A Day in the Life

Law Firms and Money

Along with reading files and making financial aid decisions, as Director of Financial Aid, it is also my job to help students organize their finances to reach their goals. That effort includes lots of individual counseling, distribution of (hopefully) useful information, and periodic presentations.

Last week, Mary Beth Wynn and I put on a presentation directed at 1Ls and 2Ls working at large law firms this summer. Roughly a third of our 1Ls, and most of our 2Ls work at law firms in the summer, so the turnout was high (free lunch might have helped too...) Mary Beth focused on the career goals of such a summer, while I discussed some of the financial aspects.

As you may have heard, Law Firms have been raising starting salaries. While this is (mostly) good news for students, it is important not to start spending this income before you earn it. The goal of my presentation was to help students understand how a summer job at a law firm can shape their law school finances, and to remind them they are still students. By living reasonably and saving as much as they can during the summer, a smart student can greatly minimize the debt for their following school year. Unfortunately, students sometimes fail to realize this, and use their summer as a time to live like a lawyer and buy unnecessary things. I remember my days as a summer associate, and it is certainly tempting to live lavishly after scrimping by on a student budget. Students who avoid this temptation, however, are in a much better financial position when considering the myriad  pportunities our students have. 

The powerpoint slides from the presentation are available online at http://www.law.uchicago.edu/prospective/financialaid/presentation.ppt. 

The Hierarchy of Student Debt

Now that the holidays are here, I hope you are relaxing with a glass of egg nog and a good book. While you are (hopefully) relaxing, here is some information on a topic students find a bit stressful: student loans!

Law Students everywhere rely upon student loans to fund the bulk of their education, both tuition and living expenses (see our student budget here). There are many different types of loans however, and some are better than others. So here is my list of the various loans, from 'best' to 'worst', in my humble opinion.

There are two main types of loans, 'fixed rate' and 'adjustable rate'. Fixed rate loans have an interest rate that stays the same for as long as you have the loan, whereas 'adjustable rate' loans have an interest rate that changes every few months based on the economy and other factors.

There are also 'subsidized' loans offered through government programs that offer special advantages other loans do not, such as being cancelled if you enter certain careers. Depending on your situation, these advantages may be wonderful or irrelevant, but usually they are good to have, just in case.

Here are the main loan types, from best to worst:

1. Parental or Family Loans: This is a loan from a family member, maybe a grandparent, parent, or other relative, and this is the best loan available. It is usually worth talking to your parents, relatives, or others, to see if they are interested in loaning you some money for school. These loans are great because they are flexible, low (or no) interest, and you know the lender well. This is not a great option for everyone, unfortunately.
2. Federal Perkins Loans: These loans are need-based loans of up to $6,000 per year at a fixed interest rate of 5%. You qualify for these loans by filling out a FAFSA which details your finances. Unlike college, for grad school you do not have to list your parental information. During school, the government pays the interest on these loans for you, so you only start paying interest after graduation. 
3. Federal Stafford Subsidized Loans: These loans are for up to $8,500 per year at a fixed interest rate of 6.8%. You qualify for these loans with the FAFSA, and the government also pays the interest on these loans while you are in school. This is a very good option, and may get even better if the new Congress follows through on its promise to lower the interest rate to 3.4%. So write your congressperson!
4. Federal Unsubsidized Stafford Loans: These are similar to the Subsidized Stafford loans, but with two differences. First, interest on these loans will accrue while you are in school, which makes them much less attractive. Second, you can borrow up to $10,000 per year of this loan, or more if you don't qualify for Subsidized Stafford loans. A nice thing about Stafford loans is they are not credit-based, so even if you have horrible credit (and are a US Citizen or permanent resident) you still can get these loans.
5. Grad PLUS loans: New this year, graduate students can take out PLUS loans, which used to be just for parents. These are fixed-rate loans, the rate depends on the lender, but is usually between 7-8.5%. These loans have fees of 3-4%, and are credit based, so make sure and know your credit history!
6. Private or 'Alternative' Loans: These are student loans from a bank, and have variable interest rates, depending on the economy (bad economy usually means lower interest rates) and your credit score. Generally, the lower your credit score, the higher the interest rate, but even with a great credit score, rates on these are 7-10%. Some of the big lenders for these loans are Citibank and Access Group.
7. Credit Cards: Credit cards typically have terrible interest rates compared to the loans mentioned above. The rates run from 13% to 24%, plus fees, and require monthly payments while in school. This is obviously not a great way to pay for school, but some students use their credit cards to pay for at least a portion of their expenses.

Well, that's pretty much all the loans we deal with at Chicago. As you can see, there is a wide variety of options for students, some of which are much better than others. Part of our mission is to help our admitted and current students understand their options and pick the loans that are best for their situation and goals.

Financing Your Education

While certainly not the most exciting topic (except maybe to me!) Financial Aid is a crucial aspect of  law school. Law School is very expensive, and you owe it to yourself to understand your options to avoid the debt trap that many lawyers fall into. In this post, I hope to give you a general idea of how people pay for law school, and some things to think about. Later I will have more detailed, thrilling posts about things such as LRAPs, loan consolidation and budgeting, so stay tuned!

Students pay for Law School with four main resources: loans, scholarships, employment earnings, and family/personal contributions. Your goal as a student is to minimize your expenditures and your loans, because loans are clearly the worst of these four options.

Scholarships are the best way to pay for law school, so let's discuss them first.  Most law schools offer a combination of need-based scholarships and merit-based scholarships, but some only offer one type, so make sure to check with your schools! Need based scholarships are based on you and your family's financial situation, and require an application like the Need Access report, which Chicago and other schools use. These applications summarize your income and assets, and show us what kind of resources you have for law school. Merit-based scholarships are based on your application, and schools use these awards as ways to encourage you to come to their school. Schools use vastly different criteria for  merit scholarships, so check with the schools for details. There are also lots of outside scholarships, like our Tony Patino Fellowship. Do some research and try to find scholarships that match your background or interests. 

Sadly, very few students are lucky enough to get a full-ride scholarship at their dream school.  For most, loans are what pays for law school. Students use Federal Stafford loans of up to $18,500 to cover part of the cost of law school, and then private loans cover the rest of their expenses. Federal loans have a fixed interest rate (6.8%) and have other favorable terms, while private loans have higher, adjustable interest rates (based on market factors) and are also credit-based, so make sure your credit is strong!

While loans are obviously not the ideal way to pay for law school, bear in mind that different schools provide different options professionally. One law school may help you get a job that pays more money, and thus makes loan repayment much easier. More importantly, if your dream school admits you, but does not offer as much money as 'School X,'  don't be afraid to chase your dream!