paying back loans Forum

[bdubs]

Focus on the Debt first, it's your best investment ITE, then start a small cushion fund, nothing dramatic. forget housing for now.

The more I research the possibility of buying a house, the more I think that the bolded is really market-and-situation-specific. Chicago, for example, has a really, really high cost of rent vs. cost to own ratio, at the moment, and even considering the opportunity cost of putting down a down payment instead of paying off loans with the downpayment amount, house ownership would make sense for me if I knew I was going to be here for 5 years.

Even though I don't know whether I'll be here that long, it's still awfully tempting, but I'm not sure I'm ready to have to deal with renting the place out long-distance if I end up having to relocate.

TCR in Chicago is to buy if you're in a rentable neighborhood. If you don't know how long you will be in the city and you're in an area that is really only desirable for purchase then you should be more cautious (transaction costs in real estate are a huge money sink).

Yeah, I'm looking at getting a south-loop condo. And with respect to transaction costs: true, but I'd be working at a bit of a discount since I have a family member who is a real estate person in Chicago.

With respect to being able to afford to wait: of course. But if owning is literally cheaper than renting on a year-to-year basis, after you account for the deductibility of mortgage interests, property taxes and the like, some of the tinkering I have been doing on the NYT calculator seems to indicate that, even presuming *no* appreciation in the home's value, and assuming no yearly increases in rent (bad assumption in Chicago right now), I'm coming out at "all-in, buying is cheaper than renting if you own the place for 4 years". "All-in" is accounting for: opportunity cost on the down payment (at a rate of 9.8% to try to account for how the calculator treats investment "income" - basically, it works out to be 8.5%. That, of course, is too high, since my highest-rate loan is 8% after auto-pay is considered, and I would kill that loan with the down-payment); condo association fees of 150 a month; lost utilities contribution of $150 a month (too high for most Chicago places); a bearish assumption about yearly upkeep costs and such; and rent of $1800 (which is on the lowish side for the kind of places in the south loop that my fiance and I will be considering).

So yeah. It's not a dead-simple calculation. I used to think it was - my plan, until recently, was all-out loan repayment - but I'm really starting to waver on it.

I found that condo fees were the biggest deal killer in Chicago real estate. They are subject to the same pressures that drive up rent and , at least in Streeterville, are a huge portion of the carrying cost of the home.

[transferguy]

What in god's name do you need a liquidity cushion while you're in school for?

Worst case scenario, you amend your loan request, but seriously, what the hell do you need liquidity in law school for? It's not like you're going to get laid off.

I think he means trying to build a liquidity cushion so that he has one when he finishes school.

As a recent grad I can give you multiple reasons why you need and should have a liquidity cushion.

Health insurance - not all firms start in September and school health insurance per month after graduation can be $500
Broker fees & security deposit- if you live in NYC and accept an offer at a NYC firm they will not pay the brokers fee for your post grad apartment nor for your moving expenses
Bar trip - could easily cost a few thousand
Actual first paycheck - in some instances you won't get paid until 3 weeks after you have started to work. At the same time, rent is still due and if you take a salary advance your salary will already reduced.

I could think of tons of other expenses that will arise after graduation and before works start. The fact of the matter is you need to be prepared for things will almost certainly arise. Too many people on this board advocate paying loans and not considering how much it sucks to live with the anxiety associated with not having enough money to make ends meet. Plus at 25/26 who wants to live like a broke undergrad. Use your summer money for that cushion. The de minimis amount you will save in interest will not be worth the stress of being broke until you mythical start date which can be as late as December.

This isn't true at my firm or other friends' firms in NYC. That's a shitty policy.

[Sup Kid]

What in god's name do you need a liquidity cushion while you're in school for?

Worst case scenario, you amend your loan request, but seriously, what the hell do you need liquidity in law school for? It's not like you're going to get laid off.

I think he means trying to build a liquidity cushion so that he has one when he finishes school.

As a recent grad I can give you multiple reasons why you need and should have a liquidity cushion.

Health insurance - not all firms start in September and school health insurance per month after graduation can be $500
Broker fees & security deposit- if you live in NYC and accept an offer at a NYC firm they will not pay the brokers fee for your post grad apartment nor for your moving expenses
Bar trip - could easily cost a few thousand
Actual first paycheck - in some instances you won't get paid until 3 weeks after you have started to work. At the same time, rent is still due and if you take a salary advance your salary will already reduced.

I could think of tons of other expenses that will arise after graduation and before works start. The fact of the matter is you need to be prepared for things will almost certainly arise. Too many people on this board advocate paying loans and not considering how much it sucks to live with the anxiety associated with not having enough money to make ends meet. Plus at 25/26 who wants to live like a broke undergrad. Use your summer money for that cushion. The de minimis amount you will save in interest will not be worth the stress of being broke until you mythical start date which can be as late as December.

This isn't true at my firm or other friends' firms in NYC. That's a shitty policy.

+1. My firm (V30) pays for both of those things. Also, your firm has a pretty awful payroll dept if it takes 3 weeks to get you into the system -- it should take 2 weeks, max (assuming you start on a Monday and the regular payday is 2 Fridays from then).

[Hawkeye Pierce]

I've read through this entire thread, but still had a question:

Let's assume that you adopt the "pay down your debt" principle. Let's also assume that an individual is coming out of law school with sticker debt (~210-220k) and is now working biglaw in NYC.

What would be a realistic timeline to pay this debt off? (If you're following a 10 year repayment plan, doesn't that come out to ~2800 a month?)

Five years? Seven years?

[Bronte]

What in god's name do you need a liquidity cushion while you're in school for?

Worst case scenario, you amend your loan request, but seriously, what the hell do you need liquidity in law school for? It's not like you're going to get laid off.

Keeping your savings from your 2L summer as a liquidity cushion is insurance against the possibility of getting no offered or deferred. This is not an "extremely low probability event." It happens to a few people in every class and it can happen to a vast swath of people if the economy tanks, as we recently saw. Given the fears of a double dip, it's not at all unreasonable. I would consider the interest payments on that extra $10,000 of debt to be insurance premiums.

I've read through this entire thread, but still had a question:

Let's assume that you adopt the "pay down your debt" principle. Let's also assume that an individual is coming out of law school with sticker debt (~210-220k) and is now working biglaw in NYC.

What would be a realistic timeline to pay this debt off? (If you're following a 10 year repayment plan, doesn't that come out to ~2800 a month?)

Five years? Seven years?

You can pay down the debt in five to ten years, depending on your frugality. https://docs.google.com/spreadsheet/ccc ... n_US#gid=0.

[c3pO4]

I've read through this entire thread, but still had a question:

Let's assume that you adopt the "pay down your debt" principle. Let's also assume that an individual is coming out of law school with sticker debt (~210-220k) and is now working biglaw in NYC.

What would be a realistic timeline to pay this debt off? (If you're following a 10 year repayment plan, doesn't that come out to ~2800 a month?)

Five years? Seven years?

If you are married and spouse makes reasonable money, you can do it in less 3-4. If single, more like 5-10.

[c3pO4]

What in god's name do you need a liquidity cushion while you're in school for?

Worst case scenario, you amend your loan request, but seriously, what the hell do you need liquidity in law school for? It's not like you're going to get laid off.

Reasoning:

I will try to save up 40-50k in cash before nuking my loans to the tune of 5-6k/month. This amount doesn't change if I have less or more loans, so I'd rather take the money I'm making next summer and try to save as much as possible to get a head start on the cash nut so I can subsequently nuke my loans that much earlier.

[rayiner]

So some math for you all. Say you owe $225k at graduation, at 7.6% (mix of 7.9% PLUS and 6.8% Stafford).

Let's compare three payment plans. Assume you make $160k and have $5,000 to save per month.

Standard: pay $2690/month
Fast: pay $5,000/month
IBR: pay $1,800/month

After three years:

Standard: $46,300 in interest, $52,100 in principal, $87k in other savings (3% return). Net: -$86k.
Fast: $36,850 in interest, $148,200 in principal, $0 in other savings. Net: -$77k.
IBR: $51,300 in interest, $15,000 in principal, $120,400 in other savings (3% return). Net: -$90k.

Takeaway: it doesn't really matter whether you use your excess cash to pay down loans faster or to save, as long as you don't just blow it on coke and hookers. Also, consider using IBR to quickly build up your cash.

[Bronte]

So some math for you all. Say you owe $225k at graduation, at 7.6% (mix of 7.9% PLUS and 6.8% Stafford).

Let's compare three payment plans. Assume you make $160k and have $5,000 to save per month.

Standard: pay $2690/month
Fast: pay $5,000/month
IBR: pay $1,800/month

After three years:

Standard: $46,300 in interest, $52,100 in principal, $87k in other savings (3% return). Net: -$86k.
Fast: $36,850 in interest, $148,200 in principal, $0 in other savings. Net: -$77k.
IBR: $51,300 in interest, $15,000 in principal, $120,400 in other savings (3% return). Net: -$90k.

Takeaway: it doesn't really matter whether you use your excess cash to pay down loans faster or to save, as long as you don't just blow it on coke and hookers. Also, consider using IBR to quickly build up your cash.

Well we have been using some math: https://docs.google.com/spreadsheet/ccc ... n_US#gid=0. Did you check out that spreadsheet? It seems irrefutable that you should only invest in the market to the extent that you can earn more than, using your figures, 9% (7.6% compounded monthly is (1+.076/12)^12-1=.078 grossed up by the cap gains rate .078*1.15=.09) or 10% (.078 grossed up by the 35% ordinary income rate).

Your figures show pretty large disparities: more than $10,000 between "fast" and the other plans. $10,000 is a lot of money.

Edit: I don't really follow your example, but the question should be what's your net worth after the payments. We've covered this pretty extensively, using math throughout the thread, and as a financial fact paying down loans is identical to investing in an asset that earns a yield equal to the interest rate on your loans (converted to an effective annual rate and grossed up for taxes). It's a basic principal of finance that, if you can't invest in assets that yield greater than your cost of capital, you're losing money. It's also pretty clear in this market that you can't earn more than the rate on your loans.

[ToTransferOrNot]

I mean, yeah, $10,000 is a whole lot of money in absolute terms.

But it's about 1.33 months of after-tax biglaw pay. So, is ~400 waking hours of your life worth the liquidity?

[Bronte]

I mean, yeah, $10,000 is a whole lot of money in absolute terms.

But it's about 1.33 months of after-tax biglaw pay. So, is ~400 waking hours of your life worth the liquidity?

I don't think his example is financially accurate. I'm not really following it. The question is what's your net worth at the end of the investment period. I think I've shown, without refutation, that your net worth will be lower to the extent that you forgo paying down your loans for investments in assets that earn less than 9-10% annually.

[ToTransferOrNot]

I mean, yeah, $10,000 is a whole lot of money in absolute terms.

But it's about 1.33 months of after-tax biglaw pay. So, is ~400 waking hours of your life worth the liquidity?

I don't think his example is financially accurate. I'm not really following it. The question is what's your net worth at the end of the investment period. I think I've shown, without refutation, that your net worth will be lower to the extent that you forgo paying down your loans for investments in assets that earn less than 9-10% annually.

Sure; I don't think he's disputing that. I just think he's saying that he's willing to give up $10k in net worth for liquidity at year 3. His model obviously breaks down pretty quickly after year 3, since the "Fast" payer is going to be finished with his loans in fairly short order and will be able to dedicate the entire $5k to savings or whatever.

However, it is worth considering that, for many people, "paying" $10k to have the option to put a solid down-payment on a house in year 3 is worth the overall reduction in net worth. And to the extent that buying a house in year 3 is, in absolute terms, "cheaper" than renting when all variables are accounted for, he might make up some of what he's lost.

Frankly, I probably would take the hit to overall net worth for the sake of liquidity if I knew I would be in biglaw for longer than 2 or 3 years; but, because that appears increasingly unlikely, I feel significant pressure to pay down the loans ASAP.

[Bronte]

Sure; I don't think he's disputing that. I just think he's saying that he's willing to give up $10k in net worth for liquidity at year 3. His model obviously breaks down pretty quickly after year 3, since the "Fast" payer is going to be finished with his loans in fairly short order and will be able to dedicate the entire $5k to savings or whatever.

However, it is worth considering that, for many people, "paying" $10k to have the option to put a solid down-payment on a house in year 3 is worth the overall reduction in net worth. And to the extent that buying a house in year 3 is, in absolute terms, "cheaper" than renting when all variables are accounted for, he might make up some of what he's lost.

Frankly, I probably would take the hit to overall net worth for the sake of liquidity if I knew I would be in biglaw for longer than 2 or 3 years; but, because that appears increasingly unlikely, I feel significant pressure to pay down the loans ASAP.

Yeah and my position is that you should build a liquidity cushion that could be used for a down payment. That's in part why I said I would save my $10,000-15,000 from the summer, which I believe you shot down earlier. If you save that, and then save another $15,000 in the first year, putting the rest toward loans, you're in the best position I think. You're taking advantage of your best long term investment opportunity (paying down your loans) while accumulating some cash to be used as insurance, for investment in a house, or whatever.

But my main point is that if you're going to make any long term investments, it should be in your loans until they're paid down. If you have good reasons to have cash available, then I'm not arguing that you shouldn't allocate some of your disposable income to a cash account or other low risk, liquid investment.

[snailio]

Look the pay fast solution is the correct one ITE. Lets deal with the real world, your options are much better after 54 months with a loan that's done, whether it be a job move or other considerations such as babies etc. Otherwise you could be stuck in a job and be saddled with interest rates that you most likely can't surpass in the next five to ten years.

Even if you only use the fast pay solution for 2 years and conditions change, you can still change up and extend and still be ahead.

Using this model, personally I don't see why 13k isn't worth saving over the three years ITE and that's the key this environment, remember where you are.

You also have to assume the fact that people don't really save that much doe, things come up, you become accustomed to your "lifestyle".

Thinking that housing is going to appreciate is a maybe and not a good one. As a mathematical equation this looks to have "some" equivalence but in the real world, I'm afraid not. If you want to build a emergency cushion then adjust but keep the emphasis on the loan.

Things change.

[Bronte]

Look the pay fast solution is the correct one ITE. Lets deal with the real world, your options are much better after 54 months with a loan that's done, whether it be a job move or other considerations such as babies etc. Otherwise you could be stuck in a job and be saddled with interest rates that you most likely can't surpass in the next five to ten years.

Even if you only use the fast pay solution for 2 years and conditions change, you can still change up and extend and still be ahead.

Using this model, personally I don't see why 13k isn't worth saving over the three years ITE and that's the key this environment, remember where you are.

You also have to assume the fact that people don't really save that much doe, things come up, you become accustomed to your "lifestyle".

Thinking that housing is going to appreciate is a maybe and not a good one. As a mathematical equation this looks to have "some" equivalence but in the real world, I'm afraid not.

Things change.

I'm definitely beating a dead horse at this point, but mathematically there is nothing close to equivalence between investing in your loans and investing in a 3% asset or any asset that yields below 9-10%. There are reasons to build cash, and I'm not disputing that. But absent building cash to use as insurance against a contingency or to use for some particular investment you think is worth it (like a home, which has benefits beside financial appreciation), it is not financially rational to make long term investments other than paying down your loans.

[snailio]

Look the pay fast solution is the correct one ITE. Lets deal with the real world, your options are much better after 54 months with a loan that's done, whether it be a job move or other considerations such as babies etc. Otherwise you could be stuck in a job and be saddled with interest rates that you most likely can't surpass in the next five to ten years.

Even if you only use the fast pay solution for 2 years and conditions change, you can still change up and extend and still be ahead.

Using this model, personally I don't see why 13k isn't worth saving over the three years ITE and that's the key this environment, remember where you are.

You also have to assume the fact that people don't really save that much doe, things come up, you become accustomed to your "lifestyle".

Thinking that housing is going to appreciate is a maybe and not a good one. As a mathematical equation this looks to have "some" equivalence but in the real world, I'm afraid not.

Things change.

I'm definitely beating a dead horse at this point, but mathematically there is nothing close to equivalence between investing in your loans and investing in a 3% asset or any asset that yields below 9-10%. There are reasons to build cash, and I'm not disputing that. But absent building cash to use as insurance against a contingency or to use for some particular investment you think is worth it (like a home, which has benefits beside financial appreciation), it is not financially rational to make long term investments other than paying down your loans.

Bronte calm down I was being generous with the word "some"

[Bronte]

Bronte calm down I was being generous with the word "some"

I gotcha, I'd like rayiner to weigh back in because he's a very wise poster, and I'd like some clarity on his position after he's looked at the other mathematical examples in the thread.

[snailio]

Bronte calm down I was being generous with the word "some"

I gotcha, I'd like rayiner to weigh back in because he's a very wise poster, and I'd like some clarity on his position after he's looked at the other mathematical examples in the thread.

rayiner without a doubt is one of the best posters on this forum and I almost always agree with him, but in this case I don't think the equation goes far enough to satisfy the variables.

[rayiner]

So some math for you all. Say you owe $225k at graduation, at 7.6% (mix of 7.9% PLUS and 6.8% Stafford).

Let's compare three payment plans. Assume you make $160k and have $5,000 to save per month.

Standard: pay $2690/month
Fast: pay $5,000/month
IBR: pay $1,800/month

After three years:

Standard: $46,300 in interest, $52,100 in principal, $87k in other savings (3% return). Net: -$86k.
Fast: $36,850 in interest, $148,200 in principal, $0 in other savings. Net: -$77k.
IBR: $51,300 in interest, $15,000 in principal, $120,400 in other savings (3% return). Net: -$90k.

Takeaway: it doesn't really matter whether you use your excess cash to pay down loans faster or to save, as long as you don't just blow it on coke and hookers. Also, consider using IBR to quickly build up your cash.

Well we have been using some math: https://docs.google.com/spreadsheet/ccc ... n_US#gid=0. Did you check out that spreadsheet? It seems irrefutable that you should only invest in the market to the extent that you can earn more than, using your figures, 9% (7.6% compounded monthly is (1+.076/12)^12-1=.078 grossed up by the cap gains rate .078*1.15=.09) or 10% (.078 grossed up by the 35% ordinary income rate).

Your figures show pretty large disparities: more than $10,000 between "fast" and the other plans. $10,000 is a lot of money.

Edit: I don't really follow your example, but the question should be what's your net worth after the payments. We've covered this pretty extensively, using math throughout the thread, and as a financial fact paying down loans is identical to investing in an asset that earns a yield equal to the interest rate on your loans (converted to an effective annual rate and grossed up for taxes). It's a basic principal of finance that, if you can't invest in assets that yield greater than your cost of capital, you're losing money. It's also pretty clear in this market that you can't earn more than the rate on your loans.

I don't disagree with your math, but I disagree with your premise that $10k is so much money that it should be determinative of your savings approach. In the grand scheme of things, $10k is a drop in the bucket.

Plan your savings based on your life plans. Do you want to buy a house? If so pay the minimum on your loans and save the extra for a down payment. You'll save more money in the long run by being able to put up a huge down payment then you'll loose in extra interest on your student loans. Do you intend to spend a few years in big law then take a low-paying public interest job? If so pay the minimum on your loans and take advantage of IBR. Do you intend to spend a few years in big law then go to a low paying private sector job? Then by all means pay off your loans as quickly as possible.

Also, re: "this market" remember we're talking about the next 3-5 years.

[rayiner]

Re: leaving big law after 2-3 years. I don't really see the advantage of paying down your loans more quickly in that scenario. If you do leave big law after 3 years you've still go the cash you can apply to your loans. You're in the same position minus about $10k, which is nothing since you'll still be $70k or so in the hole. At the same time recall that IBR will limit your loan payments to 15% of your income so it's not like you'll be stuck making $2,700/month payments on $50k salary.

[Bronte]

I don't disagree with your math, but I disagree with your premise that $10k is so much money that it should be determinative of your savings approach. In the grand scheme of things, $10k is a drop in the bucket.

Plan your savings based on your life plans. Do you want to buy a house? If so pay the minimum on your loans and save the extra for a down payment. You'll save more money in the long run by being able to put up a huge down payment then you'll loose in extra interest on your student loans. Do you intend to spend a few years in big law then take a low-paying public interest job? If so pay the minimum on your loans and take advantage of IBR. Do you intend to spend a few years in big law then go to a low paying private sector job? Then by all means pay off your loans as quickly as possible.

Also, re: "this market" remember we're talking about the next 3-5 years.

I think we're on the same page then. The point I'm just trying to drive home is that if you're choosing between a long term financial investment (bonds, stocks, etc.) and paying down your loans, you should only choose the former if you think you can earn greater than 9% (if stocks) and 10% (if bonds or other fixed income securities). Personally, I wouldn't expect to earn more than 9-10% on average in any investment over the next ten years. You also have to adjust for risk. Your 9-10% return on loans is risk free, whereas even if you expect to earn 10% in the stock market, there's a high attendant risk level. A rational investor will demand a premium of at least 4.00% over their risk free rate to invest in stocks. So really you should be expecting 13-14% in the market in order to make that the correct investment.

For me, as a young bachelor going into big law and hoping to stay for 4-5 years and either continue on the partnership track or exit into an in-house position, with no plans to purchase a home soon, it makes the most sense to invest in (1) a reasonable cash cushion ($30,000 or so) and (2) my loans. This is because I believe that the current long term outlook does not provide risk adjusted opportunities to earn more than 9-10% per year.

[Bronte]

Re: leaving big law after 2-3 years. I don't really see the advantage of paying down your loans more quickly in that scenario. If you do leave big law after 3 years you've still go the cash you can apply to your loans. You're in the same position minus about $10k, which is nothing since you'll still be $70k or so in the hole. At the same time recall that IBR will limit your loan payments to 15% of your income so it's not like you'll be stuck making $2,700/month payments on $50k salary.

In the long term you'll make more than the investor who exits into the same job but who made minimum payments during the 2-3 year period. That's what this spreadsheet shows: https://docs.google.com/spreadsheet/ccc ... n_US#gid=0.

[snailio]

Re: leaving big law after 2-3 years. I don't really see the advantage of paying down your loans more quickly in that scenario. If you do leave big law after 3 years you've still go the cash you can apply to your loans. You're in the same position minus about $10k, which is nothing since you'll still be $70k or so in the hole. At the same time recall that IBR will limit your loan payments to 15% of your income so it's not like you'll be stuck making $2,700/month payments on $50k salary.

Leave it to rayiner to find the weakest part of my argument, my argument gets stronger with time, and since we are talking 3 years out lets assume a 10% limit on income via the new legislation just for shits and giggles.
I guess my problem with this scenario is the "savings" theory, that sounds great, but in reality I would think most would not hold to it. I'm just being more of a realist here, of course if you can hold your priorities straight well that's different, but imo that's a big if for most people.

[okinawa]

.

[Bronte]

The first spreadsheet I made was using imaginary numbers to show the principle. Here's a spreadsheet showing two big law investors who exit into a job paying $80,000 after five years. One's on a 10-year plan, the other is on a 5-year plan. The disparity is huge. I made it quickly, so the numbers may be fucked up. But when you take into account the salary increases of a big law associate in the first five year, he's putting a very large amount of money into a higher earning asset than his peer who's investing in the market. He ends up making way more.

https://docs.google.com/spreadsheet/ccc ... li=1#gid=0