Author Topic: "Gaming" Big Student Loans  (Read 7408 times)

ficarrot

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"Gaming" Big Student Loans
« on: May 13, 2013, 01:36:26 PM »
Hello friends, I have a sorta complicated situation that I could use some advice on.
The starting premise is:  My wife (27yo) and I (28yo) are taking on what we anticipate to be 100k in student debt to finance my law degree.   I want to practice law in the public interest.  I got into a great school.  So we're going to go for it.

We are doing our best to be deliberate about managing the debt responsibly.  We fully plan on living below our means in mustachian fashion while I'm in school and she's working.  Here are the facts about our current financial situation:

Emergency savings will be around 17k
Another 11k in a separate savings account.
Wife has something like 25k in a retirement account.
Already carrying about 20k in student loans.
No other debt, own an old car + motorcycle outright.

So we're debating between two plans for how to deal with the debt, Plan A and Plan B.

Plan A is the trickiest, so I'll start there.
The federal government has a loan forgiveness program for people that work for the gov't or nonprofit sector.  Basically, if you make 120 payments while working in the public interest, the government will forgive any remaining student loan balance.  If I use the "income based repayment" (IRB) scheme with a conservative estimate of 60k/year household income,  we will pay about $500/month x 120 payments or about 60k in total payments.  The government forgives the rest (which should be about an 80k value per finaid.org).
To sweeten Plan A, my law school offers a Loan Repayment Assistance Program (LRAP).  If I stay in a public service job and my household income stays below 120k, they will make 10 years of IRB payments for me.  So, if Plan A goes off without a hitch, we pay nothing out of pocket for an expensive legal education.  But obviously Plan A has some restrictions and risks.  I have to count on the continued existence/funding of both programs, and I'm locked into a fairly narrow set of employment options for 10 years.  This is what I view as "gaming" the debt.

We would save aggressively while I'm in school.  Maybe we can grow our 11k in "other" savings into 25k.  If something went awry with the "game" described above, we could throw all of those savings at the debt right away and then work hard to extinguish the remainder quickly.

Plan B  Is very simple.  Do everything we can to minimize the amount of loans we take out in the first place.  Everything we would have *saved* in Plan A we will instead throw at tuition payments.  We would still have something like 60k in debt on this scenario.  Then, still do what we can to take advantage of the "game" in Plan A, but the consequences of it not going as planned are less severe.

The way we see it, the main difference between Plan A and Plan B is comparing the value of the best possible out come and the worst possible outcome.  If Plan A goes perfectly we could have payed nothing out of pocket and have started early on saving more (Best possible outcome).  But if something goes wrong, we'd be much better position to handle to smaller debt load if we follow Plan B (worst possible outcome?)

I know this is a bit complicated but we really want to think about this (perhaps unmustachian choice) in the smartest possible way!


matchewed

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Re: "Gaming" Big Student Loans
« Reply #1 on: May 13, 2013, 01:45:07 PM »
You've got the pros and cons pretty well defined. Plan A is risky but good for your financial stability if you can pull it off. Plan B is more flexible but may not be so good for financial stability (but by no means will it be devastating as long as you are reasonable with your debt).

Tough call fic. If I were in your shoes I'd try to do both. Scrimp and hit up the loan forgiveness route. That way if you get sick of the nonprofit sector or you get an opportunity for a very high paying job you have that flexibility available for your future.

ficarrot

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Re: "Gaming" Big Student Loans
« Reply #2 on: May 13, 2013, 01:58:38 PM »
Yeah part of the value of Plan B is the flexibility inherent in it.  And, once we're in a 2-income household again we should be able to murder the remaining student debt within a few years.  Thanks for your input!

matchewed

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Re: "Gaming" Big Student Loans
« Reply #3 on: May 13, 2013, 02:01:29 PM »
You're welcome. Good luck with your decision.

LDoon

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Re: "Gaming" Big Student Loans
« Reply #4 on: May 13, 2013, 03:43:46 PM »
I'd think about a modified plan.  Aggressively save throughout the 3 years and try to take minimal loans.  Both the loan forgiveness programs and your interests might change over the 3 years.  If you do end up in non-profit, then think about the loan forgiveness and you'll have a nice stash.  However, if you decide on private practice, you can use your savings to get a big jump on SL debt.

The other thing to consider is that if you pursue non-profit for 10 years b/c of the forgiveness programs, you're locking yourself into that type of practice.  I'd personally opt for more flexibility in career choices so you can pursue a job change in year 2 or 3 if you desire.

Mazzinator

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Re: "Gaming" Big Student Loans
« Reply #5 on: May 13, 2013, 06:43:31 PM »
http://studentaid.ed.gov/sites/default/files/income-based-repayment-common-questions.pdf

Here's a good link for info on the IBR. My dh went to law school $120k, but only $66k of debt qualified for the IBR, the fed loans.

Also, the PSLF program may be gone before you even graduate.. So i wouldn't bank on it.

Study that pdf...and choose wisely, my friend ;-)

StarryC

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Re: "Gaming" Big Student Loans
« Reply #6 on: May 13, 2013, 06:58:01 PM »
I'll also say that even though "low paying public interest" sounds like it would be an easy job to get, it hasn't been for the last few years for many law grads.  The benefits of Plan B are that in the case you have to take a low paying non-legal (or legal non-public interest) job for some reason, you have less to pay off than in Plan A.  What have you done up until now to prove your "street cred" to the public interest groups?  Are you willing to work for free both summers? This is another version of the flexibility argument, but just a reminder that wanting a certain type of job doesn't mean you will get it.  Also, my most annoying law school debt is the bar loan: living expenses, fees, classes for bar prep, and your initial bar dues.  Private firms pay, but that will either be a private loan or money from your savings.  Mine was $12,000 but if you didn't have living expenses it would be closer to $6000. 

Another thing is that when your loans are forgiven on IBR, the remaining balance is taxable.  I'm not sure if that applies to public interest forgiveness.  If you take out 100k, and pay IBR for 10 years, you might end up with 90k forgiven.  In a year when you made 60k, your tax burden would be about $30,000 at current rates.  So, plan for that either by saving enough to cover it, or by keeping your debt lower. 

foobar

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Re: "Gaming" Big Student Loans
« Reply #7 on: May 13, 2013, 07:18:16 PM »
If you give up like 30k of salary for 10 year by taking a low paying public job, are you really gaming the system or are you getting taken advantage of? Obviously made up numbers and no one can tell you if you enjoy one type of work versus another but 10 years is a really long time to a) stay in the same job and b) to count on a government program continuing. Personally I would take out the big loan (assuming the interest rate is <5) and do the savings. But you have to realize that the savings is strictly for paying off the debt. When you graduate you can then figure out to do. At worst you get stuck with some higher minimum monthly payments.

The one wild card is how much does your wife make? Is her income going to mess up the 120k family limit? Any chance she is getting some decent sized raises over the next 10 years?

Dee18

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Re: "Gaming" Big Student Loans
« Reply #8 on: May 13, 2013, 07:30:06 PM »
Another thing to consider:  at a top law school, you may be able to make significant income during the summers working for private firms.  I did this and managed to earn all my living expenses for the year in 10 weeks.  I went to work in public interest right out of law school (back before there were any loan forgiveness programs).  You can work for public interest  groups during the academic year while  in law school, through externships or volunteer activities, to make contacts and gain experience.  But use the summers to make money.  I also advised a younger friend, who wanted to work at my public interest place, to go to a big law firm for two years after law school to wipe out her debt.  She did that and was then able to choose her public interest job without financial concerns.  Finally, once you are at law school, find out what they award money for.  A school may have an endowment that awards a $1500 prize every year to a student in _____ club which may only have 6 members.  Also, there are many writing contests with significant cash awards, as well as trial and moot court teams.  Best of luck.

ScubaAZ

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Re: "Gaming" Big Student Loans
« Reply #9 on: May 13, 2013, 11:38:05 PM »
Another law grad here:  I would caution you against taking out more loans than you absolutely need thinking that they will be forgiven later.  Governmental law jobs are actually very competitive (and few hire right out of law school and for the last many years have not had the budgets to hire at all), and public interest work is even more competitive.  They also want a "believer."  So unless you've been spending a lot of time saving the whales, an environmental non-profit isn't going to buy your story that you're conveniently a convert as a 3L looking for a job.

I also think with all of the government's fiscal issues that student loan forgiveness is going to be a target for cuts in the future.  I would not bank on this program being available 15 years from now when you're out of law school and served your 10 years in a low paying job thinking the other $90k was going to just disappear.

And not that high paying big law jobs are easy to find, but they could be depending on your school and your grades (your job in law school is to get the highest grades possible).  If the sole point of public interest work is to get rid of the loans, you might be better off to go private firm.  You'd have the chance to earn well over $1M in 10 years, pay off the $100k in loans and still be well ahead of where you'd be making $40k for 10 years to forgive $90k of student loan debt.

At the end of the day, its all a gamble so I would be as frugal as possible (I wish I had been more so!) and then have some options upon graduation.  Hopefully the legal market picks up by then.

champion

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Re: "Gaming" Big Student Loans
« Reply #10 on: May 14, 2013, 08:32:24 AM »
The other big issue here is the negative amortization of loans.  As you described the numbers, you borrow 100K, make 60K of payments, but still owe 80K at the END of 10 years.  Because the IBR payments are lower than payments would be on a normal payback plan, you aren't reducing the principal very much with your payments.  So even after 10 years and 60K in payments, you are almost in the same place you started--you still owe 80K out of the 100K borrowed. 

If anything goes wrong during the 10 years to jeopardize the loan forgiveness at the end of 10 years, then you will quite possibly regret having gone on IBR.  For example, what if, after 9 years, you got a private sector job you couldn't refuse.  At that point, you will almost be starting OVER on student loan repayment.  Now you'd have to pay them in full--perhaps another 10 years but with double the monthly payments.  Add it all up and your repayment plan will have caused you to pay back maybe more than double the principal amount.  And that's not even considering the low salary during the first 9 years.

So, the plan sounds great, but the plan requires you to do something dangerous--underpay the interest on your student loans for 10 years.  If there was no forgiveness at the end, you'd never want to underpay the interest, because it just increases your total payback amount significantly.  So you're taking a gamble. 

As someone said, the lower salary is a cost to you that offsets some or all (or more than all) of the loan gaming benefits.  But, if we ignore that and focus just on the loans themselves, the possible outcomes are:

Best case:  Successful loan gaming--60K in payments followed by 80K loan writeoff by government--so you borrowed 100K and only paid back 60K
Medium case:  Pay them off yourself as quickly as possible--you borrow 100K and pay back 100K plus interest over 10 years (less interest if you try to pay back even faster)
Worst case:  You go on IBR, but something causes you not to get the writeoff.  In this case your total payback will be much higher than in the medium case.

So the question is:  what is the risk that something could interfere with the writeoff?  Possibilities include:  high household income, inability to get and keep public sector job for 10 years, need to take time off, so you reach 10 years of employment after 13 calendar years (and pay 3 extra years of IBR interest), you take a private sector job, the government changes the program, etc. Those risks are non-trivial.  Finally, I read somewhere (on a forum--don't know if it's true) that the lenders and/or the government do want to have the program to encourage people to do public sector work, but they aren't thrilled about paying off your loans for you.  So, according to one forum post, there are various hoops to jump through along the way, and if you mess them up you can hurt yourself.  An example might be having to send in a form each year reconfirming that your employer counts as public service.  If the form gets lost one year, they could disqualify that year of employment from your 120 months count.  If any of these things happen to derail you from the loan forgiveness, you'll wish you had paid the full payment each month instead of the IBR payment.


chesebert

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Re: "Gaming" Big Student Loans
« Reply #11 on: May 14, 2013, 09:36:01 AM »
I think OP deserves a face punch for coming up with such a non-mustachian idea. Here is how it's suppose to be done:

Debt: 100K <- this is a debt emergency, so treat it like one!
Target payoff period: 1 year
Starting salary: $160k before tax and before bonus ($15k in the first year)

You will attend a great law school, that's great! That means you are a shoe-in for that $160k + bonus job. Take it! Work your ass off for a year and save like a mustachian. You should be able to wipe $100k out in 1 years' time, if not a little over 1 year.

Don't stop there. Continue for another year, where you will use the same skill/badassity learned in year 1 to save $80k (assuming your debt repayment spills over into year2) or more.

Now you are two years out of school with 0 student loan, $100K in the bank and a marketable firm name. Which would you rather have, working 10 years and end up with $80K of student loan or working 2 years with $80K in the bank.

Remember $100K of student loan @ 6-8% IS A DEBT EMERGENCY!

« Last Edit: May 14, 2013, 09:40:00 AM by chesebert »

Paul der Krake

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Re: "Gaming" Big Student Loans
« Reply #12 on: May 14, 2013, 09:46:23 AM »
The federal government has a loan forgiveness program for people that work for the gov't or nonprofit sector.  Basically, if you make 120 payments while working in the public interest, the government will forgive any remaining student loan balance.  If I use the "income based repayment" (IRB) scheme with a conservative estimate of 60k/year household income,  we will pay about $500/month x 120 payments or about 60k in total payments.  The government forgives the rest (which should be about an 80k value per finaid.org)
60k for two earners seems awfully low if one of them went to law school. Do you really expect to be making so little until you're 40?

I'm all for controlled, tought-out gambles, but this is a lot of risk and morally questionable.

LDoon

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Re: "Gaming" Big Student Loans
« Reply #13 on: May 14, 2013, 10:12:39 AM »
Quote
You will attend a great law school, that's great! That means you are a shoe-in for that $160k + bonus job. Take it! Work your ass off for a year and save like a mustachian. You should be able to wipe $100k out in 1 years' time, if not a little over 1 year.

This is so not true.  Hiring hasn't significantly changed since 2009, and to get the Biglaw positions, you still need to have good grades and fill a niche.  There is statistically a much higher chance of finding a job paying less than 100k.  Hence all the more reason to keep debt to a minimum during law school.

chesebert

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Re: "Gaming" Big Student Loans
« Reply #14 on: May 14, 2013, 10:50:08 AM »
Quote
You will attend a great law school, that's great! That means you are a shoe-in for that $160k + bonus job. Take it! Work your ass off for a year and save like a mustachian. You should be able to wipe $100k out in 1 years' time, if not a little over 1 year.

This is so not true.  Hiring hasn't significantly changed since 2009, and to get the Biglaw positions, you still need to have good grades and fill a niche.  There is statistically a much higher chance of finding a job paying less than 100k.  Hence all the more reason to keep debt to a minimum during law school.
If you think you can get a great gov or non-profit job, you can def get a "big law" job. There are still more "big law" jobs out there than gov and non-profit/international law jobs.

When OP said great school, I assume it's at least one of the top 10 in the country.

To be blunt, if OP can't make top 50% after year 1, he should just quit and take the loss (depending on the school ranking of course, e.g., if the school is Yale, he is more than fine).

hoodedfalcon

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Re: "Gaming" Big Student Loans
« Reply #15 on: May 14, 2013, 11:17:57 AM »
"If you think you can get a great gov or non-profit job, you can def get a "big law" job. There are still more "big law" jobs out there than gov and non-profit/international law jobs."


Eh, I don't know about that. Big law jobs paying 160K right out of law school are, uh, quite rare. This also depends on where you are living. They may be more common in larger metropolitan areas (with higher COL). However,  government jobs (state, federal, local) are quite literally all over the place. Getting a legal job at a non-profit is certainly doable, especially if your interests during law school show you are committed to the cause. I've been out of law school for a few years, and have landed both government and non-profit legal work without a whole lot of effort. But I am not well suited for big law, and that becomes blatantly obvious with one look at my CV. I knew I would never go for one of those jobs, so I spent my summers, internships, externships and volunteer work getting experience at a variety of public interest groups - semester with the feds, summer with the state attorney general, plus working with local non-profits as well as a policy institute. I think spending summers at a big law firm will be a red flag for a lot of non-profits. Less so government agencies.

The legal market is tough these days. I would keep your options open. Plan for the worst case scenario. Hope for the best. Have multiple plans of action. Sounds like you do. Good luck!
« Last Edit: May 14, 2013, 12:17:14 PM by hoodedfalcon »

James

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Re: "Gaming" Big Student Loans
« Reply #16 on: May 14, 2013, 11:23:03 AM »
I'm with Chesebert, why milk the system when you can beat the system. Be badass, take minimum loans, pay them back asap, and move on. How will you feel for 10 years with a restriction on income and huge loans in your name just sitting out there whispering your name? Compare that to how you will feel a few years out of school with your loans paid off and your freedom? You really want to be a slave to a set of conditions with a high price to break free and do whatever you feel is best at the time? Loan forgiveness costs too much in my book, but for you it might be worth jumping through hoops just in case it works out.

ficarrot

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Re: "Gaming" Big Student Loans
« Reply #17 on: May 14, 2013, 12:30:43 PM »
This has been hugely helpful!  Getting so much feedback and being pressed on my assumptions has forced me to think twice about which plan should count as "Plan A".  I'm also going to have my wife look through the responses and see what she thinks.

I think I'm coming around to the idea that I shouldn't bank on the benefits available through the "game".  Even though I do plan on working in public interest, it's probably the best bet to think of the potential benefits as a bonus, and not as a foundation for the debt plan.

For example, even if I can get the school to pay my loans while my household income is below 120k, we can save aggressively and be ready to destroy the debt if and when I am no longer working in an eligible job or we make too much money.  If the school pays my debt the whole time (a la the original Plan A) then we're 100k closer to FI!

I'm looking forward to hearing any more feedback!

ScubaAZ

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Re: "Gaming" Big Student Loans
« Reply #18 on: May 15, 2013, 01:24:51 PM »

This is so not true.  Hiring hasn't significantly changed since 2009, and to get the Biglaw positions, you still need to have good grades and fill a niche.  There is statistically a much higher chance of finding a job paying less than 100k.  Hence all the more reason to keep debt to a minimum during law school.


I agree 100%.  Biglaw jobs are not all that common, and are very hard to get into even with the best grades from the best schools.  If you think about it, the top 10% of a Harvard graduating class is 50 people.  Yale is going to be around 20.  Totally anecdotal, but our office has hired 5 associates directly from law school since 2008.  I don't know the total firm-wide, but I bet it is very very low.

Less anecdotally, unemployment and underemployment are a systemic problem across all levels of law school, including the top schools.  See http://www.theatlantic.com/business/archive/2013/04/the-jobs-crisis-at-our-best-law-schools-is-much-much-worse-than-you-think/274795/.  And I think these numbers are significantly lower than is really the case, as no one wants to admit that they aren't at the top, and so don't report any jobs data rather than admit they are unemployed or underemployed.

Law school is not a sure fire bet to a $160k a year job, and $15k bonuses as a first year associate are pretty rare as well.  I would do law school as cheaply as humanly possible while staying at a Tier 1 school.  One thing to consider is if you know where you want to work, the best regional school where you can be at the top of the class may be a better bet than being mid to bottom of the pack at a higher ranked school.  If you have few ties to where you ultimately want to practice, it will be difficult to get a job there even from the best schools, simply because law firms put so much money into you, they want to have a good idea that you will stay for a reasonable amount of time.  The more ties you have to an area, the more likely that is the case.

I also agree that if your first semester, or possibly year, do not go well for you, take a look at whether it makes sense to walk away.  People who didn't do well in law school can end up being a great lawyer and doing well financially, but it makes it infinitely more difficult.  I have friends who knew after the first semester that they didn't want to do law, but finished anyway.  Now they have the $100k in debt, are 'overqualified' for many jobs simply because they have a JD on their resume, and are struggling to find anything to pay the bills.  I caution though, that just because you don't love law school doesn't mean you won't like actually being a lawyer.  They are very different, at least in my experience.
« Last Edit: May 21, 2013, 08:29:57 PM by ScubaAZ »

thurston howell iv

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Re: "Gaming" Big Student Loans
« Reply #19 on: May 21, 2013, 11:29:09 AM »
OP:  My suggestion is that you talk to some real lawyers who work in your local area or who do the sort of work you're interested in. Every lawyer I know is miserable... many of them are from top schools!

Big money is nice but not at the price of your soul (You don't understand this yet- but, chatting with a few legal veterans shackled to their desks with their golden handcuffs might give you an idea). Not only that but, most Big Law firms are in big cities... Go and see what Cravath pays as starting salaries (if you can make the cut) - then go see what it costs to live nearby as you need to practically live there in order to work there.  Your income adjusted for COLA in that area could be much less than you've planned.

Additionally, as others have stated, don't count on the big money jobs being there. The job market is tough. All of the desirable places to live are saturated with lawyers so the jobs are tighter and the salaries significantly lower...

Finally, this idea of loan repayment is nice but the Fed is fickle... DO NOT count on it being there or working out as planned.... Ask me how I know.

- "The best laid schemes of mice and men"... -Robert Burns