Financing Your Law Degree. Borrow Smart, Owe Less Later and Gain Financial Freedom a Whole Lot Sooner!

Transcription

1 Financing Your Law Degree Borrow Smart, Owe Less Later and Gain Financial Freedom a Whole Lot Sooner! Prepared for Washington College of Law August 2008

2 Your First Years as an Attorney That corner office is a long way down the hall.

3 This investment will pay off, but only if you squarely face the challenges ahead. Let s Run the Numbers. o In % or 40,186 law school graduates were employed nine months after graduation o Of these 55.8% or 22,424 went into private practice o Of these approx. 37% or 8,297 entered firms with 101 attorneys or more o The vast majority of the firms paying first year associates the much vaunted $160,000 have 500 or more attorneys Source: Leigh Jones, About That Huge Salary: It s a Long Shot, The National Law Journal July 13,2007

4 Thank God You re not a Med Student! Degree Progra ms Graduate Education Debt All Education Debt (Grad & Undergrad) % Borrowing Debt % Borrowing Debt MBA 53.0% $35, % $41,687 MSW 76.5% $27, % $43,028 Ph.D. 40.0% $36, % $41,540 Ed.D. 53.4% $49, % $47,725 Law (LLB or JD) 87.7% $70, % $80,754 Medicine 95.0% $113, % $125,819 Source: FinAid.org

5 After borrowing $180,000 what s left in your wallet every month? $61,500 graduate Stafford loans at 6.8% $118,500 GradPlus loan at 8.5% That s $1, a month for 30 years!

6 And You ll Pay $290,969 in interest!

7 Source: AllianceBernstein.com Fast Facts: The Long-Term Impact of College Debt

8 The Golden Rule of Borrowing Smart: Exhaust all Options Before Borrowing Your list of financial aid priorities should look like this 1. Grants & Scholarships 2. Savings, Employment & the AU 2. Savings, Employment & the AU Payment Plan 3. Federal Loans 4. Private Loan

9 Grants & Scholarships More than $2 billion will be awarded next year in private sector scholarships, grants and fellowships Fast Web Scholarship Search Engine College Board s s Fund Finder Scholarships.comLLC FinAid.org Your very own Washington College of Law

10 A Little Goes a Long Way: The Value of Small Scholarships $14, $12, $10, Assumption: $180, % over 30 years 360 Monthly Payments of $1, Total Cost of Loan: $470, $8, $6, $4, $2, $0.00 $500 $1,000 $2,000 $5,000

11 Establish Some Q&A Baselines

12 Weed Out Those That Do Not Evidence a Commitment to Student Lending & Financial Stability Since August 1, 2007 over 130 student lending organizations have suddenly exited or suspended their participation in federal and private loan programs.

13 What s the interest rate? That begs a more important question: what s the total cost of this loan? Lender Number of Payments Monthly Payment Rate APR Total Cost of Loan Example $ % 4.45% $34, Example $ % 4.93% $32, Example $ % 4.44% $38, Example $ % 4.93% $32,857.20

14 Summary Choose your Lender & Your Loans Based on the Following Criteria: At least 10 years in the student lending industry and with recognized standing within the financial industry, i.e. Moody s, Standard & Poors, Forbes 2000 etc Loan should be chosen based on its total cost. What will I have paid when I ve made all the payments? Have a bias toward lenders that base their rates on LIBOR vs. Prime Don t make your decision based on back end benefits. If you gain them, consider it a bonus. Make sure the lender capitalizes any deferred interest only once at the time of repayment.

15 Now about those law school loans Graduate Stafford Loan Either subsidized or unsubsidized Subsidized Stafford: need based and the federal government pays the interest while enrolled Unsubsidized Stafford: non-need need based and interest is deferred until graduation No credit check required Annual Limit = $20,500 Aggregate Limit = $138,500 (includes undergrad Stafford loan debt) Repayment begins 6 months after graduation or drops below half-time Fixed interest rate of 6.8%

16 Federal GradPlus Loans Eligibility: credit check screens for adverse credit history only Interest Rate: 8.5% fixed No Annual or Aggregate Limit

17 Private Law School Loans Credit Evaluation Determines Eligibility and Interest Rate The Capitalization Question? Interest Rates Vary The LIBOR vs. Prime Argument

18 Before you take that loan Another Key to Smart Borrowing is to Review Your Credit Report

19 Did you know Consumers find 13 million inaccuracies on their credit reports each year Inaccuracies include: erroneous late payments and other people s debt information to nonpayment of a bill dating to before they were born Federal law requires the three national credit reporting companies: Equifax, TransUnion and Experian to provide consumers one free copy of their credit report every year.

20 Losing by just a few points? TIER Credit MIN Credit MAX Margin 3M LIBOR Max 4.00% % % % % vs. 8.3%: What would one point cost you on a $20,000 loan? $1,261.93

21 Leverage Your Own Resources: Savings, Employment & The AU Payment Plan Next to free money nothing beats using your own money. Now we re not talking $1,000s, but pennies. $1/day for 2 years would save you another $1, on the same $85,000 loan $2/day for 2 years would save you $3,674.07

22 You Don t t Have to Borrow the Entire Amount WCL Budgets for Living Expenses

23 Don t have anything left to give? Reach deep inside and you ll find more Use a high interest savings account instead of a traditional banking account Buy used books. Many of the on-line used books purveyors specialize in law school texts. You re in D.C. Lose the car. Pocket the insurance, gas, maintenance, parking and use public transportation. It s green to boot! Reduce your cell phone plan. You re supposed to be studying anyway. Prepare your own meals, in particular lunch and dinner. Turn the cable off. Diligently record your expenses I mean even a pack of gum for 30 days. You ll find more ways to save. Cut up the credit card and use only debit when plastic is necessary. Get a job! I m I m serious.

24 Expenses Cost of Attendance: Full-time Enrollment Tuition Fees-General/SBA Sports Center Technology $1228 per month $38,652 $ $130 $190 $11,048 $322 per month $2,900 Book/Supplies Transportation Personal/Misc. Total $1,038 $2,283 $3,248 $59,919

25 So you can borrow up to $20,517 in living expenses, but why? You can save 50%-75% when you buy used books instead of new = $519 savings. When you lose the car and take the metro you can save $279. (I even included $600 buffer for two plane tickets!) Find a roommate. If we assume $1,600/month for a two bedroom apartment, you re still saving $3, Employ some of the earlier recommendations and a few more to come and save another $100/month Now borrow only $14,971/year for personal living expenses You ll save $43, (P&I) on that $180,000 loan we ve been discussing!

26 I did promise a few more Set your thermostats no higher than 68 degrees in winter and no lower than 78 degrees in summer. And turn it down even further at night or when you're not home. Potential Money Savings: $325 to $500/yr. Don t t go grocery shopping when you re hungry and never buy anything unless you have a coupon for it. It s s Washington, D.C. Take advantage of free concerts, parks, and dollar draft nights instead of clubs, concerts and the movies.

27 Allow Me to Suggest a Revised Cost of Attendance Expenses Full-time Enrollment Tuition Fees-General/SBA Sports Center Technology $800 per month $38,652 $ $130 $190 $7,200 $322 per month $2,900 Book/Supplies Transportation Personal/Misc. Total $519 $2,004 $2, $54,373

28 If you already borrowed the full amount for personal, living expenses, you can return some of the funds. It s s easy-ask ask the financial aid office.

29 The Truth About Credit Cards You will spend more if you use credit cards: 12%-18% more! Credit card rebates, whether airline points, car rebates or even cash reimbursements are no argument in their favor. Personal finance is 80% behavior. You need to cut out habits that make you spend more. You do not build wealth with credit cards. Use common sense. When you play with a multi-billion dollar industry and you think you re going to win at their game, you are naïve. --Dave Ramsey. Source: The Truth About Credit Card Debt

30 Your First Years as an Attorney Again. Again. Loan Repayment: The Other Half of Borrowing Smart

31 What are my options? Standard Repayment Extended Repayment Graduated Repayment Income-Contingent Repayment Income-Sensitive Repayment Income-Based Repayment

32 Standard Repayment: fixed monthly amount for a loan term of up to 10 years $50.00 minimum monthly payment This is always your cheapest option!!!

33 Extended Repayment Plan Allows for a term of 12 to 30 years, depending on the amount owed Stretching out the payments over a longer period reduces the size of each payment. Significantly increases the total cost of the loan with additional al interest accumulation Repayment Plan & Loan Term Std Repayment Exd Repayment Cost Difference Monthly Payment $ $ $77.49 Total Interest Paid $7, $16, $9,020.43

34 Graduated Repayment Plan Starts off with lower payment, which gradually increase every two years Loan term is 12 to 30 years, depending on total amount owed Monthly payment can be no less than 50% and no more than 150% of the standard payment plan Monthly payment must be at least the interest that accrues and at least $25, whichever is more Will also significantly increase the amount of interest paid

35 Income Contingent Repayment Only available through the Ed. Dept s Direct Loan program Max repayment period is 25 years, after which remaining debt is forgiven Repayment is based on a formula that weighs on income, family size and debt Monthly payment is adjusted annually based on changes in income and family size. Interest rate capitalization cap

36 Income Sensitive Repayment Available only for loan serviced under the FFEL program Monthly payment is pegged to a fixed % of gross monthly income (between 4%- 25%) Limited to a 10 year term Lower monthly payments are compensated for by a proportionate increase in the remaining monthly payments Borrowers must reapply each year

37 Income Based Repayment Caps the monthly payments at 15% of borrower s s monthly discretionary income. Cap adjusted annually No minimum monthly payment Max term is 25 years, after which remaining debt is forgiven Limited interest subsidy benefit

38 Or What About Loan Forgiveness?

39 Quick Tips Don t wait too long after graduation to find out who is servicing your loan. Consult the WCL financial aid office. Federal loans have fixed interest rates. If all your loans are federal loans, don t fall prey to marketing tactics that try to pressure you with a sense of urgency. There s no rush.

40 Federal Consolidation Loan Most federal loans can be consolidated: Stafford, Plus, GradPlus, SLS, Perkins, and Direct Loans. The interest rate is the weighted average of the interest rates on the loans being consolidated rounded to the nearest 1/8% and capped at 8.25% For instance: $71,000 x 6.8% + $13,500 x 8.5% = 7.07% $71,000 + $13,500

41 Federal Loan Consolidation (cont d) No fees to consolidate. Consolidation can occur only during the grace period or in repayment. You may consolidate with any lender. Try to avoid the extended repayment terms. The standard ten year repayment will save you lots of money!

42 10 Years vs. 25 Years If you can afford the monthly payment it will save you $10,000s. $50,000 Consolidation Loan Percentage Rate Repayment Term Monthly Payment Interest Paid 8.25% 10 Years $ $23, % 25 Years $ $

43 The Loophole Come on You re studying to be an attorney. What s the law without a loophole?

44 GradPlus loan borrowers can lower their interest rate from the fixed 8.50% to 8.25% simply by consolidating two or more GradPlus loans together. Two Qualifications Don t include other types of loans in the consolidation loan because the weighted average will reduce the interest rate before applying the cap. Make sure you re not losing existing lender benefits that are more advantageous to you, i.e. GradPlus loans with back-end benefits.

45 The Single Fastest, Most Effective Way to Reduce Student Loan Debt in Repayment

46 The Power of Extra Payments Let s s Assume a $50,000 Consolidation loan at the capped rate of 8.25% with standard repayment over 120 months at $ Total Cost of this Loan = $73, (Interest Alone = $23,591.58) Now Some Hypotheticals If you made an extra $50/month payment, you would have only 107 payments and save $2, in interest. If you made an extra $100/month payment, you would have only 96 payments and save $5, in interest.

47 The Power of Extra Payments: Part Two Now Let s s Assume a $50,000 Consolidation loan at the capped rate of 8.25% with an extended repayment 0f 360 months at $375.63/month. Total Cost of this Loan = $135, (Interest Alone = $85,227.99) More Hypotheticals If you made an extra $50/month payment, you would have only 241 payments and save $32, in interest. If you made an extra $100/month payment, you would have only 188 payments and save $46, in interest. If you made one extra payment of $1000 with your first scheduled payment, you would have only 332 payment left and save $9,

48 Public Service Loan Forgiveness This program discharges any remaining debt after 10 years of full-time employment in public service. The borrower must have made 120 payments as part of the Direct Loan Program in order to obtain this benefit and been employed in a public service job for each of those 120 payments. If this program applies to you, you are well advised to consolidate your FFEL GradPlus and Stafford loans into the Direct Loan program before making your first payment. Please consult the WCL financial aid office.

49 About That Public Service Loan Forgiveness Students are well advised to contact the Federal Direct Loan program to make sure their public service job qualifies. Be sure you will remain in this job or in another qualifying job for every month of those 120 payments. To get the most forgiven under this program, borrowers should start off with income-contingent repayment, if possible. The amount of debt discharged on your behalf through this program may be taxable.

50 Remember One More Thing There are only two kinds of attorneys. One who knows the law, and one who knows the judge. Thanks for Listening!

51 Credits Unless otherwise indicated, this information has been taken from FinAid.org s website. Washington College of Law recommends this website as one resource for up to date information on critical financial aid topics.