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Glassman: Let’s go back to talking about people going into the public sector and working for the government, and address the reimbursement by federal agencies of loans. Kuhn: Right. OPM has issued regulations in January, giving agencies the authority to establish programs. Now, I don’t know which agencies have established those programs yet, but they have the authority, and they can use this program to attract people to the government or retain qualified, exceptional employees, and agencies may repay up to $6,000 of student loan debt per year per individual for a maximum of $40,000 per individual. Now there are tax consequences to this, of course, because when the loan repayment is made, it is additional income to the individual, so you have to deal with the withholding. Glassman: It’s taxable. Kuhn: It’s taxable. So you have to deal with the withholding. Whether it is withheld from the repayment, which is one option, or the employee can actually pay a check to the agency to pay for the withholding, or they can spread the withholding payments out. There are different plans, but you do have to make sure that those withholding payments are covered. Glassman: Good point. Scherschel: And this is for federal agencies? Kuhn: Federal agencies. It does not cover states. Scherschel: Individual states can offer something. CASE STUDY “Jane,” a Second-year Associate Annual salary: $120,000 Four outstanding student loans: $70,000, including accrued interest. Monthly payments: $860 Credit card debt: $7,000 Monthly rent: $1,600 Not participating in 401(k) Savings for cond $4,000 (bank account) Glassman: What I’d like to do is actually dive into the case study. I’d like to have each person give a brief opinion on Jane’s situation, as far as recommending a course of action. What problems do you foresee, what tax advantages could she take? To start, I think she has her priorities almost completely reversed. Or awfully jumbled, for lack of a better word. Her goal really should be to pay off credit cards before paying off other loans. I think she needs to consider retirement planning before she dives into buying a new car or a condo. And I think she needs some help with the choices on her 401(k). Lammert-Reeves: Well, I agree. From the get-go, she needs to figure out what she is spending. If she makes $120,000 and all she has managed to come up with is $4,000 in savings, and she has been out for two years, she is obviously not sure of where her money is going. So that is the first thing. I think it is great that she has the $4,000. I would like to see that as sort of a rainy-day fund. She doesn’t know what the firm is going to do, what will happen to the practice area she is in; if it was dot-com work, you know, she might need to be looking elsewhere, depending on what is going on. So I would put that in some sort of an interest-bearing account that is liquid but better than savings. Glassman: A money market? Lammert-Reeves: A money market account. And – Glassman: Perhaps even a short-term bond fund? Lammert-Reeves: Well, it depends on how soon she thinks she might need the money. A rainy-day fund would cover major expenses. Living, rent, utilities, consumer debt. What would she need to have on a monthly basis if she walked in and her firm or her practice area were suddenly closed? You’d want three months’ worth of a cushion there. So I like the fact that she’s got that, but she needs to keep track of her expenses for about two weeks to see where she is spending the money. And then total it up and say, “Does that make sense to me?” And she needs to immediately go and get the paperwork for her 401(k) and at least start investigating the choices, so that by the time that she knows where her money is going, she can identify some savings for herself, and say, “OK, I really could afford a couple of hundred dollars a month toward my 401(k).” She’s got a better idea of where she wants to put that money. Give herself some homework assignments and be thinking about these different things simultaneously. Glassman: Nancy, what about the fact that she is saving money in a low-interest-bearing account, yet she still has high-interest credit card debt? Kuhn: She really needs to restructure that. Get the credit cards transferred to a lower interest rate. I think with her monthly rent being $1,600 a month with $4,000 in savings, she needs to start looking at buying a condo. Unless you are in a really high-rent district, such as San Francisco, or certain parts of New York City or Washington, D.C., you can get a condo with a mortgage that would be no more than $1,600 a month, and with $4,000 in savings, assuming 5 percent down, 7.5 percent interest rate, you can easily get your own home, build up the equity so you can look forward to consolidating your debt in a secured home loan in which the interest would be deductible. Glassman: David, are you ready to buy a condo? Witherspoon: I personally am not. Glassman: What would you say to Jane? Witherspoon: Well, of course, being lawyers, we want to know more facts, like is the car something she needs in order to carry out her job? Kuhn: That could be a used car. Glassman: She wants a new Toyota Spyder convertible, in metallic silver. Witherspoon: A lot of us do. Glassman: With the high-performance wheels, and a CD player-changer in the trunk. Witherspoon: What I see here is what I have been noticing with colleagues of mine, and those who have come out since I have, and that is the desire to do everything now: Now that I have the money, I need a car, and I need a condo. It seems to me that, in addition to reprioritizing some of the things she has down here, it may be in her best interest to take things one step at a time. Get the new car later. Kuhn: Yes, buying a condo is much different than buying a car, because buying a condo gives you that interest deduction. Buying a car, you get no benefit. Also, it is an appreciating asset, versus a car, which immediately depreciates. Glassman: Pat, what would consolidation do for her? Scherschel: Well, if they are all federal loans, and based on this payment, it doesn’t look like she’s consolidated yet, she can actually reduce her payments by about 40 percent. A little bit more if she opens with a graduated repayment, but she could get for herself an extra $350 or so with a discretionary spending flexibility. And then restructure her credit card debt by trying to find those offers for 2.9 percent or 5.9 percent. Make sure you always make those payments on time, because once you are late, they jack that rate right back up. Read that fine print. But she could take only a couple of years at a low interest rate to pay off all that credit card debt at $350 a month. And then I would definitely recommend scrapping the plans to purchase a new car. I’d tell her to get a used car or repair the one she has and make do. To purchase the condo, she needs to be setting aside hundreds of dollars in savings a month if she wants to make a good-sized down payment. In a couple of years, she can raise enough to do the 5 to 10 percent down payment and then get a mortgage loan without the private mortgage insurance. But consolidation clearly would give her more discretionary spending that she should first allot to pay down other debt, and then to savings for the condo. Witherspoon: And my question is if she can live somewhere for less than $1,600 a month. If she finds a decent place at maybe $850 and $900 a month, that is $700 a month she could either put toward her credit card debt or whatever it is she prioritizes to pay first. Assuming this is in this area [Washington, D.C.], there are nice places to live for less than $1,600 a month. I know that from personal experience. Glassman: She must prioritize. What I would recommend to Jane is a plan. Sit down with even a single sheet of paper and write out her goals. And then within each goal, how she plans to get there. Secondly, we’ve mentioned she needs to save in the 401(k), even if the options are too confusing. Just to put the dollars in a money market earning 5 or 6 percent interest — or, by the time this is printed, as little as 3 percent. Just to earn some set rate of interest in a stable value fund. That fund choice is usually at the top or the bottom of the entire list. It is the most boring one that doesn’t have a lot of double digit numbers. Even to save that little, not to mention any kind of match or incentive offered by her firm, gives her an immediate tax savings. Kuhn: Frequently, you can borrow from it for your first home. Lammert-Reeves: Well, if she wanted to know what the tax savings would be, she could just go to www.turbotax.com, put in her income as it is now, and then put it in as it would be adjusted after she makes her 401(k) contribution. She’ll see an immediate change. She gives herself a pay raise, whatever tax bracket she is in, money that she would otherwise be paying to Uncle Sam, as well to the state. Glassman: It’s paying herself first. Lammert-Reeves: That’s right. Glassman: She is not paying Toyota first; she is not paying Sallie Mae first; she pays herself first. I think that it is important for everyone to do that. Witherspoon: And she will learn to adjust to the monthly take home difference. I mean, initially, it is a bit of a shock. Glassman: When it doesn’t show up, it is easier not to spend it. Kuhn: Even if you start out maybe not at $120,000, but something substantially less than that, it is still going to be better than being a law student. Glassman: And if Jane, earning $120,000 a year, could actually save $10,500 a year and consolidate her loans, and not spend so much, and take some tax incentives and actually buy the condo — if she is able to do those things and actually put $10,500 away, she’ll have a very prosperous future. Lammert-Reeves: But even if she can’t do $10,500 a year, maybe she does $200 a month. Because sometimes people think it is all or nothing. Glassman: That’s a great point. Lammert-Reeves: There’s a great Web site which I could give you, that has a calculator that lets you say, “If I put in x amount over time,” and it lets you say what tax bracket you are in, it lets you put an estimate of what you think inflation is going to be. It will show you that $200, which is 50 bucks a week, maybe that is a day and a half of not buying food out. Glassman: It’s Starbuck’s coffee. It’s buying regular coffee instead of the skimmed latte. Lammert-Reeves: It can make a huge difference over time. And for people getting out of school, their biggest asset is the length of time that they have between now and when they plan to retire. And so if you can let something compound over 30 years, even if it is a small amount, and if it grows tax-deferred, it has incredible beneficial impact at the point when you are ready to use the money. Scherschel: Also, she should check just to make sure that consolidation may not be the best option if she has been making payments for a year, two years, and it’s always been on time, and has a shot at that two-point reduction. Also, it depends on what interest rates are at the point in time. Does she want to lock in today’s rate, but she could get a graduated payment plan and convert to that, and have an interest-only plan for a couple of years, and then the payment would rise, assuming that if she is doing well as a lawyer, she will be making much more than $120,000 in the near future. Glassman: But on $120,000, shouldn’t she live within her means? Jane is renting, she doesn’t have overwhelming credit card debt, shouldn’t she bite the bullet and live within her means? Scherschel: Oh, I think so. It is just that one of the things that people do is they see the really low payment that they can lock in for as long as 30 years. And in this case, she has enough debt to lock it in for 30 years, and so that is what they do. Even though she could pay more later, she might not. But if you go into one of these plans where they can extend the payback period for 10 years to as long as 15 years, depending on how they’ve worked the plan, and you get interest-only for a few years, and then the payment moves up, and then levels off at a certain point, it is like a 15-year mortgage, as opposed to a 30-year mortgage. You’ll pay less interest. If she can take advantage of the interest benefits that are available, that might be better. A lot has to do with interest rates. Let’s say interest rates all of a sudden go up in the next few weeks. She would be consolidating at the maximum rate. If all she wants is a lower payment for the next couple of years, she would be better off not consolidating and going to a lower payment plan. And then she gives herself the option of consolidating when rates are lower. Lammert-Reeves: Well, she has that option in the Direct Loan consolidation, too. I mean, the graduated payment option is available there as well. Scherschel: Yes, that’s true. Glassman: My feeling is that she may earn more later. It has been my experience that you spend what you make. You can’t imagine earning $200,000 and not making it work. But as you make more, you spend more. Witherspoon: That’s why the discipline factor that we were talking about earlier is so important. The discipline must remain constant because we don’t know what the market is going to be, we don’t know what the economy is going to be, we don’t know what the legal business is going to be. But if you are disciplining your structure, you can adjust if you have to adjust. Whereas if you just spend like you are always going to be making six figures, and you go down to five figures, or perhaps even a little bit lower, then you have some real issues, because you won’t have the disciplined structure and mind-set to put money where it should go. And that creates a lot of problems in the future. Scherschel: She should watch to see what interest rates are doing. She doesn’t need to consolidate at this minute, since we are close to the midpoint of the year. The rate change takes effect July 1, if there is going to be one. If it drops, she doesn’t want to submit the paperwork before July 1, if she consolidates. And then the rate’s in effect for an entire year, and then it could go up or down, depending on where rates move. And, of course, most borrowers don’t know that, but if she called up and asked her loan servicer, they will tell her. Glassman: Well, my hope is that today, through our discussion and collaborative efforts, we’ve helped identify the problems faced by associates like Jane, offered some practical steps that can be taken to solve them, and provided a strategic approach that can help young associates begin working toward a brighter financial future. Back t Having it All — Later

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