Loans are the Devil

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student-loans By: Jeff Salling

My wife and I decided that we were going to plan a very romantic evening. For some, that is a walk along the lake or a candlelit dinner. For us, it was time spent at the kitchen table making a plan to pay off our law school loans. I expected to feel relief, pride and some sense of accomplishment after this special night. Instead, I felt a lot of frustration as I analyzed the numbers. I was very upset to see the amount of money that I had ‘left on the table’ or wasted through poor planning. Per usual, I took to Microsoft Word to vent my frustrations, because I figured that sharing them could help others save thousands of dollars.

Above the Law says that the average law school debt (in 2012) is just north of $140,000 (Read more…). The American Bar Association says it is $84,000 for public and $122,000 for private higher ed (Read more…). In an informal survey of friends and colleagues, the number seems closer to $150,000 to $200,000. Regardless of the exact number, everyone agrees that it is a lot of money. For me, I guess I was lucky that my debt was just over $100,000.

For this article, I wanted to discuss a few tips that might save you thousands of dollars and won’t require more than an hour or two.

  • Beware auto pay! The mistake I made was setting up auto-pay and not looking at anything for almost a decade. I was paying roughly $1,000/mo on the 25-year repayment plan. While I made sure that they were getting paid (and auto-pay is the best way to do it), I did not look at interest rates or set up a plan of attack. I figured that setting up auto-pay was the plan.

When you hear about student loans, you think you will be paying back a little more than you borrowed. I assumed that if I took out $100,000 in law school loans I would be paying back $110,000, maybe $120,000. I did not think I would be paying back $200,000-$300,000.

For one of my loans, I took out $20,500 in 2007/2008. My payment each month was $150. I paid $150/mo for around 90 months for a total of $13,500. In my mind, I should have owed less than $7,000 when I paid off my loan. In fact, I still owed over $18,000. How? This just didn’t make sense. I paid $13,500 and it only took $2,500 off of my principal? Well, there was a time period where $35 went to the principal and $115 went to interest. Eventually, I got to a point where $69 went to the principal and $81 went to interest.

  • Pay close attention to interest rates. In retrospect, the first thing I would do is check the interest rates. I know that they are higher today, but mine ranged from 0.00% to 6.55%. When I looked at why it was 6.55%, I learned that I set up auto-pay a month late and missed the 1.00% deduction they offered for making the first 48 payments. I missed another deduction (it might have been for paying the first 24 payments) for 1.00%. Regardless, I paid 2.00% extra every month for eight years because I didn’t take the time to look into this at the beginning. While I wish the lender would have noticed that I paid the next 90+ months on time and credited me the 2.00%, they did not. Six months ago, when I finally noticed the missing deductions, I called and they gave me a 1.00% deduction. It was better than nothing, but I still paid the extra 2% for eight years.
  • Understand the difference between private and public loans. Unbeknownst to me, some private lenders will let you pay off your loan at a smaller amount or ‘settle’ your debt. I knew that several folks who went into default were able to settle for less, but they took a hit to their credit score. I often found it quite unfair that those in default could settle for less but others who work hard and are just barely getting by could not. That said, I have had several friends who have called their private loan lender and paid off their debt for significantly less than they owed without going into default. I have heard about 70-80% of the total. If your lender is willing to take the settlement, this is a fantastic way to pay off your loans. Save up some money and when you have enough, call and say, “I owe you $10,000 as of today, but I just came into some money and could pay you $8,000 today to discharge the rest of my loan.” They don’t have to do it, but they might. They likely bought your loan for pennies on the dollar and would still come out ahead.

Unfortunately, there is no such deal for the federal loans. I called each agency that held a loan (National Education, Naviet, Great Lakes, Netlnet) and asked. All of them, though very polite, told me there wasn’t a chance. The loans are guaranteed by the federal government and they would never take an amount less. This was incredibly frustrating. I have paid the last 90+ months on-time and in full, but there is absolutely nothing they can negotiate to discharge the debt (besides full payment).

  • Consider consolidating at a lower rate. There are a plethora of companies who are marketing toward consolidating student loans. Contact one of these financial institutions and see if you can lower your rate that way.
  • Pay off the higher interest rates when you can. Do not wait until you can pay them all off because you are just wasting the interest. I would recommend picking a percentage (maybe 4%) and paying off everything over that number. If it is under that number, investments should be able to offset what you are paying. Clearly, if you are a savvy investor and making a higher percent than you are paying, please keep investing.

In conclusion, I will say that the relief of being done with this debt feels amazing. While it was difficult to see all of the money that I wasted, I am pleased that my better half motivated me to get a handle on finances and plan for the future. Life in the legal industry is very stressful. As attorneys, we need to strive for minimizing the amount of stress we get outside of the office. It is then, that we can focus on reducing stress inside of the office.

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