## Wednesday, January 12, 2011

### The Student Loan Calculator

Finaid.org has a great tool for prospective students to use when deciding whether or not to attend a expensive college program. The program calculates the monthly payment that has to be made by the borrower in order to fully pay off the loan. Here is an example by using \$120,000.00 as the loan amount, assuming a 25 year loan term.

Loan Balance: \$120,000.00
Loan Interest Rate: 7.50%
Loan Fees: 0.00%
Loan Term: 25 years
Minimum Payment: \$0.00

Monthly Loan Payment: \$886.79

Number of Payments: 300

Cumulative Payments: \$266,036.49
Total Interest Paid: \$146,036.49

Notice that the total amount of interest paid is actually greater than the original loan amount. In addition, given that not all of the loans will have the interest subsidized while you are attending college, the loan amount will be even bigger. Thus, on a 120k loan, expect to pay somewhere around \$900 to \$950 per month for 25 years. In the event that it takes a graduate a good 2 years to get a decentpaying job, the loan balance will have grown even larger as the interest accrues on a DAILY BASIS!

Many naive students believe that \$1,000 per month in loan repayments is perfectly reasonable to manage. Guess again. If you get a job earning \$45,000 per year, after taxes of 22% your net earnings are \$35,100 or \$2,925 per month. Take out the \$1,000.00 for the loan and your left with \$1,925.00. How about rent? Lets assume some real cheap rent in the amount of \$800 (assuming roommate or partner to help pay) plus utilities and your left with \$1,000.00. How about a car payment or a flat tire, busted brakes, oil change, blown transmission? Then you have to eat, pay for a phone, and all the other necessities of life and you will be flat broke. Lets go back to what the loan calculator said about \$120,000.00 in student loan debt:

It is estimated that you will need an annual salary of at least \$106,414.80 to be able to afford to repay this loan. This estimate assumes that 10% of your gross monthly income will be devoted to repaying your student loans. This corresponds to a debt-to-income ratio of 1.1. If you use 15% of your gross monthly income to repay the loan, you will need an annual salary of only \$70,943.20, but you may experience some financial difficulty.This corresponds to a debt-to-income ratio of 1.7.

On a salary of 45k you will be devoting nearly 25% of your gross income to debt service. And if you think I'm using a low salary base as an example just take a look at many of the entry level positions out there as they are paying far less than 45k.In fact, many entry level positions pay less than 30k a year. There are entry level lawyer positions that pay minimum wage at times. For numerous examples take a look at shitlawjobs.com.

It is imperative that all college students fully understand the implications of student loans on their future finances. The other day I spoke with a recent college grad who owed \$200k in loans. When I told him he was looking at \$1,500 a month for the next 30 years he said "that's not too bad." I look forward to his response a year from now.

1. WOW! if this doesn't prove that most law degrees are not worth the cost, I don't know what will. I got out of the law biz, but I have a friend who still practices crim/PI. he can hire an assocate for a song. he pays one 34k plus some piss ant benefits. Well, the other, he doesn't pay him at all. the associate works for office space and the CHANCE to bring in some business of his own. Sad, truely sad. McDonald's pays their fry cooks better than this.

2. Law schools and the ABA are far from blameless in creating the high debt to no jobs ration.

But with this environment the best lawyers can do is to think of alternative ways to use their law degrees and become more entrepreneurial whether by opening up their own practices or checking out things like perdiemattorneys.com or Hireanesquire.com.

3. This is happening in other career fields too. Some of these for profit schools graduate a student with \$100,000 in student loans (not including interest) and that's for a four-year degree! I know someone, who is only half-way through, and already has accumulated \$50,000 in debt. She's been told either get private loans, or drop out because she can't get any more federal loans. She, like many other students, is of the belief that she'll make a great salary when she gets out so loans don't matter.

4. please edit your post, changing "your" to "you're" where appropriate. otherwise good.

5. I had \$9700 left to pay after my loans were set aside due to permanent disability. I didn't have the money to pay any of it. Now, after a few years, the balance is a whopping \$36,000 and growing. I'll never be well again, and in fact, am terminal. Guess they just like having the debt on their books! MUST be making them hay somehow or they'd have let that small amount be set aside, too. The loans that were set aside had specific language in them stating they COULD be set aside, so they were. However, the State of Alaska changed the way the loan agreements read: they left off any mention at all of accident or illness ocurring making it impossible for the student to repay! I went all the way to mediation with this but lost. Next step: civil court. But frankly, I just don't care anymore. I thought I was well enough to return to work, and college but becuase of the enormous medical and college debt, I've been turned down twice due to "bad credit." Depression rules this day for me. No degree (got sick in my final semester, lack ONE class for BA), no job and I WANT to get off disability. But why bother? Talk about a Catch 22!

6. Glad you are plugging into this financial literacy. Finaid and Fastweb are good resources. If more young people were knowledgeable about BASIC finances, they could avoid the kind of debt they get into. Just know that no matter how hard you try to instill these ideas, some kids still won't listen.
People like lemmings have to screw things up horribly before the lesson is learned. Sad but True.

I wrote up an article about the power of compounding interest here, hopefully some future freshman will read it and evaluate school options considering debt: http://www.custudentloans.org/student/the-power-of-compounding-interest

7. I find it hard to get through the article considering you don't know how to spell the proper they're/their/there. For everyone of you who post about law school being terrible/the worst idea of your life/ yada yada yada, there are other people, quite busy with their successful law jobs who aren't posting. I take this with a grain of salt, as it were.

8. These law schools that manipulate statistics are certainly at fault, but I also think these students can only be deluded to believe that they can screw around as an undergrad, then not study hard for the LSAT, and then by going to any law school can still end up with a fat job, nice car, and go out for drinks all the time. I certainly think the students and the ABA should demand transparent and non-manipulated statistics, but the students also need to take some ownership over their situation and not blame the schools. The formula is not so difficult people: Study hard (in school and for LSAT) + live within your means= good law school. Also, most of the top law schools have loan repayment programs that allow their graduates to not pay back ANYTHING if they make under a certain amount.

9. Anon @ 12:57AM

"The formula is not so difficult people: Study hard (in school and for LSAT) + live within your means= good law school"

Hence why the blog is called "subprime" and not "prime" JD. You basically stated what is wrong with the system when schools manipulate data thereby misleading students about their prospects. We blog to raise awareness and put people on notice of how difficult it truly is. Hundreds have abandoned the idea of going to law schol after reading these blogs. Eventually market forces will win as they always do in the end. I don't know if the tuition bubble will burst in 2012 or 2013 but it eventually will. And as long as I play even a small part in popping the bubble my job will be done.

The other day my friend who owns a call center put up some job listings looking for sales people. Three attorneys responded to the ad, one of them being a 2006 law graduate from a tier 2.
These are the stories that people need to know before they take the plunge.

10. You hit some nerves...I love it.

The federal government is partially responsible for this mess...they still offer federally backed student loans. Take away this backing and they pop this bubble.

11. Income based repayment. It will save your life!

12. Like the article. As far as the grammar issues who cares really--I would keep it "as is" just to iritate some peope. A thing they don't tell you also is its more difficult to pay down student loans even with a higher income because by then you have other expenses to worry about, higher income taxes, and no student loan tax deduction because you make too much. I recommend with excessive debt to live very poorly as long as you can out of school, and use the savings obtained to pay down student loan debt. I also found group therapy in the form of other similarly situated folks on the web and when going through something so major such as paying down student debt for a long time it pays to have some emotional support since there will be highs and very emotional lows. Even on my worst days I remember feeling better because some medical grad or someone else out there that had it worse than me.

13. I graduated 2 years ago from law school with over \$135k in debt. While I abhor the debt, I accept it (even though I question the wisdom of going to law school). But what I can't figure out is why I'm not able to refinance at a lower rate. My near-8% interest rate is ridiculous. Rather than bailing out the banks, Uncle Sam would do better to reduce student loan debt to 4%, which would 1) make folks like me less likely to default and 2) inject billions into the economy.

14. I agree with PoorGrad. I've lived poorly for years and finally looking at the light and the end of my tunnel. But still crossing my fingers...
My luckiest break was finding a job where fashion wasn't a requirement. *whew*! But fashion senses have relaxed over the past couple of decades anyway. My husband is the spendthrift...I could easily live on less than 1K a month, including rent in NE OH.

15. Hi!
You seem to be a reasonable person.
What income should one have to take a loan on 450k house with 10% down payment?

16. To anonymous at 11:34 AM

On a 400k note with an interest rate at 5%, your looking at \$2,616.04 per month to pay the mortgage, property taxes and insurance. Your housing expense should not be more than a third of your net income. Thus, you should be bringing in a good \$7,500 per month net if you want to incur up to 400k in mortgage obligation. Don't forget about TV, alarm, internet, possible HOA, landscaping, furniture, appliances and other associated expenses with a home purchase.

17. I recommend law school as a great education. I don't recommend it as a guarantee to a fabulously wealthy lifestyle.

If you keep your expenses down (my husband and I both attended law school & chose the one that offered the most scholarship money and we lived VERY cheeply- owned 1 used car, rented a tiny but affordable apt., shopped at thrift stores, etc.) and keep your expectations reasonable as far as salary goes, you'll save yourself a lot of heartache.

We attended a 4th tier law school and expected to make around \$40-\$45K after graduation. 1st salary was \$44K. Currently (5 yrs past graduation) my husband makes \$53,000. I spend most of my hours caring for our children, but am licensed to practice and do some paid legal work. We live simply and comfortably in a medium-sized city in the west. (Obviously you can't make it in NY, LA, or DC on \$53K.)

All our loans were Federal. Most did not accrue interest until after graduation. We had \$90,000 of debt for TWO law degrees (essentially \$45,000 each). We locked in at a low interest rate, so we pay \$325 a month combined. You don't have to take out \$100K+ in loans to get a law degree. Apply to your state university. Get a scholarship or a job, live on a student budget, and don't limit yourself to think the only jobs are firm positions. Consider government agencies, non-profits, banks and other businesses, or lobbying groups.

It's a tough market right now and new grads have my sympathy, but it's hard to find a job in ANY field, not just legal work.

I LOVED studying the law & still find it fascinating. Education has value beyond increased earning potential.

Good luck to current students and grads!

18. Learn to spell.

19. I think that that law school (and higher education, generally)is currently NOT in the best interest of many Americans solely because of the long term lingering costs of school loans. Something needs to be done to stimulate education AND provide relief to those former students restricted from progress by the golden handcuffs of school loan debt. For many, the cost of higher education is not worth the price. However, I am of the mindset that the "Educated Stimulus" plan could provide relief while simultaneously stimulating the economy (without significantly adding to the debt). It is not nearly as exciting or desirable as full student loan forgiveness, but it is a reasonable plan that the Parties may actually agree on. Find the details and contribute to the discussion at http://www.educatedstimulus.com. The website is an attempt to promote simple ideas to preserve our future. (After complaining about the problem for so long, I am finally trying to push my solution.) I only hope those who daily sculpt our generation's future will daily seek our generation's input.
As an aside, I love my profession, despite my EXTREMELY stressful loan payment. My love of the profession is the ONLY thing that makes my six figures of debt worth while. I would only precaution those deciding whether or not to join the profession to truly think about their motives. If you want to be a lawyer because you want to be rich, you will likely be disappointed after a couple years. I actually think the misconception that all lawyers are rich is why only about 25% of licensed attorneys are still practicing after their first five years out.

20. Those monthly loan payments are BIGGER than my mortgage (\$800/mo)! BTW, that includes everything: principal, interest, taxes, and insurance. I'm glad I didn't attend law school...

21. Oh my goodness! I'm a high school teacher that has been preaching student loan debt realism for years! Students tend have a lethal combination of egocentricity and optimism. I've witnessed students taking on \$80-120,000 of student loan debt to become graphic designers and communications majors! Four years later they express anxiety, but not until then. Stop the madness!!!

22. Yes, stop the madness and learn the time value of money.
I was 32 when I went to a Tier 2 school that seemed expensive at the time (1995-1998) avg cost 12k per year. I was fortunate to have some Army Ed Money left over, scholarship, working and later clerking 35 hours a week, and a wife who made enough to cover the rent/groceries/etc. Now the latter was a plus that single folks generally can't avail themselves of. But instead of getting an apartment, rent a room at someone's house. It's a lot cheaper and every dollar you don't borrow is 1.5 you don't have to pay back. Think about it.
A number of my cohorts didn't work or if they did kept to the less than 20 hours per week rule. When I was done I had less then 7.5k of debt (to include my undergrad). Of course, being my undergrad was Accounting and I had my CPA helpee. to have a real appreciation of debt and came into Law School with some money saved to pay for it. Being older was a real advantage in law school.
And for God's sake, use Junior College and State School for Undergrad. I would have went to a cheaper law school but needed to stay in that location.

For jobs, I never really wanted to be an attorney and clerking disabused me of any remaining notion that I did. I went to work for Uncle Sam and within 6 years was making 100k and ten years later made \$150k. And the hours are not anything like the private sector, holidays, and a nice pension to boot. If you don't like working for the gov't, then Bank Compliance in private industry. Bank Regulation if you work for the Federal Gov't is a field that scream for folks with JDs. If you don't have any experience, you will start off around \$45-50k but you get promotions and until recently, regular raises.
My friends that went into practice are still making less than me and put in some insane hours.

23. Holy Crap, I haven't looked at tuition to my old Law School and just found out it is \$33k.

Jeez, no f'n way would I pay that for that! Please people, do yourself a favor and have a financial plan in place before you incur these huge levels of debt.

I drove by my old school a couple weeks ago. It was Saturday. I watched those drones heading to the library with that \$4 starbucks coffee in their hand (financed no doubt) and with plenty of fancy computer/i phones etc (also financied). I laughed knowing the pain of spending a weekend studying but it wasn't until now as I looked at the tuition that I started to feel pretty damn bad.
BTW, my school touts itself as a 'social justice' etc. But looking at the salaries those professors are now pulling in leaves me little doubt that they view 'social justice' as making sure they get paid.

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