Friday, July 13, 2012

Be a Student of Loans

Staring down the barrel of well over six figures in debt while holding a government salary will alter your perspective on debt.  The restless nights hoping they don't cash your rent check until payday.  The daytime worries about where you'll get money for Christmas.  I didn't appreciate what debt can do to a person until I decided to take care of it.

College is expensive.  So is law school.  The government and the universities have made it easy to finance your education.  Just sign on the dotted line and we'll send you a check.  Don't worry it's not payable until six months after you graduate, when you're making tons of money.

I hope you can see the danger based on my previous posts this week.  (Here and here).  There has to be a better way.

First of all, you have to decide if higher education is the right option.  Are you going to college or law school just to delay the real world?  Do you really want to become a plumber or electrician?  If so, learn the trade.  No sense amassing tons of unnecessary debt.  What about the type of degree?  A Russian poetry major might be interesting, but the only jobs available will be teaching that to college students some day.

Not sure about what kind of degree you want or whether college is right for you?  Try a community college first.  The costs will be low and it will give you a flavor of post-high school life.  Work hard and get good grades and you'll be able to transfer to a good college after one or two years.  And, hopefully, now you'll have an idea of what to study.

Okay, so what about loans?  Every needs them right?  There's no way to get through college or law school without them.  Paying them off in thirty years is normal?  You even get a tax break.


I worked two jobs through all of college and law school.  In addition, I took out the maximum amount of money in loans the federal government would allow.  That means the loan paid for my tuition and gave me some extra money for things I absolutely thought I needed and deserved (a new laptop, a vacation, a night out with some friends).

I was making enough money at my jobs to pay for college at my state school.  Instead, I chose to spend that money on frivolous items and take out loans.  My jobs would not have paid for the entire law school tuition, but it would have defrayed the costs, allowing me to breathe easier when I graduate.

Imagine graduating college or law school with no debt.  What can you do?  Anything you want.  You are not tied to trying to take any job that comes along to pay your hefty bills.  You can take  a shot starting a business or starting your own firm that way.  Or you can take that year doing volunteer legal services in an inner city, on a modest salary, but learning how to be a lawyer.  There is no worry about how to pay the bills so you can do anything you want.  Or, if the job you do accept isn't what you thought it would be, you can leave without a worry about finances.

But you get a tax break for your loans, you say.  I know we're lawyers, but this involves a little math.  Borrowing $100,000 at even 2.5% interest means you pay $2,500 per year in interest.  You can deduct up to $2500 (filing jointly) from your salary at tax times.  That means if you make $100,000 a year, subtracting $2,500 brings your adjusted taxable income to $97,500.  Assuming a 28% tax bracket that means you  would pay $28,000 in taxes on the $100,000 income or $27,300 on the $97,500 adjusted gross income.  So to pay $700 less in taxes, we are willing to pay $2500 in interest?  It doesn't make sense.

As you can see, I am clearly anti-debt.  I'm still digging free from the mess I created.  A few years ago my wife and I compiled a budget and put a plan together to pay off the debt.  In just under three years we have paid off over 50 % of our debt load and hope to have it all gone by the end of next year.  Then, we are free to use all that money to build our wealth, free from sending our money to other people.

There are hundreds of law schools to choose from.  Is a Harvard education and debt bill worth the cost?  Probably if you think you can graduate near the top and want to work at one of the top firms.  But if you want to work for the legal aid society, this may not be a good idea.  What about those tier two, three, and four schools?  Why not choose a public school and the significantly reduced cost that comes with it?  If the schools will get you to the same goal, why spend $60,000 a year when you can spend $15,000?

To recap the week:  1) Work on deciding a plan for college.  If you don't know what to do with your life, try classes at a community college.  Investigate possible careers before choosing a major.  2) Figure out how to pay for college.  Work during the school year and summer.  Strongly consider state schools.  Apply for every scholarship.  There are hundreds out there that are unclaimed every year.  3) Figure out what a lawyer does and decide if you want to do it.  Then, figure out a plan to pay for it.  DO NOT just think everything will work out.  It is a difficult job market and the costs of education are only rising.

I anticipate some debate over some of these views.  Many people believe that you should just make the minimum payments on student loans and invest other money you would use to accelerate your payments.  I disagree, because you just keep that weight of risk hanging around your neck for thirty years.  But I look forward to comments and emails.

Have a good weekend.


  1. I meant to comment earlier, busy me. But the one thing I always tell people thinking about law school relates to loans. I tell them to think long and hard about the debt, because it sticks like glue and is so much harder to pay off in reality than the schools, loan companies etc make you think.

    1. Couldn't agree more. There is a terrific sales job out there. They wouldn't be so easy to get if they weren't making the loan company money and costing us.

  2. I started at a community college and it was fabulous. By the time I got to a 4 year school I had spent almost nothing (comparatively--and at that time the CC tuition was so low!) and I had no loans yet and I knew what I wanted study (English). I am a huge proponent of community colleges! Yes, the debt sucks and really the interest deduction is not all that great. I mean it's cool and all but I'd much rather have no debt! LOL.

  3. I have started my application for a student loan 5 years ago and I'm kind of paying it now bit by bit. I'm certain that within a year I may be able to pay it back without any problems.

  4. The big problem is you are talking about young people making the decision to get these loans. 18/19, just out of high school, there is no way they are thinking that far ahead. Most just see this as the way it is done, get the loan, and don't think about it again until they graduate.

    1. That is exactly right. And even more reason for personal finance to be taught at a young age and even more reason for people to follow this advice!

    2. of course, even if you teach finance at younger ages, would any of them listen?

      Still, I think its something they should teach at least in high school. Managing personal finances is something everyone heading for college needs to know. Not just for loans, but there is also all that credit card debt.

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