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STRATEGY PLUS DISCIPLINE Glassman: Let’s talk about some of the success stories. Now, we happen to be lucky enough to have somebody here who has set forth a plan. David, you paid off your loans. Tell us a bit about your strategy when you graduated law school. Witherspoon: Well, first of all, I had never owed that kind of money to anyone or to anything. Glassman: How much money? Witherspoon: I think it was right around $60,000, which back in ’94 when I came out was what a lot of my classmates and colleagues were facing. But all the other incidentals that we’ve been discussing, now that I think back, probably took it over that amount. Glassman: So how quickly did you pay off your $60,000 in loans? Witherspoon: Let’s see, I think my grace period — and it really is not a grace period when you think about it. It is really a period that you need to use affirmatively to come up with some ideas and some plans and some self-discipline. When my “grace period” ended, I believe that was January of ’95; I had effectively paid off my loans by March of ’97. So we are talking a little bit over two years and four months. Glassman: And if you were talking to a newly graduating associate and sharing your strategy, what were the three most important factors? Witherspoon: Factor number one was — and this is kind of a mushy psychological standard — being honest with yourself. I wanted a lot of things that I felt I had deprived myself. Once you identify your weaknesses, and I had quite a few, you then sit down and you deal with them one by one. Do I need the car? Do I need the condo, or do I just need a place to stay for a year or two or three until I get on my feet? Number two is setting forth a plan. It doesn’t have to be very detailed. Mine wasn’t. But it has to involve a general idea of where you want to be, financially. And you set a time limit. My time limit was inside of three years. I’d give myself inside of three years to try to get as much of the Harvard debt behind me as possible. The third is, no matter what you want to do, do what you set out to do first. And if you are lucky, you can kind of create a nexus between the two. You can find creative ways of doing things that don’t cramp your lifestyle that much. I made the decision to move back into my childhood home, which for a lot of my friends was not an option. Absolutely not an option. I’d tried my best to stay on good terms with my folks throughout the years. That paid off. They actually wanted me to come back home. It turned out to be just a little over four years. But it was something that I knew that I had to do to get to where I wanted to be. And I was willing to do that for that period of time. It doesn’t have to be living with the folks. It can be anything, but it has to be something that you have to commit to doing. It has to put you in a better place. Kuhn: I had kind of the opposite experience. I was married with a family. I took the opposite approach in that I didn’t have a huge debt. I went to the University of Colorado for my J.D., and then for the L.L.M., I went to a private school. So that wasn’t too bad, but even so, it was a load to have to deal with. And my husband also had his own student debt load. So we consolidated loans and spread them out as long as we could, and tried to backload it so the monthly payments early on were not as great, which allowed us then to do the sorts of things that are covered by the tax code for which you receive tax incentives: Get the 401(k) built up so you can get a loan to buy the house. We still have debt, but it’s spread out, so it is not affecting our lifestyle at all. We’ll be paying it for the next I-don’t- know-how-many years, but a long time. But it is just something we do. Glassman: From what we’ve talked about so far and what I’ve learned from the associates I’ve worked with in financial planning seminars, it’s obvious that many new graduates begin the practice of law under a huge mountain of debt in a work environment that features long hours and a great deal of performance pressure. Even with huge starting salaries, it’s not so easy. Nancy, can you offer two or three hints that might help associates take control of the debt issue? Kuhn: I would suggest consolidation. Get those monthly payments as low as you can now so that you can invest in the 401(k), so that you can start saving for a home, for whatever you can buy to get that home acquisition indebtedness, and then as you build up your equity in your home, you can take out a home equity loan and also deduct interest from that, and use the home equity proceeds to pay off your student loan. The interest then becomes deductible under the rules governing home equity loans. Lammert-Reeves: Well, I think you are both getting to where you want to go, but the point is you had different goals. And it is such a personal thing, how you feel about loan debt. Do you want to pay it off as quickly as possible, which was David’s issue, or do you want to spread it out longer? Because we have some students who say, “I want to take as long as possible because over time, inflation is going to make it so that that loan payment is a minor issue for me, and it is going to give me the time and the money to do some things I couldn’t otherwise afford to do.” Kuhn: It also depends on the type of debt you have, because if you have debt that has a high interest rate — I mean, not all debt is low-interest, federally subsidized. Lammert-Reeves: Well, for a lot of private loans, there is no interest cap. As interest rates spike up, the student is going to feel the effect of that within the next three months. So you have an interest rate exposure that could be very costly. Scherschel: Consolidation is an excellent choice for anyone who has high levels of other debt that are at higher rates because they can slow down the payback of their federal loans, which have taxpayer-subsidized lower rates — great advantages when it comes to deferment and forbearance. They don’t let you defer your car payment for six months. And so these are really much better loans to slow down the payoff of. And if your income is a certain level, you can deduct the interest on education loans now, including a private loan or any educational debt. But what you want to do is speed up the payback of the credit card debt, which usually carries rates of 12 percent, 15 percent, and even 22 percent at a department store. And I think what happens is that when the loan paperwork comes, they don’t really read it and they don’t sign up for the payment plan. Several months later, we tell them that their grace period is coming to an end and they need to pick a plan. Most of them still don’t do anything, and so we automatically put them into the standard 10-year repayment plan, which has the highest payment. So they are making a big payment on their consolidation loan, and making the minimum payment on their credit card debt, when it really should be the opposite. So then they call up later and say, “I am having a little trouble, and would you mind consolidating my loans,” and of course, we’ll be glad to do that, but they paid a price just in those few months that they have spent too much on interest on their credit card debt. They might not consolidate until after they’ve left grace, but you can get a better interest rate if you consolidate in grace. And one big trouble is that if they really think, “Well, the government is not going to come after me,” they’ll put off paying their student loans, and they’ll become delinquent. If they really are right at the edge of default, consolidation can take four to six to eight weeks, especially if they have a complicated loan portfolio. They can’t consolidate in time to delay default. If they default, then they can’t consolidate without going through other mayhem. And one of the biggest mistakes they make is to wait too long to wave the white flag and say, “Please, I need help.” All they have to do is pick up the phone and call their loan servicer. Most of the student loans are serviced by big operations, Sallie Mae, others. We have expert staff at all these organizations, and we will counsel people through the process and help the borrower ask the right questions. They don’t know what questions to ask, and it is our job to divine, based on their comments, what they are trying to do and what their problem is, and to give them the best advice possible for their individual situation. Glassman: Well said, Patricia. What I’m hearing is that we really need to advise associates of the need to develop a budget. Ruth, you spoke of this briefly early on, as far as knowing what the bottom line on the paycheck truly is. I think we can go a little further with that thought, given the availability of software programs that make it easy to download bank and credit card transactions. With just a little work in the way of creating categories, home PC users can create reports that tell how much they’re spending on clothing, dinners out, and so forth. What they may find is that they’re spending way more on these categories than they’re paying down on outstanding loans. That step is number one, then you can develop a budget that will let you know what you can actually spend. That leads to step two, a strategy designed to pay down loans in a way that makes sense, like paying down the high-interest items first. You mentioned 12 percent, but in reality, those cards are more often of the 18 to 21 percent variety. There are a few gems in the rough that are “day trading” credit cards for the 9 percent introductory rates and the frequent flier miles, but once you’re working 2,000 hours, it’s difficult to continue playing that game. The third step is to consolidate, but to consolidate with discipline. As opposed to thinking, “Well, now the payments are under control because it’s going to be paid over 30 years.” Yes, consolidate to give yourself breathing room, but have the discipline to make accelerated payments whenever you can, rather than sitting back and putting it off. Lammert-Reeves: Say, for example, you free up through consolidation $150 per month. If you don’t take that and apply it to credit card debt, or put it in retirement savings, or do something else constructive with it, you have just wasted that money. Glassman: Exactly. Lammert-Reeves: There are people who say, “Oh my gosh, it’s more money,” and ratchet up whatever their day-to-day living expenses are, instead of using it with a plan in mind. Scherschel: The level of federal education debt of law students, most of them can go out 30 years, which means that by consolidating they are really going to reduce their payment by about 40 percent. Glassman: It takes discipline. And one thing that makes it easier is the automatic withdrawal from a checking account. So let’s say the payment goes from $1,100 to $650. To pay down principal faster, you can continue to have the $1,100 payment withdrawn from your checking account without worrying about writing the check or remembering to write the check. In months where there’s a need to scale back, you can authorize the bank to deduct only the $650 payment that’s actually due. Scherschel: Right. Glassman: The other thing we should discuss, Pat, is future discounts for on-time payments. Scherschel: Those discounts are only available if you do not consolidate. You can always consolidate at any point in time if you get into trouble later and need to slow down the payoff of your loan. But under a lot of the incentive programs for on-time payment available in the marketplace today, the standard benefits are two percentage points reduced off your interest rate after, say, 48 on-time payments. And it doesn’t mean that you have to make it that big. It’s only 15 days actually from the due date to get that payment in and we’ll count it on time. If you do that 48 times in a row, we’ll take your interest rate down by two percentage points. Right now, the rate of repayment is almost 8.25 percent, so that takes it down to 6.25 percent. And if you pay by electronic funds transfer, you can save an additional quarter of a point, and so by four years out, your interest rate is now 6 percent. And should interest rates fall — like this coming July, they are most likely to fall considerably-it’s two points down from whatever that is. And so this can actually reduce your interest expense by 15 to 20 percent. All you have to do is pay on time to get the benefits. But if you need to consolidate to get the lower payment, you can start off paying the lower payment, and then once you have more income, you can always pay more. The advantage of consolidating for borrowers who have very irregular monthly incomes is that they could just pay the payment that would be due under the consolidation plan, and they don’t have to worry about being delinquent on any of their payments. And so they can use the consolidation loan to give themselves flexibility in how much they pay each month. Glassman: Well, let’s talk about who should not consolidate. Any thoughts on that? Scherschel: People who really want to pay off the debt in a hurry and get rid of it. And basically the only reason why you wouldn’t pay off debt is if you have a use for the money which, on an after-tax basis, gives you a higher return. LOAN REPAYMENT STRATEGIES Glassman: Now, Ruth, you’ve been looking at some of the other programs as well? Lammert-Reeves: Yes, what Pat was talking about is consolidation under the FFELP Program. Under the Direct Loan Program, at least between now and the end of September, the way the current program runs, students can lock in an interest rate that is likely to be less than 6 percent because there are some incentives that expire at the end of September, which after 12 on-time payments, give an extra point in percent reduction in the interest rate. So for students, particularly for people that are just graduating, we are suggesting that once they take the bar exam, contact us in August for the latest rate information to see if it makes sense for them to lock in a lower interest rate, depending on where the rate is set for the next year. Because under the tax scenario, the person never locks in at the maximal rate of 4 percent if they don’t consolidate, but if they go through the Direct Loan, they’ll know what their rate is for the rest of the time that they are in repayment. And that could be a significant savings because you want to consolidate when the rate is lower. Scherschel: So that’s why, if you can, you want to lock in during grace, but you give up your grace once you do that. But you might save yourself a whole lot of money over the life of the loan. Lammert-Reeves: If you look at the differential, it’s made up pretty quickly, because it’s giving up two months of grace period for having a much lower interest rate for the rest of the time. Scherschel: But the difference is how many days you have to be late. The government sets the late clock at six days, and that is a tougher hurdle for many, and so if you are going to do this and you want to lock that in after the 12 on-time payments, you’ve got to make sure. You can’t pay 12 payments in advance and say, “OK, I’ve done it.” Lammert-Reeves: Yes, you definitely want to have, as Barry said, the electronic transfer payment because otherwise — you know the frailties of humankind — it is going to be late. But if you are able to set it up so that your bank withdrawal happens on a regular basis – Scherschel: And then set overdraft protection on your account, so you can’t get in trouble. Kuhn: Is this rate reduction of 2 percent automatic, or does the student have to know about it and apply for it? Lammert-Reeves: If they are eligible for it, it is automatically applied. They have to continue to make on-time payments in order to stay qualified. Scherschel: I’d like to do just a little aside here. If you are considering consolidating when you get out of school and you’ve got a spouse who also went to law school and has education debt, if you are thinking about going back to school, do not consolidate your loan with your spouse’s. Don’t do a spousal loan because if you go back to school, you won’t be able to defer those payments that you would normally have with your own consolidation loan because both of you would have to have the same deferment. Lammert-Reeves: We tell our students not to get into them because there is more of a downside than not. Scherschel: Those things create community debt. You are responsible for paying the debt of your spouse’s portion of the consolidation loan, should your spouse become permanently disabled or die — or divorces you and becomes a deadbeat and leaves you stuck with the debt. You don’t want to create that situation unless you really know what is going to happen to you in the future with your marriage. But some people do that and the trouble is, once they’ve done it, they can’t undo it. But clearly, if you want to go back to school, you don’t want to go into that joint spousal consolidation loan because you are not going to be able to get the deferment. Continued: Having it All — Later, Part III

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