Paying for LS with a Mortgage? Forum

[LawperaMan]

If I own a home (or my parents own a home) would it make some sense to take a second mortgage to pay for law school? Rates are exceptionally low right now, and (more to the point) if the whole legal profession path blows up, mortgages can be discharged in bankruptcy. I'm not saying that is the plan, but given the current state of affairs it may be a desirable safety net.

Any thoughts?

[MrPapagiorgio]

It's one thing if you want to pull the equity out of your home to pay for law school. It is entirely different to ask your parents to do so. Ultimately, risking your home for law school is very dependent on the realities of what your law school offers you as far as employment opportunities post-graduation.

[Ludo!]

You want to literally bet the house on law school? This sounds like a terrible idea.

[ben4847]

Inasmuch as student debt is non-dischargable, you are betting the house anyway.

The differences I see are this:
1. Interest rate- is probably better on the home.
2. IBR, and any public interest loan forgiveness will not apply to your home loan.
3. Is interest on a re-mortgage tax deductible?

[LawperaMan]

I really had not thought it through. It seems like there are a number of advantages and disadvantages, and I wanted to see if the TLSers had any thoughts or experiences on the subject as a look into all options. I am not saying this is be best option, just trying to see the pros/cons.

Lets face it, if I default on a mortgage through bankruptcy, there are protections in place to help keep the home and restore my credit in 7-10 years. If I default on a student loan, more interest capitalizes and the amount climbs and keeps my credit in the crapper until the whole thing is paid off. Seems like the mortgage path might be worth exploring.

[barneytrouble]

If you are a 22 year old single guy that somehow already owns a 200k house, I would do it in a heartbeat.

If I had a wife and kids, then it sounds like an awful idea if you ask me.

[dingbat]

Let's try simple math.

Current Mortgage rates are around 4% or so. The entire interest is tax deductible [edit - see discussion below regarding limit]
Current Student Loan rates are about 7%. The amount of interest that is tax deductible is low.
(this year, I deducted $2,500 in student loan interest, and $20,000 in mortgage interest)

If you default on a mortgage, the bank will take your house, but depending on the state, they can't come after you for the rest and the loan will be discharged

If you default on a student loan, your wages will be garnished and the debt will never be discharged
I'm not sure if they can sue you and force you to sell off your assets (i.e. your home)

The only advantage of a student loan is that the debt might be forgiven under LRAP. Check the stipulations of the school. Then think really hard about what those mean (e.g. are you sure you want to work PI for 10 years? What if you hate it?)

I would absolutely take out a mortgage rather than a student loan. It's a far better type of debt to have.
Financially, this is a no-brainer

[09042014]

If I own a home (or my parents own a home) would it make some sense to take a second mortgage to pay for law school? Rates are exceptionally low right now, and (more to the point) if the whole legal profession path blows up, mortgages can be discharged in bankruptcy. I'm not saying that is the plan, but given the current state of affairs it may be a desirable safety net.

Any thoughts?

Secured loans aren't lost upon bankruptcy if they are capitalized right. You'll lose your equity in your house if you stop paying the mortgage. If you don't stop paying, you'll keep the mortgage through bankruptcy.

[ben4847]

Let's try simple math.

Current Mortgage rates are around 4% or so. The entire interest is tax deductible
Current Student Loan rates are about 7%. The amount of interest that is tax deductible is low.

yes, but:

IRC 56
(e) Qualified housing interest
For purposes of this part -

(1) In general
The term "qualified housing interest" means interest which is qualified residence interest (as defined in section 163(h)(3)) and is paid or accrued during the taxable year on indebtedness which is incurred in acquiring, constructing, or substantially improving any property which -

[dingbat]

Let's try simple math.

Current Mortgage rates are around 4% or so. The entire interest is tax deductible
Current Student Loan rates are about 7%. The amount of interest that is tax deductible is low.

yes, but:

IRC 56
(e) Qualified housing interest
For purposes of this part -

(1) In general
The term "qualified housing interest" means interest which is qualified residence interest (as defined in section 163(h)(3)) and is paid or accrued during the taxable year on indebtedness which is incurred in acquiring, constructing, or substantially improving any property which -

What's your point?

[AreJay711]

Why don't you just use the equity in your home to pay of your law school debts if and when you get a job so you know you won't need IBR? That would cut out a lot of the risk.

[20130312]

At first I thought, what a friggin idiot. And then I thought about it more. This is actually a great idea.

[ben4847]

Let's try simple math.

Current Mortgage rates are around 4% or so. The entire interest is tax deductible
Current Student Loan rates are about 7%. The amount of interest that is tax deductible is low.

yes, but:

IRC 56
(e) Qualified housing interest
For purposes of this part -

(1) In general
The term "qualified housing interest" means interest which is qualified residence interest (as defined in section 163(h)(3)) and is paid or accrued during the taxable year on indebtedness which is incurred in acquiring, constructing, or substantially improving any property which -

What's your point?

I'm not a lawyer or anything, but it looks like you only get the tax deduction if the debt was for buying, constructing, or renovating the house. So that if you refinance it to pay for law school, you wouldn't get the deduction.

[dingbat]

At first I thought, what a friggin idiot. And then I thought about it more. This is actually a great idea.

As someone who works in the financial field, I noticed that starting a few years ago (when student loans jumped to 6.80% and mortgages dropped below 5%) that the conventional advise (use student loans, don't use mortgage) made no sense, economically speaking.

10 years ago, this was different, student loans could be had for under 4% and mortgages were typically over 6%. In the new economy, one needs to think differently about debt.

[dingbat]

Let's try simple math.

Current Mortgage rates are around 4% or so. The entire interest is tax deductible
Current Student Loan rates are about 7%. The amount of interest that is tax deductible is low.

yes, but:

IRC 56
(e) Qualified housing interest
For purposes of this part -

(1) In general
The term "qualified housing interest" means interest which is qualified residence interest (as defined in section 163(h)(3)) and is paid or accrued during the taxable year on indebtedness which is incurred in acquiring, constructing, or substantially improving any property which -

What's your point?

I'm not a lawyer or anything, but it looks like you only get the tax deduction if the debt was for buying, constructing, or renovating the house. So that if you refinance it to pay for law school, you wouldn't get the deduction.

Do you realize you're quoting IRC provisions for the AMT?
Quick piece of advice: if you get to the point where the AMT might apply, pay an accountant to minimize your taxes, you can afford it and it'll be worth it.

[dingbat]

Why don't you just use the equity in your home to pay of your law school debts if and when you get a job so you know you won't need IBR? That would cut out a lot of the risk.

But increase the cost. IBR doesn't cancel your loans, it just lets you pay less.
IBR should be a last resort, not a planning tool.
Besides, if you take out a student loan, then take out a mortgage, you're paying origination fees twice, instead of once. Also, mortgage rates are freakin' low right now and they may not be as low when you get out.

So, what you're suggesting is, instead of borrowing at 4%, for a fixed duration, you borrow at 7%. Then, when you graduate, if you make enough money, maybe take out a mortgage to pay off the student loan, if mortgage rates are still cheap enough. If you can't get a job, go for IBR, so you have no idea when you might be paid off (depends on many factors).
Now we don't know what the interest rate will be nor what the duration will be.

[ben4847]

I'm not a lawyer or anything, but it looks like you only get the tax deduction if the debt was for buying, constructing, or renovating the house. So that if you refinance it to pay for law school, you wouldn't get the deduction.

Do you realize you're quoting IRC provisions for the AMT?
Quick piece of advice: if you get to the point where the AMT might apply, pay an accountant to minimize your taxes, you can afford it and it'll be worth it.

Good point. Good think I'm not a lawyer.
Ok, I found the proper code section. It looks like if the debt is a refinance which is not for renovation, then you can only deduct interest on the first 100k of debt (50k if married filing separately). IRC 163h3
And, just for fun we'll link the IRS Publication http://www.irs.gov/publications/p936/ar02.html scroll down to "Home Equity Debt"

[Nelson]

Why don't you just use the equity in your home to pay of your law school debts if and when you get a job so you know you won't need IBR? That would cut out a lot of the risk.

But increase the cost. IBR doesn't cancel your loans, it just lets you pay less.
IBR should be a last resort, not a planning tool.
Besides, if you take out a student loan, then take out a mortgage, you're paying origination fees twice, instead of once. Also, mortgage rates are freakin' low right now and they may not be as low when you get out.

So, what you're suggesting is, instead of borrowing at 4%, for a fixed duration, you borrow at 7%. Then, when you graduate, if you make enough money, maybe take out a mortgage to pay off the student loan, if mortgage rates are still cheap enough. If you can't get a job, go for IBR, so you have no idea when you might be paid off (depends on many factors).
Now we don't know what the interest rate will be nor what the duration will be.

Are you seriously suggesting that putting your house on the line along with the possibility of destroying your consumer credit via a bankruptcy to pay for a law degree is a sound course of action?

[dingbat]

Why don't you just use the equity in your home to pay of your law school debts if and when you get a job so you know you won't need IBR? That would cut out a lot of the risk.

But increase the cost. IBR doesn't cancel your loans, it just lets you pay less.
IBR should be a last resort, not a planning tool.
Besides, if you take out a student loan, then take out a mortgage, you're paying origination fees twice, instead of once. Also, mortgage rates are freakin' low right now and they may not be as low when you get out.

So, what you're suggesting is, instead of borrowing at 4%, for a fixed duration, you borrow at 7%. Then, when you graduate, if you make enough money, maybe take out a mortgage to pay off the student loan, if mortgage rates are still cheap enough. If you can't get a job, go for IBR, so you have no idea when you might be paid off (depends on many factors).
Now we don't know what the interest rate will be nor what the duration will be.

Are you seriously suggesting that putting your house on the line along with the possibility of destroying your consumer credit via a bankruptcy to pay for a law degree is a sound course of action?

No, I'm saying that if you're going to borrow money, from a financial perspective, a mortgage is better than a student loan.
Whether or not you should be borrowing the money to begin with is a different matter altogether.
Hell, even whether or not to go to law school is a different conversation.

[dingbat]

I'm not a lawyer or anything, but it looks like you only get the tax deduction if the debt was for buying, constructing, or renovating the house. So that if you refinance it to pay for law school, you wouldn't get the deduction.

Do you realize you're quoting IRC provisions for the AMT?
Quick piece of advice: if you get to the point where the AMT might apply, pay an accountant to minimize your taxes, you can afford it and it'll be worth it.

Good point. Good think I'm not a lawyer.
Ok, I found the proper code section. It looks like if the debt is a refinance which is not for renovation, then you can only deduct interest on the first 100k of debt (50k if married filing separately). IRC 163h3
And, just for fun we'll link the IRS Publication http://www.irs.gov/publications/p936/ar02.html scroll down to "Home Equity Debt"

Specifically, the first 100k (50k if married filing separately) of mortgage not used to acquire the home.
e.g. you took out a $125k mortgage to buy the home, but paid off $50k, so now you only owe $75k
You take out a second mortgage (or refinance) for another $150,000, bringing your total debt to $225,000
7/9th of your interest is deductible ($75k initial mortage, $100k of second mortgage, or $175k total, is 7/9th of $225k.
Thank you for looking this up.
A point worth making (but not advocating), is that if you then sell your home and buy a new one, the entire interest payment becomes tax deductible, as the entire loan will have been for the purpose of buying a home.

[ben4847]

I'm not a lawyer or anything, but it looks like you only get the tax deduction if the debt was for buying, constructing, or renovating the house. So that if you refinance it to pay for law school, you wouldn't get the deduction.

Do you realize you're quoting IRC provisions for the AMT?
Quick piece of advice: if you get to the point where the AMT might apply, pay an accountant to minimize your taxes, you can afford it and it'll be worth it.

Good point. Good think I'm not a lawyer.
Ok, I found the proper code section. It looks like if the debt is a refinance which is not for renovation, then you can only deduct interest on the first 100k of debt (50k if married filing separately). IRC 163h3
And, just for fun we'll link the IRS Publication http://www.irs.gov/publications/p936/ar02.html scroll down to "Home Equity Debt"

Specifically, the first 100k (50k if married filing separately) of mortgage not used to acquire the home.
e.g. you took out a $125k mortgage to buy the home, but paid off $50k, so now you only owe $75k
You take out a second mortgage (or refinance) for another $150,000, bringing your total debt to $225,000
7/9th of your interest is deductible ($75k initial mortage, $100k of second mortgage, or $175k total, is 7/9th of $225k.
Thank you for looking this up.
A point worth making (but not advocating), is that if you then sell your home and buy a new one, the entire interest payment becomes tax deductible, as the entire loan will have been for the purpose of buying a home.

Yeah, I'd check the regs and caselaw before I did that.

[LawperaMan]

Are you seriously suggesting that putting your house on the line along with the possibility of destroying your consumer credit via a bankruptcy to pay for a law degree is a sound course of action?

No, I'm saying that if you're going to borrow money, from a financial perspective, a mortgage is better than a student loan.
Whether or not you should be borrowing the money to begin with is a different matter altogether.
Hell, even whether or not to go to law school is a different conversation.

+1

Just about everyone on this website is contemplating taking on some level of debt to finance law school. I'm just trying to figure out the best kind of debt. Why wouldn't a person explore every possibility?

[AreJay711]

Are you seriously suggesting that putting your house on the line along with the possibility of destroying your consumer credit via a bankruptcy to pay for a law degree is a sound course of action?

No, I'm saying that if you're going to borrow money, from a financial perspective, a mortgage is better than a student loan.
Whether or not you should be borrowing the money to begin with is a different matter altogether.
Hell, even whether or not to go to law school is a different conversation.

+1

Just about everyone on this website is contemplating taking on some level of debt to finance law school. I'm just trying to figure out the best kind of debt. Why wouldn't a person explore every possibility?

I still think the ability to take IBR is beneficial. It might cost more to wait if interest rates increase significantly but it is also safer. But fuck it, I guess you have to be a bit of a gunslinger to go to law school right now anyway.

[furcifer]

Why not use standard loans like everyone else? Did you max yours out?

[furcifer]

That reminds me of case where a guy did that with creditcards. Still had to explain it to the bar and they refused to let him pass C&F.

Then again, if you honestly don't care about practicing but want to do lawschool for all the mad tail and respect us lawstudents get ( ) Then go for it, max it all out on creditcards while your at it. Then enjoy being insolevent for awhile to make it all work. I do hear that Foodstamps and income based apartments are beautiful this time of year.....

If I own a home (or my parents own a home) would it make some sense to take a second mortgage to pay for law school? Rates are exceptionally low right now, and (more to the point) if the whole legal profession path blows up, mortgages can be discharged in bankruptcy. I'm not saying that is the plan, but given the current state of affairs it may be a desirable safety net.

Any thoughts?