less since less interest would accrue.

Also, let's consider I do pay it off that slowly, you're talking about an added $80,000 expense over the course of 15 years -- just over $5k a year in exchange for potentially six months or more of not working, living abroad, traveling, whatever I want to do. Freedom for the last time in a long time after I begin law school and my legal career. I imagine that when I'm out of law school I'll probably consider $5k a year a very fair trade for a once-in-a-lifetime opportunity.

Also, lastly, I don't think if I applied my savings towards law school it would have the $50k impact that you assume in your calculation. I think it would be more like $30k since I probably still wouldn't go in completely broke and think I could live comfortably off $30k for six months.

All in all, when you factor in that the difference likely wouldn't be the $50k you assume, that it hopefully wouldn't accrue interest for a full 15 years, and that even in this worst-case the long-term amortized cost would be fair considering the opportunity I have on the front end, I think this if anything supports the idea that the savings wouldn't have a huge impact if I applied them to law school rather than spent most of them.

Of course this assumes I get into a great school, do well, get a high-paying law job and am able to pay this off. Although arguably that would be a factor no matter which scenario I choose.

[patently_oblivious]

"there might not be an appreciable difference between 180k in debt and, say, 150k or 140k in debt if I am reasonably confident I can pay it off"

40k is definitely an apppreciable difference! It's sticker on a new BMW 335i. Your reasoning follows the inherent fallacy of the human mind, that we're hard-wired to compare relative values rather than absolute values. Dan Ariely quotes some interesting experiments in his book Predictably Irrational, for instance that a consumer will be willing to drive across town to buy a pair of jeans $25 off retail but won't be willing to drive across town to save $25 on the price of a new flat screen TV. Both outcomes yield the same benefit, $25 richer, yet the brain doesn't interpret the savings difference the same.

However, you evidently haven't even been accepted anywhere, so the whole discussion is likely moot.

[TUP]

How would this impact financial aid? Obviously the situation eliminates need-based aid, but what about federal loan eligibility? Is there a risk that at some point savings would impact the 20500 in subsidized / unsubsidized loans?

[eldizknee]

.

[TheBigMediocre]

Reality

Dreams

Sounds good then, go for it.

[JOThompson]

"there might not be an appreciable difference between 180k in debt and, say, 150k or 140k in debt if I am reasonably confident I can pay it off"

40k is definitely an apppreciable difference! It's sticker on a new BMW 335i. Your reasoning follows the inherent fallacy of the human mind, that we're hard-wired to compare relative values rather than absolute values. Dan Ariely quotes some interesting experiments in his book Predictably Irrational, for instance that a consumer will be willing to drive across town to buy a pair of jeans $25 off retail but won't be willing to drive across town to save $25 on the price of a new flat screen TV. Both outcomes yield the same benefit, $25 richer, yet the brain doesn't interpret the savings difference the same.

However, you evidently haven't even been accepted anywhere, so the whole discussion is likely moot.

Interesting. I guess I'm in the habit of comparing percentage discounts rather than actual money saved. I work in retail too and I'm afflicted by that mindset.

But OP: Use your savings, you'll be sitting far better in the long term.

[TheBigMediocre]

I imagine that when I'm out of law school I'll probably consider $5k a year a very fair trade for a once-in-a-lifetime opportunity.

--ImageRemoved--

Note: The publisher made a mistake by putting (Millions of Dollars) along the Y-Axis.

[Alyssa]

I agree with everyone who says you have been getting some terrible advice.

I was fortunate enough to land a good job and pay off my undergrad loans pretty quickly. By the time school starts, I will have saved up enough not to have to take out loans outside of the subsidized ones for the first two years. I will probably be borrowing heavily for the last two semesters, but hopefully from my home equity line of credit at a rate of about 4%.

Keep in mind that with educational loans (unsubsidized) the interest still accumulates while you're in school so, if you can, use up all your savings at the beginning and take out loans for the later semesters so the interest piled up is less.

[06132010]

I'm incredibly irresponsible with money, so I say lose it. getting packages during finals keeps the killself away.

[lawyering]

I'm not sure everyone giving advice on here has actually gone through the financial aid process. Here's the deal: If you're going to try to depend on a merit scholarship somewhere, save the money, and use it for your cost of living during law school. HOWEVER: If you're going to be depending (like I am) on need-based aid, you should know this: Most schools expect you to spend every cent of your savings during your first 2 years of law school (some calculate 3, I think, but not the ones I was considering). This means that if you have savings, you will get less in scholarship aid. Any money you have and therefore declare to them will be taken for tuition.

Once you get into school, determine what sort of financial aid options you will have. And if you are going for need-based aid, I'd suggest investing in retirement accounts like a Roth IRA (which usually is protected), buying a new computer for school, traveling, buying a car if you plan to at all, etc. That way, you will have less to declare on the FAFSA/NeedAccess forms.

If you are young, and your parents' incomes will assure you zero in need-based scholarship money anyway, the above advice doesn't apply. In that case, your assets won't affect your financial aid package, and keeping your savings might be a good thing.

[TheBigMediocre]

I'm not sure everyone giving advice on here has actually gone through the financial aid process. Here's the deal: If you're going to try to depend on a merit scholarship somewhere, save the money, and use it for your cost of living during law school. HOWEVER: If you're going to be depending (like I am) on need-based aid, you should know this: Most schools expect you to spend every cent of your savings during your first 2 years of law school (some calculate 3, I think, but not the ones I was considering). This means that if you have savings, you will get less in scholarship aid. Any money you have and therefore declare to them will be taken for tuition.

Once you get into school, determine what sort of financial aid options you will have. And if you are going for need-based aid, I'd suggest investing in retirement accounts like a Roth IRA (which usually is protected), buying a new computer for school, traveling, buying a car if you plan to at all, etc. That way, you will have less to declare on the FAFSA/NeedAccess forms.

If you are young, and your parents' incomes will assure you zero in need-based scholarship money anyway, the above advice doesn't apply. In that case, your assets won't affect your financial aid package, and keeping your savings might be a good thing.

That "spend every cent of your savings..." ON law school will keep OP from taking out loans FOR law school, which is what I've been arguing through numbers and a pretty bar chart. However, I agree with annually putting the maximum amount of money possible into a Roth.

Also, reporting your parents income is optional on FAFSA for grad school, regardless of age.

[LawCurious]

Thanks so far for the advice everybody. I really appreciate it. You've all been very thoughtful and constructive.

I tend to agree with all of you that the advice in general is not great, or at the very least VERY RISKY. However I think that any ultimate decision depends more on a person's individual situation than it does on generalizations. While I agree with all of you on the generalizations, I still haven't decided about my own case, which obviously can't be summed up by the information I feel comfortable sharing on this thread. I asked for your opinion on this advice in general, you gave it, and I agree with it in general. Now I need to decide if it applies to my case.

One thing I would like to throw out there relates to PatentlyOblivious's point about relative and absolute values. I guess my response is that relative values are important. It's the whole "Bird in the hand is worth two in the bush" issue, or the diminishing relative value of money as wealth grows. (Aka, the first million is worth a lot more to you than the 498th million.)

Thanks for all of your thoughts on this.

Edit: Also regarding the "hope for the best, plan for the worst," I guess that depends on what your risk tolerance is. Most entrepreneurs aren't well served by that advice early in their careers. Then again, most entrepreneurs fail

[TheBigMediocre]

Thanks so far for the advice everybody. I really appreciate it. You've all been very thoughtful and constructive.

I tend to agree with all of you that the advice in general is not great, or at the very least VERY RISKY. However I think that any ultimate decision depends more on a person's individual situation than it does on generalizations. While I agree with all of you on the generalizations, I still haven't decided about my own case, which obviously can't be summed up by the information I feel comfortable sharing on this thread. I asked for your opinion on this advice in general, you gave it, and I agree with it in general. Now I need to decide if it applies to my case.

One thing I would like to throw out there relates to JOThompson's point about relative and absolute values. I guess my response is that relative values are important. It's the whole "Bird in the hand is worth two in the bush" issue, or the diminishing relative value of money as wealth grows. (Aka, the first million is worth a lot more to you than the 498th million.)

Thanks for all of your thoughts on this.

You're welcome

--ImageRemoved--

[lostjake]

I imagine that when I'm out of law school I'll probably consider $5k a year a very fair trade for a once-in-a-lifetime opportunity.

--ImageRemoved--

Note: The publisher made a mistake by putting (Millions of Dollars) along the Y-Axis.

Why is this a mistake?

[lawyering]

That "spend every cent of your savings..." ON law school will keep OP from taking out loans FOR law school, which is what I've been arguing through numbers and a pretty bar chart.

Based on my personal experiences, I'm going to have to disagree with this. The difference in my assets would not have changed my loans one bit. The loan package remained constant, and the only thing my assets affected was my scholarship award. If I had had no assets, my scholarship would have been bigger to make up the difference. Thus, having those assets did me absolutely no good.

Also, reporting your parents income is optional on FAFSA for grad school, regardless of age.

This is true for the FAFSA in general, but to be eligible for need-based aid, you MUST report your parents' incomes to the law school. You haven't applied for need-based aid yet, have you? Trust me, if you do not report your parents' incomes you will NOT receive any need-based aid consideration (unless you will be 29 or above when you start LS).

[TheBigMediocre]

Why is this a mistake?

Sorry, my bad. It's not a mistake per se. It's just weird that they choose to scale the chart like that. With only two instances both with labeled amounts, you think that would suffice.

[TheBigMediocre]

That "spend every cent of your savings..." ON law school will keep OP from taking out loans FOR law school, which is what I've been arguing through numbers and a pretty bar chart.

Based on my personal experiences, I'm going to have to disagree with this. The difference in my assets would not have changed my loans one bit. The loan package remained constant, and the only thing my assets affected was my scholarship award. If I had had no assets, my scholarship would have been bigger to make up the difference. Thus, having those assets did me absolutely no good.

Also, reporting your parents income is optional on FAFSA for grad school, regardless of age.

This is true for the FAFSA in general, but to be eligible for need-based aid, you MUST report your parents' incomes to the law school. You haven't applied for need-based aid yet, have you? Trust me, if you do not report your parents' incomes you will NOT receive any need-based aid consideration (unless you will be 29 or above when you start LS).

Excellent point, I apologize for generalizing. I haven't applied for need-based aid.

[lawyering]

No worries! It's obviously complicated and dependent on personal circumstances. But my experiences did give me interesting insight into one type of situation that can come up when one has some assets going into law school.

[yeff]

This doesn't have to be an either-or. You can "take six months off from the world" for very very little money, especially if you're up for doing a bit of work in that foreign place.

[LawCurious]

This doesn't have to be an either-or. You can "take six months off from the world" for very very little money, especially if you're up for doing a bit of work in that foreign place.

That's a very good point. The goal of taking time off to travel, do whatever, wouldn't be to spend all the money. I guess at a more general level this question can be summarized as one about capital preservation going into law school and how much it matters whether you have a little bit of money saved away once you get there. Does it improve your quality of life meaningfully or just impact your debt load?

One other thing to consider is that even if I did spend all my cash (which I wouldn't) I wouldn't be entering law school any worse off than practically all of the people going straight from undergrad and the majority of people coming from a couple years doing paralegal or other work. Given that I was very fortunate not to take on debt for ugrad, I'd probably still come in very lucky compared to many. And since I have pretty good stats (3.8x, high 170s) I feel confident about getting into at least one T14 school that I'd be happy to go to (though this is not guaranteed, obviously). That's one of the reasons I'm considering this course of action, because I think that I am already extremely fortunate just to have this opportunity as a realistic option at my age.

But of course, the right question isn't how my situation would compare to others but how it would look in each of these two scenarios.

Thanks.