Managing Massive Law School Debt

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Valuethinker
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Re: Managing Massive Law School Debt

Post by Valuethinker »

robocop wrote:
Valuethinker wrote:
Dianne wrote:
Valuethinker wrote:
You can't be in law without having decent clothes, good hairdresser and manicure etc. etc. You'll never get promoted as a woman in law without that.
I disagree with this. Female lawyers succeed all the time without manicures or expensive haircuts or clothing (as do male lawyers). I have never had a manicure, and none of my female colleagues ever talk about manicures. The people making the promotion decisions simply don't notice that sort of thing. Inappropriate clothing will get noticed, of course, but if it's a conservatively-styled suit in good condition, it's not going to matter whether you bought it at Penney's or Neiman's. Buy some high-quality business clothes in classic styles at a mid-level department store, get your hair cut at Supercuts, and skip the manicures, and you'll look just fine for this career.
Dianne

I shall bow to knowledge 'on the ground'.

In the context I have worked with lawyers (London - finance) the women have all looked pretty sharp-- no 'off duty'. Now for a bloke that is easy, get a decent suit, shave and shower, get someone to iron your shirt & polish your shoes. For a woman that's just harder. I don't know where London solicitors (women) buy their suits and dresses but they usually look pretty good.

I was simply expressing a realization that a young woman in professional life cannot 'cram down' the lifestyle expenses in quite the way a young man can (and I lived in some pretty crummy places that a young woman working late should probably not have lived in-- w hat you'd call 'Projects' etc.).

But I am not in the profession, wrong city, and the wrong gender: so I bow to your judgement on this.
Yeah you can get away with not having a good hairdresser or manicures- I am living proof of that! I avoid dyeing my hair and manicures because they eat up so much moola. If the hair doesn't look so great, a neat bun is perfectly acceptable. Generally, as long as you look professional and are clean I don't think anyone pays attention.

To keep my clothing expenses down, I also only shop sales at places like The Limited, Ann Taylor Loft, Athleta, and Modcloth. They are good enough for business casual environments and if you watch sales you can get good dress pants for under $40, dresses under $40, cardis under $30, and blouses under $20.

If you have to wear a suit every day though, I would go a bit higher quality. I don't have to wear one unless in court or in front of a client, so I can get away with a cheaper option.

I also want to echo what some others have mentioned- you want to live very frugally, but remember to take care of yourself. Many biglaw jobs are very draining, so making sure you are eating, exercising, and sleeping well is very important to your happiness and wellbeing. That doesn't mean you should not try to minimize these expenses (I brown bag lunch and work out in my apartment gym), it does mean that you shouldn't obsess over the loans so much that you aren't taking care of yourself. If you do obsess too much, you will probably burn out and not keep the high paying salary. Additionally, depending on your firm policy, it is often more cost-effective to pay a higher price for something and work an extra hour. For example, I get a certain amount per hour if I go over quota, so I know exactly how much my time is worth. If I have to get a $5 sub at Subway in order to have a quick and easy dinner so I can work an extra half hour, I do it without even thinking about it because I end up way ahead.

Finally, there is a certain amount of socializing both with other firm employees and other attorneys/professionals that is encouraged at firms. Take advantage of this, especially if you are not sure you want to stay there forever. Of course, you can try to get most of this paid for on the company card, but even if you have to fork out some dough, if you build up a good professional network and find good mentors, it will be very helpful down the road.
I am sure this is all excellent advice.
Valuethinker
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Re: Managing Massive Law School Debt

Post by Valuethinker »

market timer wrote:
goggles wrote:Over the next five or so years, you can pay down your debt AND save up some money for retirement. Here's an example:

(note that this neglects any market gains or losses and also ignores tax treatment, but it's a guide)
2011: add $5k RIRA; total $5k saved
2012: add $5k RIRA + $17k 401k; total $27k saved
2013: add $5k backdoorRIRA + $17k 401k; total $49k saved
2014: add $5k backdoorRIRA + $17k 401k; total $71k saved
2015: add $5k backdoorRIRA + $17k 401k; total $93k saved
2016: add $5k backdoorRIRA + $17k 401k; total $115k saved
This is the right idea. I think it's debatable whether to max out the Roth for the first couple years (personally, I'd suggest starting to max out the Roth once OP is 3 years away from paying off all the loans), but I strongly agree that the 401K should be maxed out every year, even while carrying these loans.
1. there are differences between your situation in life and AFAWK the position of the OP, re backstop. You like leverage, you've used it before in your investment strategy.

2. you are basically suggesting leveraging your investment into the market. But that ignores the Option Value of being student debt free. For the OP, in a notoriously demanding and stressful career, either she will make it, in which case this is all academic, she can catch up on her savings later, or having the Option Value of exit without 7% student loans is huge.
Valuethinker
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Re: Managing Massive Law School Debt

Post by Valuethinker »

danwhite77 wrote:As a seventh (or is it eighth, it has been so long I can't remember anymore) year associate in biglaw, I echo the sentiments of everyone advising you to pay down your loans as quickly as possible and hold off on a home purchase until then. I, myself, have been renting for the last three years and my homeowner fellow associates are very envious of my housing situation.

One important thing to keep in mind - don't listen to your coworkers when they make fun of you for saving money and paying down debt (and they will). Lawyers (at least my fellow associates who are probably typical) oftentimes have awful personal finance habits. They are, in effect, merely conduits through which money flows. Don't listen to them when they rationalize the purchase of a new car, new house, extravagant vacation, taking on more debt etc. You are way ahead of the curve by posting here. You already understand what most of your coworkers will only learn once they've been Lathamed: you aren't just saving money -- you're buying your own freedom by paying down debt. Don't lose sight of that fact.
Coupled with the advice from women posters (reacting to my ignorant advice about lifestyle) this sounds like ohh-so-good advice.The whole point about working hard when you are young, all that schooling, all that debt, is to be in a position by late 20s/ early 30s with a clean balance sheet and *options*. If you stay on in Big Law then you will have so much money that it's not an issue (til you get kids, house in Brookline, private schools etc.) and if you do not, you will do so with nothing hanging over you.

I have seen a similar syndrome in finance. High salary gets burned in high living expenses. For young people in finance, a huge bill for MBA beckons. or the interminable problem of what to do after you are 30.

Law I think is little different in that there is no prospect of making multiples of base salary at an early age and whilst big law partners make $1m+ (top law firm in London about £2m) that money burns faster than you think.
Valuethinker
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Re: Managing Massive Law School Debt

Post by Valuethinker »

Just to summarize the thread so far:

- OP sounds suitably frugal and she should continue with that, without making excessive tradeoffs where she lives (remembering she is coming back from work late at night, frequently-- so safety and long commutes are both considerations)

My guess is still 1/3rd 1/3rd 1/3rd: taxes, living costs, loan repayments.

- Alex F made an important point about safety money in IRA - but $5k should do it? Alex F knows quite a lot about the law firm world if you PM him privately he might explain

- Internal Rate of Return for paying down student debt, particularly on a risk-adjusted basis, is hugely attractive. You are getting the expected returns of equities, but at no risk

- Vt opined and got nicely shot down, cue trailing smoke as the enemy F190 fighter goes down-- the good thing is several real time women lawyers chipped in on the necessaries as a working woman in the law, so we replaced opinion with data. We also heard some good advice generally about not getting caught up in the lifestyle race of the young Associate

- the goal for the next 2-3 years is to liquidate debt and find your way in Big Law. At which point you will already be getting signals from The Firm about your future. If Big Law is how you wish to spend your life then great, the money and the prestige, working on important matters for your clients, will flow, and eventually lead on to non-executive positions in other areas as well-- you can become a trusted mentor to your clients, in many ways there is no one closer to us than our lawyer exept maybe our doctor. If not, then being free of the loans will give you a whole host of options (corporate, government, not for profit, education perhaps) that you just don't have at the moment with loans that big.

Modern law, like modern finance, has become excessively transactional. But there must still be ways to carve out a niche as an adviser, counsellor, mentor.

(note on education NYT had an article about law professors. Too many years in practice is a *disadvantage*-- the schools are ranked by their publications which are largely theoretical in nature, and a school which tries to be too 'practical' in its teaching gets downgraded (I think Vanderbilt tried, and got into trouble for it). The ideal background is said to be a Phd in microeconomics. Sigh. Imagine if the ideal background for medical school teaching was never to have touched a live patient).

I met a guy once who told me that he had had ONE course in law school he used in his working life: a course on the modern corporation by Frank Partnoy (he wrote a memorable work of his time in finance FIASCO). One course in 3 years of law and $150k+ of tuition.

The practice of Law is so different from the study of Law that it's really impossible to know whether it will suit most people, until they do it. Just plan, in the long term, so that you do it because it's a career that consumes and impassions you, NOT simply because you still have student loans or a big mortgage to pay down.

And always remember George V. Higgins. OK he was a criminal attorney (in Boston) not civil. But he wrote some of the best crime novels (in particular: Friends of Eddie Coyle, which was also an excellent movie with Robert Mitchum)-- his ear for the Boston argot was perfect. Later novels weren't as good.
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market timer
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Re: Managing Massive Law School Debt

Post by market timer »

Valuethinker wrote:
market timer wrote:
goggles wrote:Over the next five or so years, you can pay down your debt AND save up some money for retirement. Here's an example:

(note that this neglects any market gains or losses and also ignores tax treatment, but it's a guide)
2011: add $5k RIRA; total $5k saved
2012: add $5k RIRA + $17k 401k; total $27k saved
2013: add $5k backdoorRIRA + $17k 401k; total $49k saved
2014: add $5k backdoorRIRA + $17k 401k; total $71k saved
2015: add $5k backdoorRIRA + $17k 401k; total $93k saved
2016: add $5k backdoorRIRA + $17k 401k; total $115k saved
This is the right idea. I think it's debatable whether to max out the Roth for the first couple years (personally, I'd suggest starting to max out the Roth once OP is 3 years away from paying off all the loans), but I strongly agree that the 401K should be maxed out every year, even while carrying these loans.
1. there are differences between your situation in life and AFAWK the position of the OP, re backstop. You like leverage, you've used it before in your investment strategy.

2. you are basically suggesting leveraging your investment into the market. But that ignores the Option Value of being student debt free. For the OP, in a notoriously demanding and stressful career, either she will make it, in which case this is all academic, she can catch up on her savings later, or having the Option Value of exit without 7% student loans is huge.
Neither goggles nor I recommended how to invest the money. Our advice is based on tax savings, not expected equity returns. In fact, I've done much as what goggles suggested for the past several years while carrying loans, having now saved $120K in my 401K and Roth, and it's 100% cash. I'm not sure if you have a 401K type of account in the UK, but in the US, for young, highly taxed workers, the 401K is extremely valuable. If you want to talk option value, the option value of deferring taxes today with the ability to convert to a Roth at some point when one's taxes are lower in the future is huge.

We discuss some numbers in this thread: http://www.bogleheads.org/forum/viewtop ... =1&t=90491
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norookie
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Re: Managing Massive Law School Debt

Post by norookie »

HardKnocker wrote:Pay off the debt.
:D +1, I started that road, paying while working FT as I progressed. Where else can you get, in this current investing environment, guaranteed 6%+ return?? Girls like houses, not renting. Get a house when its less than 30% of your income, and you have put some cash aside for it's down payment after starting your retirement direction. Most guys will rent forever, it's their nature. The more you move the more females around :wink: IYKWIM. Good Luck! WELCOME TO BHs!
" Wealth usually leads to excess " Cicero 55 b.c
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SamGamgee
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Re: Managing Massive Law School Debt

Post by SamGamgee »

tyrion wrote:
SamGamgee wrote:$1500 sounds pretty high.

If I were you I would get a nondescript white van and sleep in the back. I would get a gym membership close to the office and workout & shower there. I'd have that loan paid off in no time and then save up a big emergency fund and a house downpayment.
Really? In Boston? In winter?

Paying off the loan is important, but let's not suggest the new lawyer making 145k also take a job delivering pizzas to pay down the loans a few weeks faster.

Live frugally. Save on recurring expenses where possible. Pay off the loans as fast as you can. But also concentrate on succeeding at work. Networking.
Life is an adventure... I wish I had thought to try this before I got married and have kids. If you don't like it you can always find a different arrangement.
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LawGirl
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Re: Managing Massive Law School Debt

Post by LawGirl »

Thanks for all the replies. I wish we could get a panel to discuss these issues at the law school!

Living within walking distance of work is very important to me from a lifestyle perspective. Knowing that I'll be working long hours, I feel the need to guard my other hours carefully. Walking to work as opposed to taking public transport should get me a little extra exercise, time to be outdoors and I still think my commute will be shorter than if I lived out in Brookline/Cambridge/Somerville. I'd like to use that extra time to get to the gym, cook healthy meals, and stay in touch with friends. I know many people have monthly mortgage payments that are less than $1500, but such is the rental market in Boston!

I like the suggestion about balancing debt payment with investing in tax-free space. Because I'm uncomfortable having so much debt, I still think that I'll focus the first year on knocking out my loans that are at 8.5% and 8.25%. But I will make a 2012 Roth contribution.

I think some people here might think I'm a bit younger than I am. I'll be 29 when I start working. Does that changes things regarding the balancing 401(k) contributions and debt repayment?

Thanks again!
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SamGamgee
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Re: Managing Massive Law School Debt

Post by SamGamgee »

LawGirl wrote:Thanks for all the replies. I wish we could get a panel to discuss these issues at the law school!

Living within walking distance of work is very important to me from a lifestyle perspective. Knowing that I'll be working long hours, I feel the need to guard my other hours carefully. Walking to work as opposed to taking public transport should get me a little extra exercise, time to be outdoors and I still think my commute will be shorter than if I lived out in Brookline/Cambridge/Somerville. I'd like to use that extra time to get to the gym, cook healthy meals, and stay in touch with friends. I know many people have monthly mortgage payments that are less than $1500, but such is the rental market in Boston!

I like the suggestion about balancing debt payment with investing in tax-free space. Because I'm uncomfortable having so much debt, I still think that I'll focus the first year on knocking out my loans that are at 8.5% and 8.25%. But I will make a 2012 Roth contribution.

I think some people here might think I'm a bit younger than I am. I'll be 29 when I start working. Does that changes things regarding the balancing 401(k) contributions and debt repayment?

Thanks again!
Transportation is a big expense for most people. If you aren't going to have any commute costs and you're living without a car, $1,500 for rent sounds a lot more reasonable.
Valuethinker
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Re: Managing Massive Law School Debt

Post by Valuethinker »

market timer wrote:Neither goggles nor I recommended how to invest the money. Our advice is based on tax savings, not expected equity returns. In fact, I've done much as what goggles suggested for the past several years while carrying loans, having now saved $120K in my 401K and Roth, and it's 100% cash. I'm not sure if you have a 401K type of account in the UK, but in the US, for young, highly taxed workers, the 401K is extremely valuable. If you want to talk option value, the option value of deferring taxes today with the ability to convert to a Roth at some point when one's taxes are lower in the future is huge.

We discuss some numbers in this thread: http://www.bogleheads.org/forum/viewtop ... =1&t=90491
If you save money, then you have to invest it!

Even if you invest it in cash. Expected real return zero.

You are proposing borrowing money at 8% and investing it for a 0% return.

What tax advantage makes that a good calculation?
Valuethinker
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Re: Managing Massive Law School Debt

Post by Valuethinker »

LawGirl wrote: I like the suggestion about balancing debt payment with investing in tax-free space. Because I'm uncomfortable having so much debt, I still think that I'll focus the first year on knocking out my loans that are at 8.5% and 8.25%. But I will make a 2012 Roth contribution.

I think some people here might think I'm a bit younger than I am. I'll be 29 when I start working. Does that changes things regarding the balancing 401(k) contributions and debt repayment?

Thanks again!
Law Girl.

The reasons NOT to pay off a debt as soon as are:

- need for liquidity - it's harder to borrow again once you have repaid it - you do need some emergency funds

- the tax exempt space point

Now on the latter:

- that works out if expected return (after tax) of investment > cost of debt (after tax) - RISK ADJUSTED. But nothing is safer than paying down debt

If you knew you were going to work in BigLaw forever then you should max out tax exempt space.

But you do not, and the date you exit from that student loan is the date you can seriously consider a career change (if the firm has not already decided to dispense with your services).

To my mind, any other course of action (other than paying down that debt as fast as possible) is rank gambling. Gambling on your career, gambling on investment outcomes, gambling on inflation (if inflation shot over 8% then the loan would be cheap).

I view it as intellectual sophistry to advise someone who is uncertain about their career direction to invest for the long term, carrying that much debt at that interest rate (my view would shift if you were paying 3%, say).

it's one thing to want to have $10k in emergency funds-- and if the IRA is the way to do that, fine.

But generally every $1 of loan you are carrying you are going to pay back c. $3= 1 loan + 2 interest, so if you repay $1 early it's going to save you $2 in interest (that's very rough, and a bit heavy, the number is somewhere between another $1 and $2 of interest, would have to work it out).

The first time you do an LBO/ private equity deal at work, you will discover that these structures are built often so that the target companies cannot repay their loans in the expected horizon of the deal (usually modelled on 5 years, but PE tries to exit via sale or IPO in 3 years). Even now you will see Debt to EBITDA ratios (a measure of payback period in years of a loan, assuming the company stops doing anything other than paying down its debt) of 4 times-- which is impossible to pay back over the average life of the deal. Peak of the bubble the market saw 8 times and plus (guaranteeing a need to refinance the debt). Lending on the never never.

You are as a human being, that leveraged. Except not, if you pay attention to cracking that debt level down.

As to being 29 again if you knew this was the right career, then fine I'd max out on LT investment (stocks probably won't do 8% pa in the next 30 years, but they should do somewhere 5 - 8%). But generally I think it would be better to be 34 and without student debt (at that interest rate) than to have that debt still, and a bigger portfolio. And I don't think that really changes with your age-- when you are ready to make significant retirement savings, you will.
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englishgirl
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Re: Managing Massive Law School Debt

Post by englishgirl »

Valuethinker wrote: To my mind, any other course of action (other than paying down that debt as fast as possible) is rank gambling. Gambling on your career, gambling on investment outcomes, gambling on inflation (if inflation shot over 8% then the loan would be cheap).

I view it as intellectual sophistry to advise someone who is uncertain about their career direction to invest for the long term, carrying that much debt at that interest rate (my view would shift if you were paying 3%, say).

it's one thing to want to have $10k in emergency funds-- and if the IRA is the way to do that, fine.
I disagree to some extent.

The OP is going to be making a large salary as a single person. Putting money in her 401k reduces her pre-tax salary, netting her some significant tax savings. And perhaps more importantly in her situation, the 401k is protected against creditors (in some states, more protected than an IRA, if I understand correctly). As a lawyer, even if she leaves biglaw and strikes out on her own, she's going to be a target for malpractice lawsuits. Even if she never does anything deliberately wrong - clients use malpractice suits as defence against being sued to pay their bills or in retaliation against the lawyer for losing a case. Now, most of these frivolous malpractice suits will be settled by her insurance company, but there is always a chance that she could be taken to the cleaners over a stupid mistake. I don't think advising someone to make sure (or at least consider that) they use up valuable tax-advantaged and creditor-protected space is sophistry. If she totally quits law after 5 years, the 401k is still going to be valuable. These accounts are a "use it or lose it" proposition - it's not like a taxable account where she can put in an unlimited amount after she's paid down the debt.

The amount she can put away is $17k pre-tax, and $5k post-tax. Her starting salary is $145k - let's just knock that $22k off the top - are you saying that a person with an effective salary of $123k can't pay down debts as well? Of course she should focus on reducing the debt as quickly as possible, but I think to totally discount the 401k without knowing any more details is not the right way to go. [Will she get a match? Probably not. Are the fees high? Probably, but should be some low cost options too. How much is she able to keep her lifestyle in check to afford both aggressive debt repayment and 401k contributions? etc]

In my view she can do both, invest AND pay down debt, IF she keeps her head and doesn't get sucked into the biglaw expenditure patterns. While expensive lunches and/or happy hours are something that she should go to for networking (maybe not every day), she can certainly keep costs down on clothing, cars, and all the other fancy stuff.
Sarah
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danwhite77
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Re: Managing Massive Law School Debt

Post by danwhite77 »

One attribute of student loan debt weighs very much in favor of paying it all off -- student loan debt is essentially non-dischargeable in bankruptcy. It's not like a mortgage, car loan, gambling debts, etc. Once you have student loan debt, the only way to get rid of it is through paying it off (or IBR which is not something you want to pursue if at all possible and may disappear whenever the administration changes). So while contributing to a 401(k) and an emergency fund isn't necessarily a bad idea, remember that the most important thing to accomplish is paying down your student loan debt because you can only eliminate it one way - paying it off. I think you mentioned that some of your debt is consolidated at 2.5%. Even if you don't pay this low interest debt off, have enough money on hand that you could if necessary.

If you want any background on why it's very, very important to pay off student loan debt, poke around here for awhile: http://insidethelawschoolscam.blogspot.com/
"While some mutual fund founders chose to make billions, he chose to make a difference." - Dedication to Jack Bogle in 'The Bogleheads' Guide to Investing'.
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goggles
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Re: Managing Massive Law School Debt

Post by goggles »

As I've said, I think tax-sheltered space is valuable and should be fully used by highly paid people.

I also think Valuethinker's talk about "sophistry" and "gambling" is quite overheated. It's emotional. You need to think about this rationally. Hell, in case of emergency, you could pay the penalty on the 401k and get the money out. Liquidity is not a bad thing.

Here are some numbers (soft, to be sure, but ballpark):

Let's say you have to pay $20k per year (posttax dollars) on your debt. You can then optionally invest $22k ($17k potential401k pretax and $5k potential backdoorRothIRA posttax) or pay down debt with it.

If you focus solely on debt repayment, you'll pay off the debt faster. BUT you'll need to pay tax on the money you use to make your payments, meaning you'll need to make almost 50% more to pay those debts (using Valuethinker's reasonable 1/3 tax - 1/3 living - 1/3 savings or debt payment breakdown of your salary). This means you can pay ($20k debt payment +$5k potential backdoorRIRA all posttax) + (2/3)($17k potential pretax savings realized as earnings) = $36.3k posttax toward debt (pretax was $37.5k + $17k = $54.5k--ouch!) (Note that to make that $20k + $5k you need to earn 3/2 of the amount to pay tax on it, making it worth that $37.5k)

If you instead save that $17k pretax, here's what happens. ($20k debt payment +$5k potential backdoorRIRA all posttax) = $25k posttax toward debt (pretax was 3/2 * $25k = $37.5k). But you also save $17k pretax. (Total pretax expenditure $54.5k, but you keep $17k of that; that means you only spend $37.5k on interest repayment.) (You could also shift this around to make the $5k potential backdoorRIRA into a real backdoorRIRA, meaning you pay less to debt repayment. You get the drift.)

In exchange for saving that $17k pretax, you save $5.7k on taxes that you would have paid on it. PLUS, and I can't account for this without more specific detail (that you won't have either until you do your taxes next year), this may reduce your overall tax burden by pushing you into the 25% tax bracket.

In short, either you save $17k in your 401k, or you put $11k toward your debt.

Either way, you'll have the means to pay off your debt, probably soon. (And if you go into public interest law after working at the firm, you'll have a lower salary, be able to deduct your interest repayments, AND have a 401k well established--all good reasons to extend debt repayment for a year or two.) You would have valuable tax advantaged space and you'll save on overall taxes in the meantime.

Think about it.
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goggles
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Re: Managing Massive Law School Debt

Post by goggles »

Also, as Market Timer suggested, you really should read this thread (which is very like yours): http://www.bogleheads.org/forum/viewtop ... =1&t=90491.

I'll quote him from that thread:
market timer wrote:What needs to be considered is not 8% student loan interest vs. 2% bond fund yield, but 8% interest vs. saving 40% in taxes + 2% bond fund yield. For every $100 earned, OP has the option of paying down $60 of debt vs. putting $100 into a 401K (a 67% return immediately -- yes, taxes will be due in the future, but the benefits of tax deferred compounding roughly offsets this for young people). If he can turn around and borrow $50 from the 401K to pay down the loan, it's a no-brainer.
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danwhite77
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Re: Managing Massive Law School Debt

Post by danwhite77 »

goggles wrote:Also, as Market Timer suggested, you really should read this thread (which is very like yours): http://www.bogleheads.org/forum/viewtop ... =1&t=90491.

I'll quote him from that thread:
market timer wrote:What needs to be considered is not 8% student loan interest vs. 2% bond fund yield, but 8% interest vs. saving 40% in taxes + 2% bond fund yield. For every $100 earned, OP has the option of paying down $60 of debt vs. putting $100 into a 401K (a 67% return immediately -- yes, taxes will be due in the future, but the benefits of tax deferred compounding roughly offsets this for young people). If he can turn around and borrow $50 from the 401K to pay down the loan, it's a no-brainer.
The perfect is the enemy of the great. 40% deferral upside vs. lifetime of indentured servitude downside. I know you mean well, and there's merit to your analysis. But the legal market is unique and exceptionally difficult outside of biglaw. The legal job market is increasingly becoming bimodal, there are "haves" and "have nots." If you start your career as a "have" the best and safest course of action is to pay down your non-dischargeable student loan debt. If you don't believe me, read this post:

http://insidethelawschoolscam.blogspot. ... ssage.html

Then, if you still don't believe me, start at the very first post on that blog and read all posts and comments until present. It's an awful market out there for lawyers without experience, such as the OP.

You can't necessarily control how long you're in biglaw, but you can control paying off your debt.
Valuethinker
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Re: Managing Massive Law School Debt

Post by Valuethinker »

goggles wrote:As I've said, I think tax-sheltered space is valuable and should be fully used by highly paid people.

I also think Valuethinker's talk about "sophistry" and "gambling" is quite overheated. It's emotional. You need to think about this rationally. Hell, in case of emergency, you could pay the penalty on the 401k and get the money out. Liquidity is not a bad thing.


It may or may not be emotional (that's more in the recipient than the speaker)-- perhaps a better word that you meant to use is 'rhetorical'? (ie meaning to persuade)

The point about raiding 401k is reasonable-- and in the UK the equivalent structure that is impossible (pre age 55).

I do think that strict denotation, when you are offered a sure thing (saving interest) and instead you bet on asset returns, then you are 'gambling' or 'speculating'. Now if your loan is at 3% I concede that might be worth doing. But at 8%? That's more or less a 6% real rate of interest. (over 8% rate of interest if we take inflation linked bond yields at face value). Ouch.

As to sophistry. Well I think the underlying argument is a bit towards that. In this sense: a debt has a very real set of consequences, if not paid and properly discharged. And that much debt, more or less, is $1k a month in interest alone. Default on the debt would have lots of bad consequences, including preventing OP from continuing in their profession (it would in the UK).
Here are some numbers (soft, to be sure, but ballpark):

Let's say you have to pay $20k per year (posttax dollars) on your debt. You can then optionally invest $22k ($17k potential401k pretax and $5k potential backdoorRothIRA posttax) or pay down debt with it.

If you focus solely on debt repayment, you'll pay off the debt faster. BUT you'll need to pay tax on the money you use to make your payments, meaning you'll need to make almost 50% more to pay those debts (using Valuethinker's reasonable 1/3 tax - 1/3 living - 1/3 savings or debt payment breakdown of your salary). This means you can pay ($20k debt payment +$5k potential backdoorRIRA all posttax) + (2/3)($17k potential pretax savings realized as earnings) = $36.3k posttax toward debt (pretax was $37.5k + $17k = $54.5k--ouch!) (Note that to make that $20k + $5k you need to earn 3/2 of the amount to pay tax on it, making it worth that $37.5k)

If you instead save that $17k pretax, here's what happens. ($20k debt payment +$5k potential backdoorRIRA all posttax) = $25k posttax toward debt (pretax was 3/2 * $25k = $37.5k). But you also save $17k pretax. (Total pretax expenditure $54.5k, but you keep $17k of that; that means you only spend $37.5k on interest repayment.) (You could also shift this around to make the $5k potential backdoorRIRA into a real backdoorRIRA, meaning you pay less to debt repayment. You get the drift.)

In exchange for saving that $17k pretax, you save $5.7k on taxes that you would have paid on it. PLUS, and I can't account for this without more specific detail (that you won't have either until you do your taxes next year), this may reduce your overall tax burden by pushing you into the 25% tax bracket.

In short, either you save $17k in your 401k, or you put $11k toward your debt.

Either way, you'll have the means to pay off your debt, probably soon. (And if you go into public interest law after working at the firm, you'll have a lower salary, be able to deduct your interest repayments, AND have a 401k well established--all good reasons to extend debt repayment for a year or two.) You would have valuable tax advantaged space and you'll save on overall taxes in the meantime.

Think about it.
I can't assail your monetary logic because I don't know how US tax system works in its entirety (leaving aside student loans, which are deducted at source from salary, interest is not tax deductible in any form in the UK), but I do think there is an underlying assumption that one keeps working at this high level of income for 3 years?

A pre tax investment (pension) locks the money up to 55. It's not worth doing unless expected returns exceed borrowing costs on a risk adjusted basis (which they never do). Post tax investment (that's your IRA) same principle.

It also looked to me like you are ignoring the effect of compounding? Ie pay off an additional 5k of debt (my way) and that saves you $400 pa x remaining life of the loan. On top of which, in year 2 it would be $432, year 3 $467 etc (compound interest).

One point AlexF brought up, the need for an emergency fund. So if $5k or $10k goes into an IRA, and that's cashable, that's not a bad way to do it.
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Re: Managing Massive Law School Debt

Post by Valuethinker »

danwhite77 wrote:One attribute of student loan debt weighs very much in favor of paying it all off -- student loan debt is essentially non-dischargeable in bankruptcy. It's not like a mortgage, car loan, gambling debts, etc. Once you have student loan debt, the only way to get rid of it is through paying it off (or IBR which is not something you want to pursue if at all possible and may disappear whenever the administration changes). So while contributing to a 401(k) and an emergency fund isn't necessarily a bad idea, remember that the most important thing to accomplish is paying down your student loan debt because you can only eliminate it one way - paying it off. I think you mentioned that some of your debt is consolidated at 2.5%. Even if you don't pay this low interest debt off, have enough money on hand that you could if necessary.

If you want any background on why it's very, very important to pay off student loan debt, poke around here for awhile: http://insidethelawschoolscam.blogspot.com/
Am I right in thinking that personal bankruptcy would more or less prevent one from practising law?

It would do so in the UK.

Our legal education system here is similarly bimodal. There are winners at Big City firms ('Magic Circle'), and there are a lot of unemployed lawyers or ex lawyers. Massive pressure from clients on bills, outsourcing to India etc.

The Bar (trial lawyers) is much worse: a handful of commercial chambers that make a mint, and an awful lot of barristers who struggle to make ends meet (they are all self employed sole practitioners, by the rules of the Bar). Most Barristers wind up leaving the profession.
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Re: Managing Massive Law School Debt

Post by Valuethinker »

englishgirl wrote:
Valuethinker wrote: To my mind, any other course of action (other than paying down that debt as fast as possible) is rank gambling. Gambling on your career, gambling on investment outcomes, gambling on inflation (if inflation shot over 8% then the loan would be cheap).

I view it as intellectual sophistry to advise someone who is uncertain about their career direction to invest for the long term, carrying that much debt at that interest rate (my view would shift if you were paying 3%, say).

it's one thing to want to have $10k in emergency funds-- and if the IRA is the way to do that, fine.
I disagree to some extent.

The OP is going to be making a large salary as a single person. Putting money in her 401k reduces her pre-tax salary, netting her some significant tax savings. And perhaps more importantly in her situation, the 401k is protected against creditors (in some states, more protected than an IRA, if I understand correctly). As a lawyer, even if she leaves biglaw and strikes out on her own, she's going to be a target for malpractice lawsuits. Even if she never does anything deliberately wrong - clients use malpractice suits as defence against being sued to pay their bills or in retaliation against the lawyer for losing a case. Now, most of these frivolous malpractice suits will be settled by her insurance company, but there is always a chance that she could be taken to the cleaners over a stupid mistake. I don't think advising someone to make sure (or at least consider that) they use up valuable tax-advantaged and creditor-protected space is sophistry. If she totally quits law after 5 years, the 401k is still going to be valuable. These accounts are a "use it or lose it" proposition - it's not like a taxable account where she can put in an unlimited amount after she's paid down the debt.

The amount she can put away is $17k pre-tax, and $5k post-tax. Her starting salary is $145k - let's just knock that $22k off the top - are you saying that a person with an effective salary of $123k can't pay down debts as well? Of course she should focus on reducing the debt as quickly as possible, but I think to totally discount the 401k without knowing any more details is not the right way to go. [Will she get a match? Probably not. Are the fees high? Probably, but should be some low cost options too. How much is she able to keep her lifestyle in check to afford both aggressive debt repayment and 401k contributions? etc]

In my view she can do both, invest AND pay down debt, IF she keeps her head and doesn't get sucked into the biglaw expenditure patterns. While expensive lunches and/or happy hours are something that she should go to for networking (maybe not every day), she can certainly keep costs down on clothing, cars, and all the other fancy stuff.
English girl.

She won't get a match. I think all of us said 'no 401k beyond the match'. the match is zero.

I don't know about USA but in the UK being declared bankrupt disbars you from being an officer of the court (ie a solicitor or barrister). Pretty sure on that.

I also understand US student loan debt has no escape via bankruptcy. Only death gets you out of it.

She seems to me to be in the perfect position to just liquidate this thing. Paying off say $40k in year one takes $3200 pa out of the interest and over $3500 on year 2. On my rough rule of thumb that at 8% $1 of loan principal brings on board $1 of interest (I'd have to check) I think you can see from whence I am coming? (my number would only be true if term of loan were c. 10 years).

5k pa into an IRA seems neither here nor there-- justifiable from the point of view of emergency cash (Alex F's point).
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Re: Managing Massive Law School Debt

Post by danwhite77 »

Valuethinker wrote:
Am I right in thinking that personal bankruptcy would more or less prevent one from practising law?

It would do so in the UK.
Good question, the answer is "no," on this side of the pond bankruptcy generally will not prevent someone from practicing law. There are some unique examples of individuals that involve interesting facts where the person did not pass the character and fitness review necessary to practice law in their state due to bankruptcy (and comparable situations).

http://abovethelaw.com/2011/01/characte ... his-debts/
http://abovethelaw.com/2009/07/400000-i ... ness-fail/

Here's a good link regarding a lawyer that found out the hard way that $150k in debt cannot be expunged in bankruptcy:

http://abovethelaw.com/2012/02/not-even ... s-go-away/

Carrying too much student loan debt is playing with fire.

Also to your 11:02AM post Valuethinker, this statement is not entirely accurate:

"I also understand US student loan debt has no escape via bankruptcy. Only death gets you out of it."

While the deceased is no longer on the hook for the loan, if a relative co-signed for the loan, that co-signer is responsible for every penny. The Wall Street Journal published a recent article (front page, above the fold) on student loan companies collecting from the next of kin of deceased students that co-signed for loans. Which is why this bears repeating:

Carrying too much student loan debt is playing with fire.
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Re: Managing Massive Law School Debt

Post by goggles »

Several of you seem to think that $11k posttax per year at a pre-bonus salary of $145k will make the difference between ruin and repayment. $10k of that is accessible after taxes and penalties from a 401k. That means you are telling her not to contribute to the 401k because of $1,000, or .6% of her salary. If $1,000 makes the difference between ruin and success for her, something else is majorly amiss. (This also neglects how saving that $17k could save her hugely in taxes, possibly AMT.)

As an aside, bankruptcy doesn't lead to disbarment. And if you don't pay your student loans, they garnish your wages. At that point you have bigger problems. Anyway, DanWhite, she's already taken out the loans. It's too late to caution her about it.

I just don't see the downside to 401k contributions. We'll just have to agree to disagree.
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Re: Managing Massive Law School Debt

Post by jodydavis »

Congrats on graduation and landing a good job! Not easy in this environment.

As a former Boston biglaw associate, I agree with those who say you should focus primarily on paying down the student loans. I think those who are advocating the IRA may not appreciate the option value of being able to change careers as a 4th or 5th-year biglaw associate. Biglaw practice is very demanding, stressful, and not for everyone. At this point, you simply don't know whether you will enjoy it. In reality, very few people do. Of my entering class, less than 20% stayed beyond 5 years.

If you do enjoy it, you will continue to be highly compensated, and missing out on a few years of IRA contributions, while not ideal, won't be devastating, seeing as how you will be pulling in a biglaw salary. You should still be able to save well for retirement after paying off your loans, as long as you keep your expenses relatively manageable.

However, if you don't enjoy biglaw, then it is crucial that you have the option to leave, and that requires paying down your loans. I can't tell you how many people I know who hate biglaw practice but feel trapped because they have massive loans. The freedom to leave (e.g. go in house, work for a non-profit, change careers) will make a huge difference in terms of mental well-being and quality of life.

Anyway, just some food for thought. Again, congratulations!

Best,
JD
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Re: Managing Massive Law School Debt

Post by englishgirl »

Valuethinker wrote:
englishgirl wrote:
Valuethinker wrote: To my mind, any other course of action (other than paying down that debt as fast as possible) is rank gambling. Gambling on your career, gambling on investment outcomes, gambling on inflation (if inflation shot over 8% then the loan would be cheap).

I view it as intellectual sophistry to advise someone who is uncertain about their career direction to invest for the long term, carrying that much debt at that interest rate (my view would shift if you were paying 3%, say).

it's one thing to want to have $10k in emergency funds-- and if the IRA is the way to do that, fine.
I disagree to some extent.

I said.....blah, blah blah.....
English girl.

She won't get a match. I think all of us said 'no 401k beyond the match'. the match is zero.
I don't think the match matters as much as you do. Look, I've worked in biglaw for a long time. I know there's probably not going to be a match. I don't get a match. I still think the 401k is valuable protected space, and a valuable way of her reducing her taxable income.
Valuethinker wrote: I don't know about USA but in the UK being declared bankrupt disbars you from being an officer of the court (ie a solicitor or barrister). Pretty sure on that..
I'm not talking about just bankruptcy. I'm talking about financial disaster following a malpractice suit. Which could lead to her being disbarred. And that's another reason why having some protected money in a 401K is even more important. If she gets stuck with a major malpractice lawsuit, she not only loses everything outside her protected accounts and any "homesteaded" home, she loses her source of income too. I'm not suggesting that she just goes out and declares bankruptcy, I'm suggesting that she think about having some protection in case the worst happens. While people think that you have to do something heinous to be sued for malpractice, sometimes it can be a silly matter of docketing a deadline wrongly and having a cascase of errors. Or not seeing a conflict that you should have seen. It can happen.
Valuethinker wrote: I also understand US student loan debt has no escape via bankruptcy. Only death gets you out of it.
I'm not suggesting she declare bankruptcy to avoid paying student loans, which as you note, doesn't help. I'm suggesting she not ignore the 401k while she's paying off her student loans. Of course she needs to pay the loans down!
Valuethinker wrote: She seems to me to be in the perfect position to just liquidate this thing. Paying off say $40k in year one takes $3200 pa out of the interest and over $3500 on year 2. On my rough rule of thumb that at 8% $1 of loan principal brings on board $1 of interest (I'd have to check) I think you can see from whence I am coming? (my number would only be true if term of loan were c. 10 years).

5k pa into an IRA seems neither here nor there-- justifiable from the point of view of emergency cash (Alex F's point).
Yes, she's in the perfect position to just liquidate this thing. I'm saying that *I* think that in her case the 401k space is worth considering, even if it means that the loan takes a little bit longer to pay off. I'm not saying she should just make minimum payments or not put everything she can towards the loans.
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Re: Managing Massive Law School Debt

Post by danwhite77 »

goggles wrote: I just don't see the downside to 401k contributions. We'll just have to agree to disagree.
Actually, we do agree. In one of my posts I said it's not a bad idea to have an emergency fund or make 401(k) contributions. I just want to make the paramount importance of the student loan repayment obvious. If I were starting out in biglaw again, I'd do the same thing I just did:

(1) Emergency fund; (2) 401(k) funding; (3) pay down student loan debt.

I would not contribute to an IRA or do anything for retirement beyond the 401(k) contributions until all of the student loan debt is paid off (or at least down to a level where you could pay it off if necessary). And I absolutely would not take on any additional debt before extinguishing the student loan debt.

Also, $1,000 may not make a difference between success and ruination, but as a BH I'm sure you're aware that $1k here and $1k there adds up.
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Re: Managing Massive Law School Debt

Post by mrwalken »

One thing that I haven't really seen mentioned here is the ability to declare 401K sheltered income whenever you want. If you do end up leaving biglaw in a few years, you may have one or more years of low or no income. Perhaps you will have kids, take a sabbatical, go back to school again (god forbid), or simply be unable to find work. In that case, you would be able to move the 401k to a roth ira and pay little or no taxes on the money (instead of the 40% you pay in biglaw). That's a pretty nice immediate return.
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Re: Managing Massive Law School Debt

Post by Jacotus »

Pay off that debt!
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Re: Managing Massive Law School Debt

Post by Valuethinker »

goggles wrote:Several of you seem to think that $11k posttax per year at a pre-bonus salary of $145k will make the difference between ruin and repayment.
If I am guilty of being rhetorical or using emotive language, then you are guilty of using a Straw Man ;-).

What 11k is is $880 of extra interest year 1, 960 something year 2 etc. Again, on my hand wavey estimation, if $1 of debt incurs $1 of interest in the life of the loan, we are talking saving $22k here *per year*.
$10k of that is accessible after taxes and penalties from a 401k. That means you are telling her not to contribute to the 401k because of $1,000, or .6% of her salary. If $1,000 makes the difference between ruin and success for her, something else is majorly amiss. (This also neglects how saving that $17k could save her hugely in taxes, possibly AMT.)

As an aside, bankruptcy doesn't lead to disbarment. And if you don't pay your student loans, they garnish your wages. At that point you have bigger problems. Anyway, DanWhite, she's already taken out the loans. It's too late to caution her about it.

I just don't see the downside to 401k contributions. We'll just have to agree to disagree.
Plus is liquidity over debt repayment. Downside is higher return for repaying debt: and a *certain* return. Now I can't properly evaluate your tax argument-- just note what I saw as the issue with it (ie about compounding).
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Re: Managing Massive Law School Debt

Post by Valuethinker »

danwhite77 wrote:
goggles wrote: I just don't see the downside to 401k contributions. We'll just have to agree to disagree.
Actually, we do agree. In one of my posts I said it's not a bad idea to have an emergency fund or make 401(k) contributions. I just want to make the paramount importance of the student loan repayment obvious. If I were starting out in biglaw again, I'd do the same thing I just did:

(1) Emergency fund; (2) 401(k) funding; (3) pay down student loan debt.

I would not contribute to an IRA or do anything for retirement beyond the 401(k) contributions until all of the student loan debt is paid off (or at least down to a level where you could pay it off if necessary). And I absolutely would not take on any additional debt before extinguishing the student loan debt.

Also, $1,000 may not make a difference between success and ruination, but as a BH I'm sure you're aware that $1k here and $1k there adds up.
I am really looking at the 8% loan interest as a risk free investment opportunity.

OP has the opportunity to invest in a loan with zero risk, that pays 8% *after tax**. When long bonds are paying less than 3% and the expected return from stocks is not 8%.

Dear Lord, can we band together as Bogleheads and acquire investment opportunities like this from BigLaw Associates? ;-).

* I am gathering student loan interest is tax deductible? that changes it, but not all that very much at US tax rates.
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Re: Managing Massive Law School Debt

Post by jlg »

Congratulations on scoring a job with big law.

My wife graduated a few years ago and went to work for a big law firm. Her job is outstandingly demanding and I'm not exactly sure how much longer she will be in her particular position.

There have been a lot of very good suggestions in this thread. One thing we did to pay down our debt was to 'snow ball' the loan payments. This is a method where you decide how much you can afford (after contributing to 401k and expenses ...) to pay toward your loans ABOVE the minimum. Lets say you can pay an extra $1000 per month. Pay down the highest interest rate loan first by applying an extra $1000 to only that loan. When that loan is paid off, your extra monthly payment will become $1000 + the minimum P&I payment you were making on the loan you just paid off. In January, you may get a bonus - put that toward your loan. You may have a really good month and have extra money left over - put that toward your loan. Eventually, it will be gone and it will feel great!

Best of luck to you.
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Re: Managing Massive Law School Debt

Post by JoeJohnson »

Valuethinker wrote:
danwhite77 wrote:
goggles wrote:

* I am gathering student loan interest is tax deductible? that changes it, but not all that very much at US tax rates.
she will make too much to deduct student loan interest
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Re: Managing Massive Law School Debt

Post by danwhite77 »

Valuethinker wrote: * I am gathering student loan interest is tax deductible? that changes it, but not all that very much at US tax rates.
The student loan interest deduction will phase out for the OP, her comp is too high to enjoy the deduction.

No argument regarding paying it all down as priority (2) (behind emergency fund). But she mentioned in an earlier post that at least some debt is consolidated at 2.5%. If that's the case (and depending on the interest rate mix with 8%) I don't have a problem contributing at least some amount to a 401(k) in advance of completely extinguishing the student loans.
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Re: Managing Massive Law School Debt

Post by JoeJohnson »

re: the guaranteed rate vs tax incentives for retirement accounts

The guaranteed return on the loan is for a fixed duration of the loan. The tax benefits of contributing to 401k pretax=huge. The benefits of receiving Roth growth for 30-40+yrs and tax-free distributions are also huge.

I'm not a big fan of debt, but EXCLUSIVELY paying down the debt vs contribution to retirement accounts is NOT a slam dunk move.
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Re: Managing Massive Law School Debt

Post by czeckers »

I would rank the order of priorities as 1) emergency fund, 2) max out tax-deferred retirement space, then 3) aggressive loan reduction. The cornerstone of your strategy will be minimizing living expenses so there is as much left over for #3.

I think not maxing out your tax-deferred retirement savings right away would be a costly mistake because of compounding.

If you are 25 years old, start investing $17,000 per year, earn 7%, and increase your investment on average by 2% (continue maxing out as the limit increases), you will have a hair over $1,250,000 by age 65.

If you wait until you are 30 years old to start, then, using the same assumptions, you will only have a bit over $1,000,000. Delaying by 5 years will mean a 20% reduction in your retirement nest egg at retirement age. If you also include the ROTH IRA in your calculations, the difference becomes even greater.

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Re: Managing Massive Law School Debt

Post by market timer »

Valuethinker wrote:
market timer wrote:Neither goggles nor I recommended how to invest the money. Our advice is based on tax savings, not expected equity returns. In fact, I've done much as what goggles suggested for the past several years while carrying loans, having now saved $120K in my 401K and Roth, and it's 100% cash. I'm not sure if you have a 401K type of account in the UK, but in the US, for young, highly taxed workers, the 401K is extremely valuable. If you want to talk option value, the option value of deferring taxes today with the ability to convert to a Roth at some point when one's taxes are lower in the future is huge.

We discuss some numbers in this thread: http://www.bogleheads.org/forum/viewtop ... =1&t=90491
If you save money, then you have to invest it!

Even if you invest it in cash. Expected real return zero.

You are proposing borrowing money at 8% and investing it for a 0% return.

What tax advantage makes that a good calculation?
The calculation is not that simple. I gave some example calculations in the linked thread to show why it is not simply 8% vs. 0%. Once tax deferred space is not used, it is lost forever. The calculations would be easier if we could make retroactive 401K contributions.
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Re: Managing Massive Law School Debt

Post by market timer »

danwhite77 wrote:The perfect is the enemy of the great. 40% deferral upside vs. lifetime of indentured servitude downside. I know you mean well, and there's merit to your analysis. But the legal market is unique and exceptionally difficult outside of biglaw.
OK, suppose OP gets laid off unexpectedly after two years of working. Which of the following allocations would be preferable?

(a) $50K in a 401K and $35K of debt outstanding at 6% interest
(b) $0 in a 401K and $0 of debt outstanding

The difference between (a) and (b) is whether one maxed out the 401K or opted to pay income tax and use those dollars to pay down loans. For me, option (a) is preferable for many reasons discussed in this thread. There is more liquidity, there is the option to convert to the Roth at a lower tax rate, there are student loan deferment/forbearance options, and OP will have a higher net worth in the long run from the tax savings and tax deferred compounding. OP might even be able to take out a 401K loan for liquidity just before leaving the company -- not all 401K loans must be repaid upon separation.
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Re: Managing Massive Law School Debt

Post by market timer »

LawGirl wrote:I like the suggestion about balancing debt payment with investing in tax-free space. Because I'm uncomfortable having so much debt, I still think that I'll focus the first year on knocking out my loans that are at 8.5% and 8.25%. But I will make a 2012 Roth contribution.

I think some people here might think I'm a bit younger than I am. I'll be 29 when I start working. Does that changes things regarding the balancing 401(k) contributions and debt repayment?
There are people who recommend paying the loans before contributing to the 401K, and there are people who recommend maxing out the 401K while paying down loans. I don't think anybody is recommending contributing to the Roth instead of the 401K. Whether you start working at 29 or 25 is a minor detail relative to the number of years you will benefit from tax deferred compounding, possibly more than 50 years.
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Re: Managing Massive Law School Debt

Post by VictoriaF »

The OP is 29; in five years she will be 34 and may decide to start a family. Would she be better off with paid of debts and no 401(k)/IRA accounts, or with reduced debt and some retirement funds?

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Re: Managing Massive Law School Debt

Post by market timer »

VictoriaF wrote:The OP is 29; in five years she will be 34 and may decide to start a family. Would she be better off with paid of debts and no 401(k)/IRA accounts, or with reduced debt and some retirement funds?

Victoria
I know of women who get unemployment benefits for 2 years during maternity leave and have subsidized student loan interest forgiven during this period of unemployment. Might be a good time to convert a 401K to a Roth as well.
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Re: Managing Massive Law School Debt

Post by VictoriaF »

englishgirl wrote:The bigger deal is going to be a) sticking it out at the law firm long enough to pay back your loans, and b) not getting sucked into the law firm mentality of "I have to have nice clothes and a nice car and a nice apartment and go out every day for a nice lunch and I've got to have nice jewelry and a nice purse to reward myself for working a gazillion hours and being miserable, and besides, I've got to look the part."
This is very insightful!

The OP should frequent this site to get some emotional support for dealing with the law-firm mentality.

Victoria
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Re: Managing Massive Law School Debt

Post by VictoriaF »

Valuethinker wrote:But generally every $1 of loan you are carrying you are going to pay back c. $3= 1 loan + 2 interest, so if you repay $1 early it's going to save you $2 in interest (that's very rough, and a bit heavy, the number is somewhere between another $1 and $2 of interest, would have to work it out).
If these estimates are correct, then the value of the loan repayment seems to supersede the value of 401(k) tax deferrals. Let's assume the OP is choosing between
(1) putting $15k into the 401(k) and
(2) reducing her debt by $15k.
Which one is better?

The OP is in the 28% Federal tax bracket and her income is subject to 5.3% Massachusetts state income tax, for the total of 33.3%
(1) If $15k goes into the 401(k), the OP is saving $5k in taxes now. Note that the money is tax deferred and will be taxed later.
(2) If $15k goes into the debt reduction, the OP is saving at least another $15k in interest (based on Valuethinker's calculation).
Option-2 seems superior.

Here are some additional thoughts:
(1) If money goes into 401(k), using a safe breakdown of 50% stocks and 50% bonds; and there is a decline, the OP may end up with less money in her account than she has put in. There is also an upside, but today's markets do not look particularly cheap and fixed income produces very little income.
(2) Paying off debt is absolutely safe.

(1) If the OP leaves her job and goes to work for a non-profit, her debt may become reduced or forgiven.
(2) If she starts family while she is in debt, she may be compelled to continue working in a stressful job and long hours even if she would have rather spent more time with her family.

(1) Psychological satisfaction from having some savings. (But this can be negated by a steep decline a la 2008-2009.)
(2) Psychological satisfaction from fast reducing debt.

Victoria
Last edited by VictoriaF on Sat Mar 10, 2012 2:10 pm, edited 1 time in total.
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Re: Managing Massive Law School Debt

Post by JoeJohnson »

Nice list...Add in the fact the 401k compounds/grows tax free
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Re: Managing Massive Law School Debt

Post by VictoriaF »

JoeJohnson wrote:Nice list...Add in the fact the 401k compounds/grows tax free
If it grows, it compounds tax free. Whether it will grow, and if it grows at what rate it will grow, are unknowns.

The OP would probably be quite unhappy if she invested within her 401(k), and the markets declined in the initial years resulting in a smaller balance than the amount she has put in.

On the other hand, if she has used all her saved money on the debt repayment, she probably would not pay that much attention to the markets and not feel regret even if the markets were rising. And if the markets were rising for the next few years, there is no reason to expect a spectacular appreciation from the today's state.

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Re: Managing Massive Law School Debt

Post by Alex Frakt »

danwhite77 wrote:The perfect is the enemy of the great. 40% deferral upside vs. lifetime of indentured servitude downside. I know you mean well, and there's merit to your analysis. But the legal market is unique and exceptionally difficult outside of biglaw. The legal job market is increasingly becoming bimodal, there are "haves" and "have nots." If you start your career as a "have" the best and safest course of action is to pay down your non-dischargeable student loan debt. If you don't believe me, read this post:

http://insidethelawschoolscam.blogspot. ... ssage.html

Then, if you still don't believe me, start at the very first post on that blog and read all posts and comments until present. It's an awful market out there for lawyers without experience, such as the OP.

You can't necessarily control how long you're in biglaw, but you can control paying off your debt.
This is a key point that I believe many of the posters are overlooking. Big law is not like other jobs. The majority of those who enter will bail out at some point (and most of the rest will get pushed out). The working conditions are really that bad. Since getting off the treadmill typically means a pay cut of 50%-100% , having large outstanding loans can and does force associates to decide between their mental and physical health and destitution. They also force choices in relationships and family planning that can come back to haunt the person for the rest of their lives. Paying off the loans gives you the freedom to make the choices that are right for you.
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Re: Managing Massive Law School Debt

Post by HardKnocker »

Fascinating thread.
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Re: Managing Massive Law School Debt

Post by market timer »

Alex Frakt wrote:
danwhite77 wrote:The perfect is the enemy of the great. 40% deferral upside vs. lifetime of indentured servitude downside. I know you mean well, and there's merit to your analysis. But the legal market is unique and exceptionally difficult outside of biglaw. The legal job market is increasingly becoming bimodal, there are "haves" and "have nots." If you start your career as a "have" the best and safest course of action is to pay down your non-dischargeable student loan debt. If you don't believe me, read this post:

http://insidethelawschoolscam.blogspot. ... ssage.html

Then, if you still don't believe me, start at the very first post on that blog and read all posts and comments until present. It's an awful market out there for lawyers without experience, such as the OP.

You can't necessarily control how long you're in biglaw, but you can control paying off your debt.
This is a key point that I believe many of the posters are overlooking. Big law is not like other jobs. The majority of those who enter will bail out at some point (and most of the rest will get pushed out). The working conditions are really that bad. Since getting off the treadmill typically means a pay cut of 50%-100% , having large outstanding loans can and does force associates to decide between their mental and physical health and destitution. They also force choices in relationships and family planning that can come back to haunt the person for the rest of their lives. Paying off the loans gives you the freedom to make the choices that are right for you.
That OP may only earn high income -- and be highly taxed -- for a few years is part of the reason why the 401K is attractive. Terms like "lifetime of indentured servitude" exaggerate the question of whether to pay down loans or contribute to a 401K. As I said before, it's a question of which of these two outcomes to have after a couple years:

(a) $50K in a 401K and $35K in student loans at 6% interest
(b) $0 in a 401K and $0 in student loans

Having $35K in student loans does not "force associates to decide between their mental and physical health and destitution." C'mon, it's more like whether to stay in biglaw an extra 6-9 months to pay off the loans completely, or keep them around at a rate not far above a mortgage while going in-house or taking maternity leave.
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Re: Managing Massive Law School Debt

Post by market timer »

VictoriaF wrote:
Valuethinker wrote:But generally every $1 of loan you are carrying you are going to pay back c. $3= 1 loan + 2 interest, so if you repay $1 early it's going to save you $2 in interest (that's very rough, and a bit heavy, the number is somewhere between another $1 and $2 of interest, would have to work it out).
If these estimates are correct...
The estimates are not correct because nobody is talking about keeping the loans for 19 years (the time it would take for a 6% interest loan to compound to 3x its original balance). We're talking about whether to pay them off in, say, 3 years instead of 2.5 in order to max out the 401K. Besides, these numbers, by themselves are meaningless. If I borrow at 1% and hold it for 111 years, I'll end up paying back $2 in interest for every dollar borrowed. Still a great deal.
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Re: Managing Massive Law School Debt

Post by JoeJohnson »

The specifics of the job field/attrition rate are certainly a major issue.

The one thing I want to make clear is that you're paying off loans with after tax money whereas you can shelter it pretax in investments. The present value of the decision is certainly bogged down by pretax vs after tax money. The interest rates are, of course, quite ugly at 8+%.

This really boils down to personal preference. I hated being in debt because my job was gambling, so I paid off student loans at 6.8% b/c they were the safe bet, but regretted it soon after as I've now lost the ability to contribute those years and reap the benefits for 30-40 yrs. Yes, I'll pay less interest IN THE FUTURE, but I gave up many years of deferred income/growth.

Personally, I will be putting $5k in IRA each year no matter what. Roth is a liquid investment if push comes to shove and you get desperate for the moola. Also, I'm not sure this has been mentioned, but if you think there's a decent chance you'll have a significantly lower income in the future (and thus marginal tax rate), I would consider contributing to 401k max now when you're in higher tax bracket and then rollover to Roth in future if you're in a lower tax bracket.
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Re: Managing Massive Law School Debt

Post by JoeJohnson »

Here's just a little something I came up with on a $145k salary, max $17k to 401k and $5k to Roth. Tax figures are rough b/c I don't know if city tax, FICA could increase in 2013, MA income tax is likely high).

145,000 Salary
(17,000) Pretax 401k

128,000
(5,800) std ded
(3,700) exemption

118,500
(26,800) Fed Income Tax
(6,727) FICA (4.2% * $110,100 = 4,624 1.45 * 145k = 2103
(6,784) MA Income Tax (5.3%*128k, but this estimate is high b/c usually get reduction on state return for fed taxes paid)
( , ) Municipal Tax?

78,189
(18,000) Rent

60,189
(5,000) Roth

55,189
( , ) Living Expenses/Insurance/Entertainment/etc
( , ) Loans
Last edited by JoeJohnson on Sat Mar 10, 2012 6:17 pm, edited 1 time in total.
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Re: Managing Massive Law School Debt

Post by market timer »

JoeJohnson wrote:(6,480) FICA (4.2% * $110,100 = 4,624 1.45 * 128k = 1,856
Medicare taxes gross income, so should be 1.45%*145K.

http://www.irs.gov/taxtopics/tc424.html
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Re: Managing Massive Law School Debt

Post by JoeJohnson »

market timer wrote:
JoeJohnson wrote:(6,480) FICA (4.2% * $110,100 = 4,624 1.45 * 128k = 1,856
Medicare taxes gross income, so should be 1.45%*145K.

http://www.irs.gov/taxtopics/tc424.html
fixed...didn't realize 401k was taxed for FICA
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