How much debt can one reasonably repay per year? Forum

[ClarDarr]

Let's say you win the big law lottery and make 160k after you graduate law school.  How much can one reasonably expect to repay on loans per year with a frugal, but not spartan, lifestyle, assuming they are single and have normal other expenses?

[sunrat]

Depends how you do on scratch offs.

[sunrat]

Being serious, depends on a lot of factors, but I think $40,000-$75,000 sounds reasonable.

[Georgiana]

I have budgeted to pay at least 3-4k per month at a minimum (not including any bonus amounts). I think I could probably afford to pay a bit more if I didn't want to put anything into savings. I'm planning on 2k for things that aren't rent, utilities, and food, which is probably a little high and will lead to more loan payments once I feel comfortable with the amount in savings.

[MrKappus]

...$75,000 sounds reasonable.

lol

[Moxie]

$30,000 - 40,000 the first year seems to be a reasonable expectation from the attorneys I've spoken to at my summer firm.

LOL at $75,000 though. After taxes, that would leave you with (96,000 - 75,000) = ~$21,000 in NYC, which probably wouldn't even cover your years rent, never mind food, living costs, etc.

[rayiner]

Depends on where you are and how you allocate your money.

If you're single*, after-tax take-home pay in NYC is about $8,200 per month (assuming no 401k contribution). Rent on a reasonably nice apartment in Manhattan will run you $2,000 (bare minimum for a studio) to $3,000 (nice studio, mediocre one bedroom). After that, figure out how much you need to live on. Between the subsidized cafeteria at many firms and SeamlessWeb after 8 pm, this might be less than you think. Remember also that if you paid full freight, the first $1,500/mo or so of every payment doesn't pay down your debt at all, it just goes to interest. If you borrowed $220k and allocate $3,500/mo to debt service, you'll actually only pay off $25k the first year.

I would not recommend sinking all of your bonus and excess cash into repaying your debt. First, the return (7.6% or so) is okay but lower than other things you could be doing with the money. Second, you want to have some cash buffer. Third, you want to contribute to your 401k.

*) Getting married will save you a ton on taxes in this bracket until you start hitting the AMT hard around $250k.

[Moxie]

Depends on where you are and how you allocate your money.

If you're single*, after-tax take-home pay in NYC is about $8,200 per month (assuming no 401k contribution). Rent on a reasonably nice apartment in Manhattan will run you $2,000 (bare minimum for a studio) to $3,000 (nice studio, mediocre one bedroom). After that, figure out how much you need to live on. Between the subsidized cafeteria at many firms and SeamlessWeb after 8 pm, this might be less than you think. Remember also that if you paid full freight, the first $1,500/mo or so of every payment doesn't pay down your debt at all, it just goes to interest. If you borrowed $220k and allocate $3,500/mo to debt service, you'll actually only pay off $25k the first year.

I would not recommend sinking all of your bonus and excess cash into repaying your debt. First, the return (7.6% or so) is okay but lower than other things you could be doing with the money. Second, you want to have some cash buffer. Third, you want to contribute to your 401k.

*) Getting married will save you a ton on taxes in this bracket until you start hitting the AMT hard around $250k.

This post is the credited response.

[ClarDarr]

Depends on where you are and how you allocate your money.

If you're single*, after-tax take-home pay in NYC is about $8,200 per month (assuming no 401k contribution). Rent on a reasonably nice apartment in Manhattan will run you $2,000 (bare minimum for a studio) to $3,000 (nice studio, mediocre one bedroom). After that, figure out how much you need to live on. Between the subsidized cafeteria at many firms and SeamlessWeb after 8 pm, this might be less than you think. Remember also that if you paid full freight, the first $1,500/mo or so of every payment doesn't pay down your debt at all, it just goes to interest. If you borrowed $220k and allocate $3,500/mo to debt service, you'll actually only pay off $25k the first year.

I would not recommend sinking all of your bonus and excess cash into repaying your debt. First, the return (7.6% or so) is okay but lower than other things you could be doing with the money. Second, you want to have some cash buffer. Third, you want to contribute to your 401k.

*) Getting married will save you a ton on taxes in this bracket until you start hitting the AMT hard around $250k.

This post is the credited response.

agreed

[XxSpyKEx]

...$75,000 sounds reasonable.

lol

$30,000 - 40,000 the first year seems to be a reasonable expectation from the attorneys I've spoken to at my summer firm.

LOL at $75,000 though. After taxes, that would leave you with (96,000 - 75,000) = ~$21,000 in NYC, which probably wouldn't even cover your years rent, never mind food, living costs, etc.

All depends on location. You assume NYC, but $75k would probably be pretty reasonable somewhere like Texas. No idea of what taxes, etc would run in Texas, but I wouldn't be surprised if take-home was around $110k, if not more (there's no state income tax from what I hear?). 110-75 = $35k to live off. I'd imagine you could live pretty comfortably off $35k/ year in Texas. Probably could sink another $10k into loans and still live decently.

Whether sinking all your money into debt would be better than investing all depends on where you predict the market to go. I sure as shit didn't beat 8% returns this last year on my investments.. Not putting away money into your 401k right away isn't the end of the world, if you're crazy enough to try and repay your loans in 2-3 years by repaying $75-85k /year. Although the lack of any cash buffer is probably a bad thing.

[vanwinkle]

All depends on location. You assume NYC, but $75k would probably be pretty reasonable somewhere like Texas. No idea of what taxes, etc would run in Texas, but I wouldn't be surprised if take-home was around $110k, if not more (there's no state income tax from what I hear?). 110-75 = $35k to live off. I'd imagine you could live pretty comfortably off $35k/ year in Texas. Probably could sink another $10k into loans and still live decently.

Having lived and worked in TX, here are my observations:

1) There is no state or local income tax in TX. Sales tax is often 8.25% but you can just deal with paying a little more for things. Money you're putting toward debt reduction isn't being hit by sales tax.

2) Playing with online income tax calculators, it looks like you'd pay about $35K in federal income tax, $11K in social security and $4K in Medicare. So your take-home is around $110K, right where you called it.

3) I had a 2BR apartment, in the "over 1000 square feet" range, in one of the better parts of the major cities. I paid about $950/mo. in rent. Living well is incredibly cheap in TX, which is one of the real advantages of living there.

4) If, out of your post-tax dollars, you took $3K per month and lived off that (and after $1K for an apartment, there's still $2K for car/food/miscellaneous expenses), that'd be $36K per year (like your estimate) and you'd have ($110K-$36K) or $74K left over.

$74K. Seriously. You could pay your entire debt off in less than three years, while still living comfortably.

[Zazelmaf]

There are decent studios to be had in NYC (Manhattan) for well under $2000. I think you can find one for $1500, to be honest, and maybe less.

[Transferthrowaway]

All depends on location. You assume NYC, but $75k would probably be pretty reasonable somewhere like Texas. No idea of what taxes, etc would run in Texas, but I wouldn't be surprised if take-home was around $110k, if not more (there's no state income tax from what I hear?). 110-75 = $35k to live off. I'd imagine you could live pretty comfortably off $35k/ year in Texas. Probably could sink another $10k into loans and still live decently.

Having lived and worked in TX, here are my observations:

1) There is no state or local income tax in TX. Sales tax is often 8.25% but you can just deal with paying a little more for things. Money you're putting toward debt reduction isn't being hit by sales tax.

2) Playing with online income tax calculators, it looks like you'd pay about $35K in federal income tax, $11K in social security and $4K in Medicare. So your take-home is around $110K, right where you called it.

3) I had a 2BR apartment, in the "over 1000 square feet" range, in one of the better parts of the major cities. I paid about $950/mo. in rent. Living well is incredibly cheap in TX, which is one of the real advantages of living there.

4) If, out of your post-tax dollars, you took $3K per month and lived off that (and after $1K for an apartment, there's still $2K for car/food/miscellaneous expenses), that'd be $36K per year (like your estimate) and you'd have ($110K-$36K) or $74K left over.

$74K. Seriously. You could pay your entire debt off in less than three years, while still living comfortably.

*Moves Dallas/Houston/Austin hire up his bid list*

[vanwinkle]

*Moves Dallas/Houston/Austin hire up his bid list*

Be careful about bidding in Austin. The offices there are typically smaller than their Dallas and Houston counterparts, take far fewer SAs, and are highly selective. Not only that, but a large number of people from Texas would take Austin over Houston or Dallas in a heartbeat, which makes Austin SA hiring far more competitive.

[TLSNYC]

In terms of sinking your bonuses right into your loans, how much of your bonus could you do that with? I.e. a first year bonus is around $7500 in NYC, but does that get taxed separately?

[vanwinkle]

In terms of sinking your bonuses right into your loans, how much of your bonus could you do that with? I.e. a first year bonus is around $7500 in NYC, but does that get taxed separately?

I may be wrong, but I'm pretty sure that those bonuses are counted as income and just increase the amount of income tax you owe at the end of the year.

[Grizz]

I suggest living with parents for the free food and rent, then using the money you save on loans.

[blink]

All depends on location. You assume NYC, but $75k would probably be pretty reasonable somewhere like Texas. No idea of what taxes, etc would run in Texas, but I wouldn't be surprised if take-home was around $110k, if not more (there's no state income tax from what I hear?). 110-75 = $35k to live off. I'd imagine you could live pretty comfortably off $35k/ year in Texas. Probably could sink another $10k into loans and still live decently.

Having lived and worked in TX, here are my observations:

1) There is no state or local income tax in TX. Sales tax is often 8.25% but you can just deal with paying a little more for things. Money you're putting toward debt reduction isn't being hit by sales tax.

2) Playing with online income tax calculators, it looks like you'd pay about $35K in federal income tax, $11K in social security and $4K in Medicare. So your take-home is around $110K, right where you called it.

3) I had a 2BR apartment, in the "over 1000 square feet" range, in one of the better parts of the major cities. I paid about $950/mo. in rent. Living well is incredibly cheap in TX, which is one of the real advantages of living there.

4) If, out of your post-tax dollars, you took $3K per month and lived off that (and after $1K for an apartment, there's still $2K for car/food/miscellaneous expenses), that'd be $36K per year (like your estimate) and you'd have ($110K-$36K) or $74K left over.

$74K. Seriously. You could pay your entire debt off in less than three years, while still living comfortably.

What's the catch?? I've never lived in Texas, but for this I would absolutely consider it...

[vanwinkle]

What's the catch?? I've never lived in Texas, but for this I would absolutely consider it...

There's several.

1) Texas firms discriminate against outsiders. They want people who are coming to live there, not to make a quick cash grab. If you've never lived in Texas, you have an uphill battle convincing a Texas firm to hire you instead of the many qualified folks with Texas ties who're seeking the same jobs.

2) While the top firms in Texas may pay $160K to start, this doesn't mean they follow the NYC market scale. Pay doesn't go up as much and I don't think you can anticipate making as much as a partner. (Of course, if your dollar goes farther in Texas, this could still be worth it...)

3) You have to live in Texas.

[Transferthrowaway]

I suggest living with parents for the free food and rent, then using the money you save on loans.

[blink]

What's the catch?? I've never lived in Texas, but for this I would absolutely consider it...

There's several.

1) Texas firms discriminate against outsiders. They want people who are coming to live there, not to make a quick cash grab. If you've never lived in Texas, you have an uphill battle convincing a Texas firm to hire you instead of the many qualified folks with Texas ties who're seeking the same jobs.

2) While the top firms in Texas may pay $160K to start, this doesn't mean they follow the NYC market scale. Pay doesn't go up as much and I don't think you can anticipate making as much as a partner. (Of course, if your dollar goes farther in Texas, this could still be worth it...)

3) You have to live in Texas.

1) Is this remedied by going to UT?

3) Am I missing something? Good weather, good sports, big steaks...

[Grizz]

I suggest living with parents for the free food and rent, then using the money you save on loans.

I am sorry for your loss, dood

[Transferthrowaway]

3) Am I missing something? Good weather, good sports, big steaks...

Your neighbor believes the world is 6000 years old, for starters.

[ToTransferOrNot]

Re: Not putting everything into loans to get the 7.6% return vs. (i) investing in other things or (ii) putting money into 401k:

(i) I cannot fathom any investment that has a high enough IRR to justify not taking the 100%-certain 7.6% (and this number should be higher - the smart money puts all of their loans into 25-year repayment but still pays the same amount overall. This allows you to put more money into the highest-rate loans. Consolidating makes absolutely no sense when you have some loans at 6.8 and some at 7.9/8.5 (depending on when you took your GradPLUS loans out)). Sure, you might be able to get 10% elsewhere - or you might get stung. 7.6% is a really, really high risk-free rate; getting another 2% doesn't justify the additional risk you take on.

Additionally, the 7.6% isn't subject to another level of tax (presumably capital gains, because getting higher than 7.6% on interest probably isn't going to happen) - which makes the 7.6% even more attractive.

(ii) I'm not going to contribute to my 401k. If your firm has a match, then you obviously contribute up to the match - that's a no-brainer. But if the firm doesn't have a match, I am not confident enough that any 401k gains are going to outdo the certain return on paying loans - not to mention the flexibility that comes with paying down loans faster (unlike other investments, you can't raid the 401k to pay off your loans early, if you have a change of heart). More importantly, I would say that the chances of taxes being much higher when we're old enough to draw on 401ks makes the tax deferral aspect be of questionable value. Again, you're considering an uncertain return later vs a very certain return now.

[MrBlonde]

3) Am I missing something? Good weather, good sports, big steaks...

Your neighbor believes the world is 6000 years old, for starters.

In one of my UG classes a kid ACTUALLY argued with the professor about this. "Well the bible says..." *facepalm*