how long does it REALLY take to pay the debt!? Forum

[nellie06]

Ok I know that a lot of people repeat the adage that 'hey don't sweat the debt, few years in biglaw will take care of it'. Ok so let's say someone comes out of law school with 180k in debt.

From my ballpark estimates, it seems like paying off 20k a year would be possible if someone were pretty frugal which basically means about 6 to 7 years in biglaw. That isn't exactly a short stint considering people usually last that long only if they want to make partner not pay off bills and take on other opportunities...am I underestimating the amt people could pay every year especially in living in nyc or a similary expensive metro area?

[AVSexton]

Making $160k plus bonus in Biglaw, if you're being "frugal", you can pay back a hell of a lot more than $20k/year.

I could pay back $20k/year with a 50k salary, and I wouldn't even consider that particularly frugal. Now, I've always lived in a low-COL area of the country, and I don't think that will change much, but to me, $30k/year (pretax) is more than enough to live on. I imagine in a NYC, Chicago or San Fran/LA, you would want closer to 40-50k after payments to live comfortably. $160k+bonus, though? You should be able to pay 80k a year on your loans with a salary like that.

That isn't going to be a glamorous life, but you did say "living frugally".

[Corsair]

..

[phillyphanatic]

Let's do a little math. First, let's assume you are single and second that you get a big law gig and have a salary of $160,000. In 2007, you would be right on the threshold of the $160,850-$349,700 tax bracket. For the sake of simplicity, let's say you fall in this bracket. You're tax would have been $39,148.75. Let's round that to $40,000. Thus, you're after-tax income is a whopping $120,000. This isn't even counting any bonuses so that number could easily go up. If you wanted, you could re-pay $50,000 a year and still have $70,000 to live on. I don't know about you but I could live very easily on $70,000 in any city in the world.

[BradyToMoss]

Agreed. The debt can be paid off in 4 years with a biglaw gig, no problem.

[sluggo]

You don't get to write off loan repayments (certain type of loans maybe?) for tax purposes?

Maybe I was being overly hopeful, but I was planning on trying to pay off law school debt with two years of big-law if that's the path I took.

[snotrocket]

Assume you make $160k per year with a $40k bonus. You're single, with a state tax rate around 5%, and you want to pay off your $180k debt in three years.

The first set of numbers are your gross income minus the only deductions you can really take (other than mortgage interest). I assumed you contribute the max allowable to your 401(k) and HSA accounts, since you can't do much else to get any sort of tax break.

The second set of numbers give your after tax income, figuring in your 401(k) and HSA deductions, Federal income tax, FICA, and state tax estimated at 5% of your AGI. This leaves you with around $118k per year take home or just under $10k per month.

The last set of numbers gives your spendable income per month, after subtracting loan payments from take home pay. Assume you consolidate $180k at 7.6% interest and pay $5,610 per month, you should have no debt after three years. And you have $4,300 per month to live on. You would also, after three years, have around $65k in retirement and HSA savings -- more or less depending on your investment returns.

Code: Select all

Gross        200,000 
401(k)       (15,500)
HSA           (5,650)
---------------------
AGI          178,850
---------------------

Gross        200,000 
Deductions   (21,150)
Federal Tax  (41,879)
FICA          (9,100)
State Tax     (8,943)
---------------------
AFTER TAX    118,928 
---------------------

Monthly        9,910 
Payment       (5,610)
---------------------
NET            4,300
---------------------

Can you survive on just over $4k per month?

EDIT: Fixed silly math errors.

[BradyToMoss]

^great stuff.

[takingmytime]

Code:
Gross 200,000
401(k) (15,500)
HSA (5,650)
---------------------
AGI 178,850
---------------------

Gross 200,000
Deductions (21,150)
Federal Tax (41,879)
FICA (7,803)
State Tax (8,943)
---------------------
AFTER TAX 120,226
---------------------

Monthly 10,019
Payment (5,610)
---------------------
NET 5,360
---------------------

Can you survive on just over $5k per month?

I thought the standard bonus was around 15-20 does anyone know this conclusively.

Also, I think your analysis is quite good but I did the calculations for myself (your's seemed too generous) and found net = 4,100 which is about 20% less.

I think you lowballed federal tax and fica by a bit. Also if you net 10,019 a month and pay 5610 in loans then your monthly disposable income is only 4,049.

But your point still stands - these are just details - and please correct me if I read something incorrectly.

[tsukasa]

Agreed, why pay off 20k a year when you can pay off 40 or 50?

will i save a significant amount of interest if I pay more per year?

[orangeswarm]

nm

[YoungFogey]

Agreed, why pay off 20k a year when you can pay off 40 or 50?

will i save a significant amount of interest if I pay more per year?

Yes.

You don't get to write off loan repayments (certain type of loans maybe?) for tax purposes?

No -- well, technically yes, but the amount is minimal and you will be way above the income cap if you are doing Big Law.

Maybe I was being overly hopeful, but I was planning on trying to pay off law school debt with two years of big-law if that's the path I took.

It takes a good deal of discipline to do it in two years, but it can be done.

[BigAristotle]

Depends on the interest of your various loans. I plan on paying my high interest loans ASAP, living as frugally as possible to do so. MY low interest consolidated loans, I'll probably play minimum on and invest the remainder of my money, until the loans aren't a factor any longer, as my interest rate on my consolidate loans are supppppppppppper low right now. My savings account% is higher than the interest on my current student loans.

[sluggo]

Yeah definitely. I would approach it the same way.

[takingmytime]

I think you lowballed federal tax and fica by a bit.

FICA is only paid up through $102,000. He is right on that. I didn't check federal tax.

That is true but unless I am mistaken you pay medicare (aprox 1.5%) on all income.

[takingmytime]

Depends on the interest of your various loans. I plan on paying my high interest loans ASAP, living as frugally as possible to do so. MY low interest consolidated loans, I'll probably play minimum on and invest the remainder of my money, until the loans aren't a factor any longer, as my interest rate on my consolidate loans are supppppppppppper low right now. My savings account% is higher than the interest on my current student loans.

Also, if you have good enough credit you can pay off loans with large balance transfers from new credit cards. Often you get offers of a 3% fee on a balance transfer and then 3% interests for life. Just set it on auto-pay and it works out to be better than most available loans. That's what I did with college loans - just note that there is no deferring them if you go back for an LLM or whatever so keep it to around 50-60k.

[philo-sophia]

Making $160k plus bonus in Biglaw, if you're being "frugal", you can pay back a hell of a lot more than $20k/year.

I could pay back $20k/year with a 50k salary, and I wouldn't even consider that particularly frugal. Now, I've always lived in a low-COL area of the country, and I don't think that will change much, but to me, $30k/year (pretax) is more than enough to live on. I imagine in a NYC, Chicago or San Fran/LA, you would want closer to 40-50k after payments to live comfortably. $160k+bonus, though? You should be able to pay 80k a year on your loans with a salary like that.

That isn't going to be a glamorous life, but you did say "living frugally".

Dude, i don't know what part of alabama you're from but living "comfortably" in NYC on $40-50K? $40K is like the poverty line in manhattan. If by "comfortable" you mean you have shelter somewhere in the non-gentrified part of Brooklyn where you can heat up your Ramen noodles over an old stove that hasn't been updated since the 1970's then maybe you could swing that, but if you want what most people would call decent living arrangements, and particularly if you're gonna want to actually live in manhattan you're in for a serious wake up call if you're budgeting $40-$50K for a comfortable lifestyle. If you're willing to have a roommate, you can get a decent place for $1,500 if you're willing to live in the cheaper parts of manhattan (far upper east side, hell's kitchen and parts of murray hill). If you want to live alone, $2,000 will pretty much be your minimum monthly rent. And don't forget the $3,000 you'll pay the realtor for giving you the key. You'll need a subway pass, so that's another $75/month. Want a gym? Let's be frugal and stay away from the nicer places like Equinox...call it $100/month. Food as a whole isn't all that much worse than the rest of the northeast, except you should realize that if you're renting an apt for $2K your kitchen won't exactly be a chef's dream, so you'll probably eat out more often than you used to...although this will be somewhat offset by all the free meals you get late night at the office. Oh, and also at a lot of the firms, you're gonna need to go on a $2,000 to $3,000 shopping spree at Brooks Bros so you can dress as required.

And for me a "comfortable" lifestyle means going out and grabbing dinner and/or drinks with friends once or twice/wk. Let's say these dinners aren't fancy (but not getting hot dogs from Grays Papaya either) and say you spend $40 (if you don't get wine or drinks at dinner). Now let's say you go to a decent bar and have three drinks over the course of the evening, so 3*$9=$27. So far you've spent $67 over the course of these three hours...you're doing well by NYC standards. Now, you need to get home. If you live in Manhattan, a cab is gonna run you $10 to $15. If you live in Brooklyn, call it $25-30 (if you can even find a cab that will take you there late at night). So assuming you took the subway at the beginning of the evening you've spent roughly $85 since leaving the office on this Friday evening. If you only go out once/wk, your friday evenings alone will cost you between $4 and $5K for the year.

I had a $45K salary in NYC about 3 years ago, and even with significant parental support on top of that i was definitely not living "comfortably".

[MPaulE]

Don't some big law firms help you refinance your debt at a lower rate?

[AVSexton]

First of all, I'm from Madison, WI, not Alabama- no need to be insulting.

And yes, to me, living "comfortably' involves a roof over my head, heat, and the ability to buy food and pay for the internet. I've lived a lot less comfortably than that; it is all a matter of perspective.

When one talks about living frugally- that doesn't include going out a couple times a week and dropping $70 a shot. It also probably doesn't involve living in Manhatten, either. Plenty of people live in New York making a lot less than 40k a year.

So, it is all about perspective.

[thespinstartshere]

I had a $45K salary in NYC about 3 years ago, and even with significant parental support on top of that i was definitely not living "comfortably".

But was this 45k before or after taxes? If it was the former, you were obviously living on far less than 45k. If you have 40-50k after all taxes, 401k funds and students loans have been accounted for, I would think that you would be able to live relatively comfortably. Maybe you are not eating at Uncle Jack’s every week, but I’ll take Gray’s or John’s on Bleeker for a year or two.

Also, I was able to live on a 45k salary (before taxes) in Chicago very comfortably with little parental support. NYC is clearly one of the most expensive cities in the country, so obvious adjustments need to be made to any calculations involving that locale.

[thedogship]

Let's be honest though - if you live in a big city like NYC or LA, you're not going to be living frugally - or at least most normal, young people will not. You're going to be killing youself with long hours at work - when you get a free moment you're going to want to live it up - which requires dropping cash in those cities. It's great to think that "oh, i'll be disciplined for 3 years and save save save and pay down the debt quickly - but when friday night rolls around you are going to splurge, and those add up. Plus a decent place to live in NYC is crazy expensive. Obviously I'm not saying you can't pay off debt at a reasonable rate and live comfortably doing biglaw - I'm just saying that I think it will take people a lot longer than they anticipate because their lifestyles that they become accustomed to won't permit those spartan spending habits. My friends on wall st are a perfect example of that. They work long hours, get paid a boat load, but have high COL and tend to splurge a bit when they have the chance or free time in order to stay sane. When you work 80-100 hours per week, you're probably not going to want to stay in on a friday night in order to save some money. I'm sure plenty will disagree, but that's MHO.

[takingmytime]

Also, the cheap housing is not where you will be working so most people would rather be within 15 minutes of their apartment than 30-40 minutes out where it is cheaper. When you only have a couple of free hours a day this commute time can be a prized possession.

[YoungFogey]

Let's be honest though - if you live in a big city like NYC or LA, you're not going to be living frugally - or at least most normal, young people will not. You're going to be killing youself with long hours at work - when you get a free moment you're going to want to live it up - which requires dropping cash in those cities. It's great to think that "oh, i'll be disciplined for 3 years and save save save and pay down the debt quickly - but when friday night rolls around you are going to splurge, and those add up. Plus a decent place to live in NYC is crazy expensive. Obviously I'm not saying you can't pay off debt at a reasonable rate and live comfortably doing biglaw - I'm just saying that I think it will take people a lot longer than they anticipate because their lifestyles that they become accustomed to won't permit those spartan spending habits. My friends on wall st are a perfect example of that. They work long hours, get paid a boat load, but have high COL and tend to splurge a bit when they have the chance or free time in order to stay sane. When you work 80-100 hours per week, you're probably not going to want to stay in on a friday night in order to save some money. I'm sure plenty will disagree, but that's MHO.

^^^^^

This is what usually happens. No, not to everyone, but over the years I've found this to be the norm. It's rare in life that you have both time and money. When you are flat broke you will spend 3 hours taking two modes of public transportation across town to save $10 on some item you need to buy. As much as you want to believe you will extend this lifestyle for a couple of years into a BigLaw career, most people do not. The hours grind at you, people like to socialize, and most people cave -- they lack the time, but have the money.

Further, life events often come up in law school. Lots of people get married during or within the first few years out of law school. That can change your economics fast (for the better or worse).

It's good to plan to pay off things fast. It generally isn't good to count on doing it.

[BradyToMoss]

Ok, but we can still make payments far in excess of 20k/year. And you will save tons of money on interest on student loans if you pay more money. All the extra payments go against your principal rather than your interest, it will make a huge difference. I see no reason for someone making BigLaw money to have student loans more than 5 years after school. If you do, I'd hope you invested that money hoping for better returns against the added-interest you'd accumulate.

[YoungFogey]

Ok, but we can still make payments far in excess of 20k/year. And you will save tons of money on interest on student loans if you pay more money. All the extra payments go against your principal rather than your interest, it will make a huge difference. I see no reason for someone making BigLaw money to have student loans more than 5 years after school. If you do, I'd hope you invested that money hoping for better returns against the added-interest you'd accumulate.

Oh, I agree that, barring major life changing events, you should be able to pay them down a lot faster. It has just been my experience that this is the exception, rather than the rule in practice.