Cost of living: borrow or burn through savings? Forum

[philawsopher]

Here's my situation, generally: I am in my mid-30's and have multiple full-tuition scholarship offers (including at least one T10 school) for Fall 2016. I also have enough savings and home equity (i.e. if I sold) to probably cover the cost of living for me and my dependents for 3 years. If I did that, though, I would be left with almost nothing (except for a small IRA). However, I would be debt-free. After law school I would like to clerk for a year and then work in the non-profit or public interest sector. No biglaw for me.

Would you recommend that I use my current resources to pay for everything, as described, or plan to take the $20,500/year federal direct unsubsidized loans (give or take) so that I can protect at least some of my savings and perhaps even keep my home as a rental (doubt we would ever move back)? More importantly, why do you recommend what you recommend?

I would love to hear from some 2L's, 3L's, and grads who may have been in a similar scenario.

[RaceJudicata]

Try and negotiate up to full Cost of Attendance.

[abl]

Does your first choice school have a halfway decent loan assistance program? How sure about doing some form of PI post-clerkship are you, and would that (and the clerkship) be covered by your school's program?

If the answer to these questions are yes, I'd lean very strongly towards taking out COA loans--especially if you can stick to more favorable loans (e.g., avoid grad plus). Why? Well, if you do PI, you're not going to have to pay off the loans. Sure, there's a risk there that you might decide to do something else, but you only stand to lose somewhere in the area of the $10,000 in interest that your loans will gain while you're in school (which should be largely balanced out by the interest your current investments should make during that time).

If the answer to these questions are no, then this becomes about how much you value liquidity and what sort of return on investment your home will yield as a rental property. Between your home investment and whatever other investments you have right now, you really should be able to make around 5% annually (even assuming you play things very safely) on your home and savings. That means that the marginal cost of taking out loans is really only in the area of 1% annually (the rate that you're paying on your loans less the rate of your return on investments). You have a much better idea of what rent's like currently with your house, what sort of maintenance is likely to be required, etc -- so adjust that number accordingly. Regardless, though, the price for liquidity for you is unlikely to be more than 1-2% annually, which is an extraordinarily small price to pay for the freedom to buy another house after law school pretty close to immediately.

Having typed that all out, I'd lean strongly towards taking out COA loans regardless (but no more than are necessary) assuming you don't mind being an absent landlord -- which is a fairly big assumption. I think you'll be in a great situation if you graduate from a T14 law school with ~$70k in debt and ~$70k in savings and house principal (and yes, I think that's a better situation than graduating with $0 debt and $0 savings or principal).

[philawsopher]

Try and negotiate up to full Cost of Attendance.

Is that even a thing?

Does your first choice school have a halfway decent loan assistance program? How sure about doing some form of PI post-clerkship are you, and would that (and the clerkship) be covered by your school's program?

Thanks for your very insightful post--I really appreciate the time you spent on it. To answer your initial questions, the school's loan assistance program would probably help during a clerkship, but not for non-public service PI work beyond that. At this point, I would say that PI is my goal, but not the only thing I could ever see myself doing. I realize that other good and interesting options may turn up.

[BigZuck]

Try and negotiate up to full Cost of Attendance.

Is that even a thing?

Does your first choice school have a halfway decent loan assistance program? How sure about doing some form of PI post-clerkship are you, and would that (and the clerkship) be covered by your school's program?

Thanks for your very insightful post--I really appreciate the time you spent on it. To answer your initial questions, the school's loan assistance program would probably help during a clerkship, but not for non-public service PI work beyond that. At this point, I would say that PI is my goal, but not the only thing I could ever see myself doing. I realize that other good and interesting options may turn up.

Keep in mind that PI is the goal for about 117% of all incoming 1Ls, but the vast majority are not actually PI diehards and they are just going to do the big law thing when OCI rolls around. I'm really skeptical when 0Ls say they plan on doing PI and then start planning law school decisions assuming they will be on LRAP/PSLF.

That's not to say that you aren't a true blue PI diehard. It's also not really directly responsive to anything you asked about. But I would do some real soul searching to make sure you're actually committed to PI before assuming that you will rely on any form of loan forgiveness.

Also, I'm not really sure what you mean by "non public service PI." Isn't all public interest work public service work?

[abl]

Try and negotiate up to full Cost of Attendance.

Is that even a thing?

Does your first choice school have a halfway decent loan assistance program? How sure about doing some form of PI post-clerkship are you, and would that (and the clerkship) be covered by your school's program?

Thanks for your very insightful post--I really appreciate the time you spent on it. To answer your initial questions, the school's loan assistance program would probably help during a clerkship, but not for non-public service PI work beyond that. At this point, I would say that PI is my goal, but not the only thing I could ever see myself doing. I realize that other good and interesting options may turn up.

You should look more closely at the school's loan assistance program -- I thought all T14 programs covered all legal public sector and non-profit jobs. Assuming you might not be eligible for income-based reasons, I'm skeptical that your clerkship would be covered.

Assuming it's not, though, it becomes hard to answer your question without more information. It is not unreasonable to expect your house to net a 10% net rate of return, which would make keeping it as an income property a much more financially favorable move than selling it. There could be a wide financial range of outcomes, though, from preserving some liquidity "costing" you 5% per year to actually "making" you 5% per year. From a financial standpoint, I'd say it's worth paying a percent or two to preserve liquidity. Whether it's worth paying 5% is a harder question.

Finally, I want to draw your attention to one other important factor here: how much time and energy will being a landlord entail? The worst thing you could do is to hold on to your house as a rental property to try to eke a couple % extra value out of your ~$70k investments, only to have an emergency crop up that requires your attention during finals. If your house is in a low-rent area, well, there's more likelihood of renter problems. Also, can you afford to price your house below market to get your pick of the best tenants? These are pretty important factors to deciding whether to rent your house out through law school.

All in all, whether you hold on to your investments or not, $60-70k is not all that much money. Being $60-70k in debt is not going to be particularly crippling or limiting. (Having $60-70k in emergency fund or to use towards another home downpayment could be very helpful in the short term, but in the longer term, you should be able to save up this amount in the span of ~5 years if you have no debt, even on a low salary.) I would make your decision more about the value of liquidity to you and the cost of being a landlord than I would about whether one route costs you a couple percent interest on $70,000 relative to the other.

[philawsopher]

Also, I'm not really sure what you mean by "non public service PI." Isn't all public interest work public service work?

You're right--thanks for pointing that out. I was misreading their LRAP requirements. PI would be covered, and not a clerkship.

Regardless, I am not really expecting to be able to benefit from their LRAP. For the sake of the present poll, I am assuming I won't qualify (and if it turns out that I do, then great).

[Tls2016]

Also, I'm not really sure what you mean by "non public service PI." Isn't all public interest work public service work?

You're right--thanks for pointing that out. I was misreading their LRAP requirements. PI would be covered, and not a clerkship.

Regardless, I am not really expecting to be able to benefit from their LRAP. For the sake of the present poll, I am assuming I won't qualify (and if it turns out that I do, then great).

Don't sell your house and deplete your savings. You have no idea how long it might take to get the back on a PI salary.
Take the loans and do PSLF for 10 years. Or get a firm job.
Edit to add: if you lose your job or something happens, you can lower your loan payment to deal with it. But if you have no savings you are in trouble.

[bretby]

Also, I'm not really sure what you mean by "non public service PI." Isn't all public interest work public service work?

You're right--thanks for pointing that out. I was misreading their LRAP requirements. PI would be covered, and not a clerkship.

Regardless, I am not really expecting to be able to benefit from their LRAP. For the sake of the present poll, I am assuming I won't qualify (and if it turns out that I do, then great).

Keep in mind too that many schools require you to spend essentially all of your assets before you qualify for LRAP. I know this is true at NYU and Harvard, and imagine it's likely true other places.

[mvp99]

use some of you savings upfront and then borrow. save on interest

[fliptrip]

I would definitely shift the risk of your law school attendance elsewhere and not bear it exclusively by using your savings to finance your COA. In the land of worse-case scenarios, I'd much rather be in a PAYE situation on my student loans than having incinerated my savings to no end.

[NycGirl12]

Hi There,
I'm in a similar situation than you but a couple years younger. I have been planning for school and had the same thoughts. Rather than tap into my savings, I'd rather take out a loan and just save whatever I have for expenses. After you less your scholarships, just finance the rest. I'm sure others feel the same way about this very personal situation. It's really about what's convenient for you and what you can afford. Btw, I wouldn't look on a forum for financial advise from complete strangers.

[philawsopher]

Thanks for all the feedback everyone. Some great things to consider.

Interestingly, today I received the following in a marketing email from M7 Financial. It's directed at this very issue (from an MBA perspective as opposed to law school).

At M7 Financial, we conduct hundreds of free budget assessments for admitted MBA students each year. During these sessions, one of the most common questions we receive is “Should I maintain my savings and take on student debt, or should I liquidate my savings and reduce my reliance on debt?”

The issue is a universal concern for a very good reason—this question has no definitive answer, and the answer will vary from individual to individual. But here are some factors that you should consider:

• How much will you pay to borrow money? Before you can make any decisions about using your savings to pay for business school, you should apply for a student loan and find out what interest rate you would have to pay: 4%, 7%, 10%? Obviously, the higher the interest rate, the less likely you would be to use a loan instead of savings to finance your MBA.
  
  Will you need your savings after graduation? It may be tough to envision your post-MBA life months before you have even started your studies, but try to imagine your future needs. Do you intend to start a business, buy a house, get married, or start a family after graduation? If so, you may want to preserve a portion or even all of your savings (keep in mind point #1 above!), so that you have greater flexibility. If you liquidate all of your assets to pay for your education, you may have more difficulty buying a house, for example, if you do not have money for a down payment.
  
  How much of an emergency fund do you need? This answer will definitely vary according to individual, but do you feel that you need $5K, $10K, or $100K in savings to feel secure and prepared for unforeseen circumstances such as job loss and health issues? Most people do not feel comfortable depleting their savings to $0. So, you should identify a comfortable baseline.
  
  Does it make sense to “wait and see”? Because student loans typically do not have prepayment penalties, you could take out a loan and not liquidate your savings, and then see how your professional prospects develop. For example, suppose you decide to take out a loan, and then you land your dream job and—even better—a handsome signing bonus! You could then use that bonus to pay down your loan, if you choose, all the while maintaining your existing savings. Remember, though, the disadvantage of such a strategy is that interest would accrue on the loan while it is outstanding. And, yet again, when considering this strategy, remember point #1 above!
  
  If you do decide to spend any portion of your savings, is doing so consistent with your financial goals, objectives, and risk profile? We strongly recommend that you consult with a financial advisor on this issue.

[WinterComing]

Thanks for making this thread. I'm in a very similar situation.

I haven't decided yet whether to take loans or use my savings to pay for cost of attendance, but I have decided to sell my house. Keeping my house as a rental property seemed like way too big a pain in the ass. I don't want to have to deal with tenants and their constant issues, especially from 500 miles away. And I'm worried that maintenance issues (a new roof will be needed in the next few years) will make the house a losing proposition anyway. I have about $65K in equity in the house, plus about $20K more in cash savings.

So it's possible I could use a portion of that cash to pay for cost of attendance and still have at least some emergency savings left over. For that reason, I'm leaning toward not taking loans at all, if I go to a school where I have a full-ride scholarship. Another factor for me is that my wife has a pretty high-paying job.

At any rate, thanks again for bringing up this discussion. It's given me a lot to think about.

ETA: Having some assets somewhat counterintuitively makes HYS less attractive, because they basically make you give them all of your cash before they'll loan you any money that's eligible for COAP or LIPP, etc.