By Jennifer Guenther • January 25, 2011•Writers in Residence
Twelve years out of law school and I am thrilled! I finally have less than $20,000 in student loans left to pay. But then I think, “Wait a minute, I am twelve years out of law school and I still have almost $20,000 in law student loans to pay?? What happened?!”
I will tell you what happened, I failed to realize early on, much like many of my brethren, that the financial decisions you make at the beginning of your career will affect your choices well into your future.
Here’s a fact: The average law school graduate now walks away with both a law degree and more than $100,000 in debt. They are expected to find a job, get a car, have a home/apartment, pay bills, pay for professional clothes, get their hair cut, wear shoes…and make what is likely to be more than $1200 a month student loan payment. Oh, and don’t forget to start planning for retirement, pay for health insurance, and perhaps support a significant other and maybe a kid or two. And a savings account—don’t forget the savings account for “just in case” things!
Here’s another fact: Lawyers are notoriously bad business people. That is why they went to law school instead of getting and MBA, right? Why are so many States and the Federal Government in such bad financial trouble? Because they are run by lawyers—just look at the vast majority of representatives in Congress. Why did so many large firms implode as soon as economic times got tough? They are run by lawyers.
Okay, joking aside—as a lawyer it is your job to counsel your clients on good management practices. Right now, as a new attorney just starting out, is the best time to give yourself some good advice as well.
- Here are a few more basic facts:
- You can’t declare bankruptcy on student loans. They are yours forever, and can be the reason that you are turned down for a home loan, or sent to collections, if you start missing payments. Student loans can ruin an otherwise perfect credit score if you neglect them.
- Most lawyers make too much money to get a tax benefit from paying off your student loans—if not at first, then within a few years.
- Consolidation of your loans may lower your monthly payment, but can often extend the life of your loan by decades--literally.
- Most law firms offer 401Ks or other retirement programs, but you are also most likely going to be required to supply the funds for those programs from your own paycheck to make them meaningful.
- Loan forgiveness programs for public interest work generally apply only to Federal Loans and not to most private loans.
When researching student loan obligations, most articles look at debt statistics in terms of recent grads foregoing public interest jobs because they cannot afford to make their loan payments otherwise.
But the reality is that the debt of new lawyers has a much great impact than simply limiting the ability of someone to work for the public sector in a “helping society” type of position. New graduates are often forced to make decisions to put off marriage or have children for fear of adding additional financial stressors to an already stressful career. Once a lawyer starts a family, law school debt can impact a lawyer’s ability to work part time or move to a less intense position—particularly if they are the primary breadwinner for the family. When a job situation becomes negative, whether as a result of a change in management at the firm, a change in career interests, or for any other reason, having a substantial payment due each month makes it more difficult to take risks or to leave.
But there are ways to plan ahead a bit, without sacrificing the benefits that come with a great new law career. A few minor sacrifices in the beginning of your practice may mean greater financial freedom in the not too distant future. Here are a few recommendations:
- Consolidate your student loans immediately upon graduation, or as soon as you read this, in order to get the best interest rate possible. Do so, however, without extending the number of years for repayment. While most loan companies offer a set period that you can choose, I found that I could actually request a specific number of years for repayment. The loan representative told me what my monthly payment would be over the phone for that number of years. I shortened the number of years left on my Federal Loans by two years because it only slightly increased the payment, but saved me two years worth of interest and time. Those Federal loans are now paid off.
- If you must extend the number of years on your loan in order to comfortably make your monthly payment, do so only for the least number of years necessary.
- Keep in mind that private and federal loans will often need to be consolidated separately.
- Always pay more than the minimum payment due- even if it is only $10. This money goes straight to the principal amount of the loan, rather than to interest, and will reduce the overall amount you pay in the end. This may shorten the total payback time by months or even years.
- Don’t fall for the changes in payment- private loan companies are notorious for changing your payment each time that the interest rates change- but look carefully at the statement before cheering that your payment just went down. They also often recalculate the amount back to the full term of the loan—meaning you will never pay off the loan. I started out with $26,000 of private loans upon graduation, in addition to my federal loans. After 11 years of repayment, I have only paid $14,495.87 in principal, while I have paid $14,786.85 in interest. Although this started off as a 15 year loan, my loan account now says that by making minimum payments I will have the loan paid off in August of 2020, more than 21 years after I graduated from law school. At that rate, I will have paid significantly more interest than the original amount of the loan, itself.
- Look beyond your student loans. It is easy to see retirement as a world away when you are 27. At 39, I am starting to wish that I had put more money every month into the 401K offered by the company. Retirement is still a world away at this point. While I put the maximum amount in that I could afford as a new associate, I never increased this amount over the years as my salary went up. Instead, I used my money for other things. 401K’s have the advantage of being deducted from your payment “pre-tax”. This means setting aside $100 for your 401K does not make your paycheck is $100 smaller. If you pay state and federal tax at the average total rate of 33%, this means that your paycheck is only $66 less. That is a lot easier to take and doesn’t feel like such a burden. If you have the amount automatically deducted before you even see your paycheck, you won’t think about it as “missing”.
- Reward yourself, but don’t change your lifestyle right away. Graduation from law school is a big deal. That first paycheck is an even bigger deal and it is very tempting to start spending it right away- on a car, a nicer apartment, some designer suits, or awesome shoes. My suggestion is pick one of the big items and treat yourself. Upgrade your car or your apartment—within reason. But then stop for a while and focus your financial efforts on getting out of debt. The faster you get out of debt, the faster you will be able to buy the “extras” without having to worry about increasing your debt load or a major change in your job.
- Limit your shopping by setting a specific dollar amount you can spend on extras such as dishes, towels, clothes, eating-out, etc. Then you won’t feel bad splurging on that sweet pair of shoes, but will also know that you have to wait for your next budget period to spend again. Or you can save the amount up over a period of time for a really big purchase.
- Create a savings account and automatically have a set amount from your paycheck deposited into it each month—then don’t touch it unless you have an emergency. Just like with an automatic 401K contribution, you don’t miss money you don’t see. Having a savings account is vital – cars break down and fender benders are extremely common. And if you are one of the lucky ones who doesn’t have emergencies come up, savings accounts are invaluable and necessary for buying a house, taking maternity leave, getting married, etc. so as to avoid going further into debt.
- Just like with a good diet, you must forgive yourself if you mess up or splurge, and then move forward as originally planned.
Think about it- paying off your student loan means an automatic extra $1200 back in your pocket each month…And more financial freedom to change jobs or career, to take risks, or to just take a trip.