"Don't take on debt more than your first year's salary" Forum

[Tiago Splitter]

The interesting thing to me is that absent government involvement in student lending and the bankruptcy laws pertaining to student loans, this is exactly the type of general rule that private lenders would use in determining whether a student is a good lending risk. Just think about it from that perspective: If a bank would be unwilling to lend you the money because you would be a bad risk, should you really take out the loan just because the government is willing to lend the money?

Banks would not apply high-minded platitudes and back of the envelope mathematics. They'd look in a nuanced way at the situation before them and make a smart decision. If I had the money I'd certainly lend more than 80K to someone looking to attend Harvard, and at a reasonable interest rate too. I think you, and most banks, would make the same decision.

Your last statement is certainly a good one for people to think about, because most banks wouldn't give people the kinds of loans they can get to go to law school.

[ajax]

It's not obvious at all. Keep in mind that interest on 225k in loans is 1600/mo over a 30 year period. So you have to make a 1600/mo payment and also pay down 225k. Sure, paying the interest is easy on 160k salary, but don't forget about the principal. Oh, and most people don't make it past 5 years in biglaw. So 225k/60months is 3750/mo. Add that 3750 to your 1600 you get 5350. Then add in your 3k/mo DECENT one bedroom in GOOD not great location in Manhattan. O, don't forget about food, utilities, going out... maybe a vacation?? Retiring some day?

Oh, and the massive supply of attorneys will never have an impact on starting biglaw salaries. That just wouldn't make any sense... LOL

But it's obvious that this advice doesn't completely apply, right brah?

It is not difficult to pay down the entirety of a $225,000 debt if you stay at a large law firm for five years.

If you make an annual loan payment of $55,756.26 for five years, you will have paid down a $225,000 debt bearing 8.00% interest. On a big law salary (Cravath scale, excluding bonuses), this allows you to live on an average $70,000 a year, after-tax, after-loan payments.

Year / Salary (Cravath Scale) / After Tax Income / After Loan Pmt Income
1 / 160,000 / 104,000 / 49,253
2 / 170,000 / 110,500 / 55,753
3 / 185,000 / 120,250 / 65,503
4 / 210,000 / 136,500 / 81,753
5 / 230,000 / 149,500 / 94,753

And, yes, I remembered to include the principal.

Looks like you have it all figured out bro. Go for it!

[ajax]

You don't make $160 all 5 years, and can easily afford to put more toward your loans with bonus and raises in the first 5 years (by year 5 you'll be making $230k in base alone). If you just put your bonuses and raises all toward your debt and otherwise made $3k/mo payments, you'd be fine getting pushed out at year 5. And that's completely ignoring the fact that 5th year biglaw associates still have income potential.

You're making a statement that you can easily afford to do this. We need to qualify "easily". If "easily" means living with roommates in a decent area while cutting costs on food and everything else, not buying many drinks when you go out, taking cheap vacations, etc, then sure you can easily afford to do this.

The problem is that most people think they are going to be living a models and bottles lifestyle when they land a biglaw job even with 225k in student loans. This is not the case, unless your parents paid for law school or you had a significant portion of it paid for. In fact, if you are done with biglaw after 5 years, which a lot of people are, you will be no better off than someone who had a decent (marketing, sales, anything not ibanking/consulting) job after undergrad.

But the rule "obviously" doesn't apply to the T14. Why I'm even trying to help out snobs who make these statements I don't know.

[Bronte]

It is not difficult to pay down the entirety of a $225,000 debt if you stay at a large law firm for five years.

If you make an annual loan payment of $55,756.26 for five years, you will have paid down a $225,000 debt bearing 8.00% interest. On a big law salary (Cravath scale, excluding bonuses), this allows you to live on an average $70,000 a year, after-tax, after-loan payments.

Year / Salary (Cravath Scale) / After Tax Income / After Loan Pmt Income
1 / 160,000 / 104,000 / 49,253
2 / 170,000 / 110,500 / 55,753
3 / 185,000 / 120,250 / 65,503
4 / 210,000 / 136,500 / 81,753
5 / 230,000 / 149,500 / 94,753

And, yes, I remembered to include the principal.

Looks like you have it all figured out bro. Go for it!

Do you have something to say? It's a simple fact that you can comfortably pay off $225,000 in five years at market pay. As to "going for it," I didn't say anything about going for anything. I'm a 3L. I've long since gone for it.

[IAFG]

You don't make $160 all 5 years, and can easily afford to put more toward your loans with bonus and raises in the first 5 years (by year 5 you'll be making $230k in base alone). If you just put your bonuses and raises all toward your debt and otherwise made $3k/mo payments, you'd be fine getting pushed out at year 5. And that's completely ignoring the fact that 5th year biglaw associates still have income potential.

You're making a statement that you can easily afford to do this. We need to qualify "easily". If "easily" means living with roommates in a decent area while cutting costs on food and everything else, not buying many drinks when you go out, taking cheap vacations, etc, then sure you can easily afford to do this.

The problem is that most people think they are going to be living a models and bottles lifestyle when they land a biglaw job even with 225k in student loans. This is not the case, unless your parents paid for law school or you had a significant portion of it paid for. In fact, if you are done with biglaw after 5 years, which a lot of people are, you will be no better off than someone who had a decent (marketing, sales, anything not ibanking/consulting) job after undergrad.

But the rule "obviously" doesn't apply to the T14. Why I'm even trying to help out snobs who make these statements I don't know.

If your only point is that you can't live a models and bottles lifestyle, then I concede. You're right. Full freight loans are going to be a strain. But that's rather a silly question. If you're deciding whether or not to go to law school, and you've gotten into a school with good biglaw placement and good LRAP options and generally good outcomes, the question is, will you be better off than before you went to law school?

Piggybacking off Bronte's calculations, relative to my pre-law job and salary, I'm already better off post-loan payments starting at year one, and my amount of better-off-ness only gets better from there. And once I'm out from under my loans, even if I do get pushed out of firm work completely (don't make partner anywhere, don't make of counsel) my exit options are probably still better than where I would be if I'd stayed in my old field. And I had a decent-enough job.

[RickyDnwhyc]

You don't make $160 all 5 years, and can easily afford to put more toward your loans with bonus and raises in the first 5 years (by year 5 you'll be making $230k in base alone). If you just put your bonuses and raises all toward your debt and otherwise made $3k/mo payments, you'd be fine getting pushed out at year 5. And that's completely ignoring the fact that 5th year biglaw associates still have income potential.

You're making a statement that you can easily afford to do this. We need to qualify "easily". If "easily" means living with roommates in a decent area while cutting costs on food and everything else, not buying many drinks when you go out, taking cheap vacations, etc, then sure you can easily afford to do this.

The problem is that most people think they are going to be living a models and bottles lifestyle when they land a biglaw job even with 225k in student loans. This is not the case, unless your parents paid for law school or you had a significant portion of it paid for. In fact, if you are done with biglaw after 5 years, which a lot of people are, you will be no better off than someone who had a decent (marketing, sales, anything not ibanking/consulting) job after undergrad.

But the rule "obviously" doesn't apply to the T14. Why I'm even trying to help out snobs who make these statements I don't know.

If your only point is that you can't live a models and bottles lifestyle, then I concede. You're right. Full freight loans are going to be a strain. But that's rather a silly question. If you're deciding whether or not to go to law school, and you've gotten into a school with good biglaw placement and good LRAP options and generally good outcomes, the question is, will you be better off than before you went to law school?

Piggybacking off Bronte's calculations, relative to my pre-law job and salary, I'm already better off post-loan payments starting at year one, and my amount of better-off-ness only gets better from there. And once I'm out from under my loans, even if I do get pushed out of firm work completely (don't make partner anywhere, don't make of counsel) my exit options are probably still better than where I would be if I'd stayed in my old field. And I had a decent-enough job.

This. What we really need to "qualify" is Exit options. 5 years of BigLaw on your resume opens more doors than 8 years at a cookie cutter marketing/sales gig don't you think? No models and bottles, but you wouldn't exactly be living in the worst neighborhood dining on instant noodles. And what about benefits? Am I wrong to assume BigLaw has better employee benefits on average than some 60k sales gig?

[ajax]

You don't make $160 all 5 years, and can easily afford to put more toward your loans with bonus and raises in the first 5 years (by year 5 you'll be making $230k in base alone). If you just put your bonuses and raises all toward your debt and otherwise made $3k/mo payments, you'd be fine getting pushed out at year 5. And that's completely ignoring the fact that 5th year biglaw associates still have income potential.

You're making a statement that you can easily afford to do this. We need to qualify "easily". If "easily" means living with roommates in a decent area while cutting costs on food and everything else, not buying many drinks when you go out, taking cheap vacations, etc, then sure you can easily afford to do this.

The problem is that most people think they are going to be living a models and bottles lifestyle when they land a biglaw job even with 225k in student loans. This is not the case, unless your parents paid for law school or you had a significant portion of it paid for. In fact, if you are done with biglaw after 5 years, which a lot of people are, you will be no better off than someone who had a decent (marketing, sales, anything not ibanking/consulting) job after undergrad.

But the rule "obviously" doesn't apply to the T14. Why I'm even trying to help out snobs who make these statements I don't know.

If your only point is that you can't live a models and bottles lifestyle, then I concede. You're right. Full freight loans are going to be a strain. But that's rather a silly question. If you're deciding whether or not to go to law school, and you've gotten into a school with good biglaw placement and good LRAP options and generally good outcomes, the question is, will you be better off than before you went to law school?

Piggybacking off Bronte's calculations, relative to my pre-law job and salary, I'm already better off post-loan payments starting at year one, and my amount of better-off-ness only gets better from there. And once I'm out from under my loans, even if I do get pushed out of firm work completely (don't make partner anywhere, don't make of counsel) my exit options are probably still better than where I would be if I'd stayed in my old field. And I had a decent-enough job.

Ok. So your options are probably still better than where you would be if you stayed in your old field. Some of you guys say T14 at full debt load are obviously a good call, and then I have you telling me that it probably was a good idea. So it probably obviously is a good idea. Nice work.

[nouseforaname123]

Ach, poor Campos. He actually says in his book that a small number of law schools are worth sticker (alluding to HYS) but look how dangerous a little rule of thumb can be. People use and abuse them, because they're safe and simple and easier than thinking.

You seem to be conflating two different topics.

Campos suggestion that HYS is worth sticker is compatible with his assertion that you shouldn't take out more debt than your expected salary. <insert pointless snark>

Ah, here's another beloved bit of flawed reasoning. Expected value is a ridiculous metric for a decision you make once. That tool is for many repeated decisions. For the person taking out the loans, they'll either win completely or lose completely, so a rule of thumb isn't going to be terribly useful for them. Instead, you have to decide for yourself how much risk you want to expose yourself too.

You don't win or lose completely in law school, especially the higher up you go in the rankings. I am at a regional school and my graduating class seems to have a significant percentage of students making below market but over six figures. I assume that the higher the school ranking, the more students there are in this in-between ground.

But even if we were going to proceed under an expected value model (which we definitely shouldn't, and wouldn't) you would also have to count in the number of people who don't get biglaw but ended up with LRAP-qualifying jobs or clerkships that will lead to biglaw jobs, because they're skewing your data.

Yes, an EV calculation is complicated in the law-school context due to the variety of outcomes a student could experience. This neither proves nor disproves the value of an EV calculation in determining how much debt a student should take on.

[AllTheLawz]

How on earth is this thread still going. Its obvious that this advice doesn't completely apply to students at top law schools. Campos probably read a very, very simple household finance book or asked a buddy that teaches a simple household finance class. In basic household finance they teach you the rule of thumb that no more than 10-15% of your gross income should be used toward student loans. At 6.5-7% interest this roughly translates into not taking out more than expected first year salary. For an average college grad taking an entry level job at 35-45k this makes perfect sense because a certain percentage of your income will be going toward necessities, tax and recommended savings and after that there not a ton will be left.

When you are making $160k (upwards of $105k after-tax for those of us not in NYC/Cali), 10-15% of gross income translates into ~$1600-2000 and easily manageable with reasonable expenses, meaning that the rule of thumb needs to be adjusted. There is obviously an upper limit but it is not debt=first-year salary.

And for those of you going all "I cant predict the future with precision so I don't believe in estimation," just assume a salary for yourself of zero and never take out a loan for anything.

It's not obvious at all. Keep in mind that interest on 225k in loans is 1600/mo over a 30 year period. So you have to make a 1600/mo payment and also pay down 225k. Sure, paying the interest is easy on 160k salary, but don't forget about the principal. Oh, and most people don't make it past 5 years in biglaw. So 225k/60months is 3750/mo. Add that 3750 to your 1600 you get 5350. Then add in your 3k/mo DECENT one bedroom in GOOD not great location in Manhattan. O, don't forget about food, utilities, going out... maybe a vacation?? Retiring some day?

Oh, and the massive supply of attorneys will never have an impact on starting biglaw salaries. That just wouldn't make any sense... LOL

But it's obvious that this advice doesn't completely apply, right brah?

It is pretty damn obvious if you aren't dense. I clearly said "There is obviously an upper limit but it is not debt=first-year salary." 10 year repayment on 160k at 6.8% interest is a little less than 2k/month, 5 year repayment is around 3k/month. No one planning on paying down debt quickly is getting a 3k/month apartment in Manhattan but of course you would say that since you are just trying to be argumentative for no reason. Anyone who has every lived on their own for more than a summer knows they can live on ~65k post tax AND loan repayment.

Feel free to continue to argue that $161k is a bad deal for HYS if you want, I am past 1L/EIP so it doesn't really matter to me.

ETA: I never said whether T14 at sticker is a good call or not. I just explained the origin of the rule of thumb mentioned in the OP and why the same rule of thumb doesnt apply in this context.

[Paul Campos]

A couple of clarifications:

(1) Rules of thumb are rules of thumb for a reason, as opposed to strict formulas. I don't actually say in the book that nobody should take out more debt than their expected first year salary. I point out that a lot of people who study educational debt think that a greater than 1 to 1 debt to initial salary ratio is dubious, but I also mention that some people think 1.5 to 1 is acceptable, especially as each number gets larger. (As is pointed out in the thread, a debt to salary ratio of $200,000 to $150,000 is a very different thing from $40,000 to $30,000).

(2) The real problem, of course, is that for the average law school graduate today the typical ratio between total educational debt and initial salary (if any) is 3 to 1 or worse. Arguments in this context about whether or what parts of the T-14 are worth it at sticker are the equivalent of first world problems -- they're interesting, but they are decidedly peripheral to the real crisis, which is that 90% of law schools are absurdly overpriced at sticker or anything remotely close to sticker.

[rayiner]

10 years ago, with 2% loans and $50k educational debt, big law used to allow for a more upscale lifestyle than it does now. That said, it's still a pretty good deal for most people. It's entirely possible to pay off your loans in 4-5 years, and you can even live a pretty reasonably nice lifestyle in the meantime if you stay out of NYC. Here in Chicago, your take home on $160k is ~$8,800/month. If you want to pay off $240k in loans in 5 years, your monthly take-home net of loans rises from $4,000/month in year 1 to $7,350 net of loans in year 5. That's equivalent to someone with no loans who starts at $70k/year with 13% raises each year and 10-20% bonus. That's a great job.

[ajax]

How on earth is this thread still going. Its obvious that this advice doesn't completely apply to students at top law schools. Campos probably read a very, very simple household finance book or asked a buddy that teaches a simple household finance class. In basic household finance they teach you the rule of thumb that no more than 10-15% of your gross income should be used toward student loans. At 6.5-7% interest this roughly translates into not taking out more than expected first year salary. For an average college grad taking an entry level job at 35-45k this makes perfect sense because a certain percentage of your income will be going toward necessities, tax and recommended savings and after that there not a ton will be left.

When you are making $160k (upwards of $105k after-tax for those of us not in NYC/Cali), 10-15% of gross income translates into ~$1600-2000 and easily manageable with reasonable expenses, meaning that the rule of thumb needs to be adjusted. There is obviously an upper limit but it is not debt=first-year salary.

And for those of you going all "I cant predict the future with precision so I don't believe in estimation," just assume a salary for yourself of zero and never take out a loan for anything.

It's not obvious at all. Keep in mind that interest on 225k in loans is 1600/mo over a 30 year period. So you have to make a 1600/mo payment and also pay down 225k. Sure, paying the interest is easy on 160k salary, but don't forget about the principal. Oh, and most people don't make it past 5 years in biglaw. So 225k/60months is 3750/mo. Add that 3750 to your 1600 you get 5350. Then add in your 3k/mo DECENT one bedroom in GOOD not great location in Manhattan. O, don't forget about food, utilities, going out... maybe a vacation?? Retiring some day?

Oh, and the massive supply of attorneys will never have an impact on starting biglaw salaries. That just wouldn't make any sense... LOL

But it's obvious that this advice doesn't completely apply, right brah?

It is pretty damn obvious if you aren't dense. I clearly said "There is obviously an upper limit but it is not debt=first-year salary." 10 year repayment on 160k at 6.8% interest is a little less than 2k/month, 5 year repayment is around 3k/month. No one planning on paying down debt quickly is getting a 3k/month apartment in Manhattan but of course you would say that since you are just trying to be argumentative for no reason. Anyone who has every lived on their own for more than a summer knows they can live on ~65k post tax AND loan repayment.

Feel free to continue to argue that $161k is a bad deal for HYS if you want, I am past 1L/EIP so it doesn't really matter to me.

ETA: I never said whether T14 at sticker is a good call or not. I just explained the origin of the rule of thumb mentioned in the OP and why the same rule of thumb doesnt apply in this context.

Clearly your lack of posting proves it does not matter to you.

[ajax]

10 years ago, with 2% loans and $50k educational debt, big law used to allow for a more upscale lifestyle than it does now. That said, it's still a pretty good deal for most people. It's entirely possible to pay off your loans in 4-5 years, and you can even live a pretty reasonably nice lifestyle in the meantime if you stay out of NYC. Here in Chicago, your take home on $160k is ~$8,800/month. If you want to pay off $240k in loans in 5 years, your monthly take-home net of loans rises from $4,000/month in year 1 to $7,350 net of loans in year 5. That's equivalent to someone with no loans who starts at $70k/year with 13% raises each year and 10-20% bonus. That's a great job.

This is my point. You aren't raking it in with a biglaw job in NYC if you have 225k in loans. Outside of NYC this is a different story, as you stated above, "If you stay out of NYC."

http://lawprofessors.typepad.com/legal_ ... power.html

How many biglaw jobs are available each year for graduating law students? Of those, how many are in NYC?

[Tiago Splitter]

It's not obvious at all. Keep in mind that interest on 225k in loans is 1600/mo over a 30 year period.

You need to re-do the math here.

You aren't raking it in with a biglaw job in NYC if you have 225k in loans

"Raking it in" is of course subjective, but no one here thinks the world will be their oyster with a first year biglaw job in NYC and 225K in debt:

If your only point is that you can't live a models and bottles lifestyle, then I concede. You're right

[ze2151]

One of Campos's favorite quotes is this one from Upton Sinclair: It is difficult to get a man to understand something, when his salary depends upon his not understanding it.

In this case, it seems that it is difficult to get TLSers to understand something, when their foolhardy personal plans depend on them not understanding it.

It's so very easy to deal with debt that doubles or triples your first year salary. Right. Don't be the reason politicians, federal judges, and John Q. Public have zero pity on current law grads with crushing debt. The argument goes- "Even with all the info, they'd still have done it." Don't prove them right. T14 at sticker is a massive, massive gamble if you're financing it, and all this other discussion is just misdirection.

[Tiago Splitter]

It's so very easy to deal with debt that doubles or triples your first year salary. Right..

No one with half a brain on TLS says this. Ever. Now please go back to lying about how you chose Emory over Harvard.

[WhiteyCakes]

As a 0L, this thread terrifies me

[IAFG]

One of Campos's favorite quotes is this one from Upton Sinclair: It is difficult to get a man to understand something, when his salary depends upon his not understanding it.

In this case, it seems that it is difficult to get TLSers to understand something, when their foolhardy personal plans depend on them not understanding it.

It's so very easy to deal with debt that doubles or triples your first year salary. Right. Don't be the reason politicians, federal judges, and John Q. Public have zero pity on current law grads with crushing debt. The argument goes- "Even with all the info, they'd still have done it." Don't prove them right. T14 at sticker is a massive, massive gamble if you're financing it, and all this other discussion is just misdirection.

What a strange post. The TLS conventional wisdom is that you shouldn't go to law school if you're likely to end up with debt that doubles or triples your first year salary.

[ajax]

It's not obvious at all. Keep in mind that interest on 225k in loans is 1600/mo over a 30 year period.

You need to re-do the math here.

Do I need to re-do the math? Do you realize you can't make that statement without knowing the rate I used. Classic TLS poster with a BA.

[lukertin]

It's not obvious at all. Keep in mind that interest on 225k in loans is 1600/mo over a 30 year period.

You need to re-do the math here.

Do I need to re-do the math? Do you realize you can't make that statement without knowing the rate I used. Classic TLS poster with a BA.

And what are you, a high school diploma for giving an answer without showing how you got there?

[ajax]

One of Campos's favorite quotes is this one from Upton Sinclair: It is difficult to get a man to understand something, when his salary depends upon his not understanding it.

In this case, it seems that it is difficult to get TLSers to understand something, when their foolhardy personal plans depend on them not understanding it.

It's so very easy to deal with debt that doubles or triples your first year salary. Right. Don't be the reason politicians, federal judges, and John Q. Public have zero pity on current law grads with crushing debt. The argument goes- "Even with all the info, they'd still have done it." Don't prove them right. T14 at sticker is a massive, massive gamble if you're financing it, and all this other discussion is just misdirection.

What a strange post. The TLS conventional wisdom is that you shouldn't go to law school if you're likely to end up with debt that doubles or triples your first year salary.

Not surprising tuition continues to rise with that flawed "wisdom".

[Ruxin1]

When are you going to stop alting?

[Tiago Splitter]

ITT: Interest rates on student loans are not commonly known.

ITT: Interest paid does not decline as the principal declines.

[ajax]

"And what are you, a high school diploma for giving an answer without showing how you got there?" -lukertin

How did you show how you got to your conclusion of me being "a high school diploma". Nice work, brah.

[Veyron]

It makes more sense when you consider beneifts to be part of salary, which you should.

Typical biglaw salary 160k + 7.5k = 167.5k + the value of benefits = 185,000k. So don't take out more than 185,000k for a T14. Seems reasonable enough for me.

Of course, I also agree with the posters that the "rule of thumb" doesn't really make sense once you get above 6 figures, especially in low COL markets.