Money, get away.
Get a good job with more pay and you’re OK.
Money, it’s a gas.
Grab that cash with both hands and make a stash.
Lamentation over money, and specifically law school debt, has been a common refrain during my term as State Bar of Michigan president. Legal aid organizations bemoan law school debt because young lawyers cannot afford to work for legal aid wages because their monthly loan payments are so high. If at all possible, they will migrate to the largest firm that can pay the highest salary in the biggest city where the most clients are available. Result? A skewed distribution of legal services available to the public.
State Bar of Michigan Character and Fitness professionals fret about law school debt because it can contribute to bad credit records, creating a possible barrier to licensure. And law schools surely don’t like the problem: it can’t be good for applications and enrollment.
Worst hit are the law students and young lawyers who expereince debt like a punch to the gut. I hear them say things like, “I’ll never be able to buy a house: my loan payments are my mortgage payments.” And, “If I had to pay for day care, I don’t know where it would come from. I guess I’ll have to wait to have children.” For an overview and reality check via Twitter, read this Above the Law article.
Apparently, the University of Michigan Law School has come up with a Debt “Wizard” that allows students to figure out how to manage their debt by thinking carefully about where they live and what they do with their degrees.
If the Wizard doesn’t solve all your law school debt problems, maybe you can save the next person from your plight. Or, if you, your kids or grandkids are thinking about law school, I dug up some advice from some very credible sources to pass along.
I interviewed a CPA in a small accounting firm, a financial planner at a top 100 wealth management firm, and a community banker from a bank that “has money and the will to lend it.” (That’s what one of their many witty billboards in town says!)
Q: What would you tell someone who is considering taking on significant debt? How would you counsel your own kids on the issue?
A: Do a cost-benefit analysis.
“Make sure the purchase is worth the cost and associated debt,” said Gary Rogow, CPA and shareholder at Rogow & Loney of Ann Arbor. “Plan ahead on how you will repay the debt and how it will impact your future income.”
“The cost/benefit analysis must include the interest on the debt as part of the cost, not just the initial amount,” added Toni-Marie Wander, CPA and senior financial planner at Old National Wealth Management. “The benefit is defined as the difference in the salary earned before vs. after the degree. For example, if the initial debt is $200,000 and the interest rate is 5 percent for 10 years, the actual cost is close to $260,000. If the salary you expect to receive is $125,000 a year and you were making (or could have made) $50,000 a year without the degree, the benefit of the debt is $75,000 per year and it would take roughly 3.5 years to make the education worthwhile (without taking into consideration inflation, income taxes, or other factors that may affect the outcome).”
Kevin Corbin, JD, general counsel and First Vice President of Ann Arbor State Bank underscored the need for a safety net. “In worst case situations, do you have sufficient reserves to make payments if something unforeseen happens? Will your current income support the debt service and permit you to save for other needs?”
Q: What are the numbers around debt? What rules of thumb are there as to how much debt you should reasonably take on and what does the answer depend upon?
A: “The younger you are and the longer the repayment horizon, the more debt you can incur,” said Rogow. Considering law as a second career? Ouch! Corbin was more concrete: “There is no right or wrong number for debt, but the upper limit debt to income when our institution underwrites a mortgage loan is about 43 percent (no more than 42 cents from every dollar can go to servicing your debt, including the new mortgage). These kinds of ratios apply to car loans and credit cards as well, but the actual ratios may be different depending upon the type of loan. Your student loan debt will probably be included in on the debt side of the equation.”
Q: How do you see student debt’s role in society?
A: Rogow predicts student debt will become the next mortgage debt crisis. “That may result in student debt being restructured and repayment terms softened. I wouldn’t rely on that!But it’s a real possibility.”
Wander gave a glimmer of hope. “Student debt is not dischargeable in bankruptcy, but it does have other benefits, such as being deductible on your tax return. Also, there are sometimes opportunities to have your debt discharged if you work for non-profit organizations.”
That would be an interesting twist, wouldn’t it? Are we headed from a world where students cannot afford to work for non-profits, to a world where they can only afford to work for non-profits?
Q: What alternatives are there to graduating with huge debt these days?
A: Across the board, the answer was, “Have rich parents, a rich spouse or other relatives.”
Wander also mentioned the idea of going to law school at night and working during the day to minimize debt.
Testimonial: That worked for yours truly. It took me four years to get my law degree going to school on nights, weekends and during the summers at Wayne State University Law School, and I graduated with $12,000 in debt. Now that was 26 years ago, but it certainly would have been much higher had I not been paying for my own living expenses from my $21,000/year job as a law clerk.
Q: Any final words of wisdom?
A: “When paying down debt, usually the best option is to pay the minimum on all [debts], and then pay extra on the highest interest loans first,” Wander said.“A popular alternative is to pay off the smallest loan first, because you then feel you are accomplishing something. I like the first option better, because you end up paying less in interest in the long run.
Also, do NOT adjust your lifestyle until you have paid off your debt – consider yourself still on a student budget until you pay it off. Then, throughout your working career, follow this simple financial planning advice: SPEND LESS THAN YOU EARN!!! Sorry guys, it’s Bud Light, not Dom Perignon for a while longer.
Last words of wisdom from the experts?
“I am rather leery of recommending debt counseling,” Wander said. “I find more often than not they are extremely expensive and do not really offer more than common sense.”
Just as seriously, Corbin warned, “Understand that accumulating significant amounts of debt to get your degree may limit your ability to borrow in the future. There is no guaranty that the job you get will produce enough income to pay off your debt in a reasonable amount of time. Do the numbers up front to make sure you understand what your income has to be in order to service your debt appropriately in a reasonable period of time. Loan calculators available on the web can help you understand what your debt service will be. And if you’re late on a loan payment, it’s going to make it tough to get other loans because your credit record will be negatively affected.”
Rogow’s advise is simple. “Get a degree in a field that can get you a job.”
Lori is a shareholder at Nichols, Sacks, Slank, Sendelbach, Buiteweg, & Solomon, P.C.