Post on 25-Feb-2016
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HLS Student Financial ServicesUnderstanding Student Loans
HLS and You Presentation FINAL APRILBOS
The Value Proposition of Law School
•Net present value of an HLS degree
•Loans represent an investment in your future earning potential in the legal profession
•HLS offers support for public service / low income careers
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$0.00 $50,000.00
$100,000.00 $150,000.00 $200,000.00 $250,000.00 $300,000.00 $350,000.00 $400,000.00
Annual Salary Projections, College Degree vs. HLS degree
College degree HLS degree
Years from graduation
Annu
al I
ncom
e
- College debt repayment $12,000, HLS debt repayment $250,000- Based on 30 year salary projections using annual salary increase rate of 3%- HLS degree salary projections based on 2012 average private sector starting salary, bonus pay excluded- NPV calculations use inflation (discount) rate of 3%
College degree HLS degree$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$1,446,590
$4,295,856
Net Present Value Comparison
HLS and You Presentation FINAL APRILBOS
Student Loans - definitions
•Principal – the total amount initially borrowed plus any interest that has been capitalized
•Interest – a charge that reflects the market cost to the lender for loss of use of funds until loan is fully repaid (“time value of money”)
•Interest rate - the rate at which interest is charged and accrues on the loan
HLS and You Presentation FINAL APRILBOS
Student Loans – more definitions
•Loan fees – additional fees that are deducted at disbursement or added to principal balance at repayment
•Capitalization – occurs when accrued interest is added to the outstanding principal balance, becoming the new basis for future interest
•Compound interest – interest charged on previously capitalized interest as well as on remaining principal balance
HLS and You Presentation FINAL APRILBOS
Student Loans – even more definitions
•Annual Percentage Rate (APR) – reflects the total loan cost, including fees and interest
•Amortization – the process of decreasing an amount (e.g. principal on a loan) over time
•Amortization schedule – a table showing the amortization process as a schedule of payments reducing the loan amount to $0
•Repayment term – how long it will take to repay the loan according to the schedule
HLS and You Presentation FINAL APRILBOS
Student Loans – enough with the definitions!
•Deferment – a temporary postponement of repayment obligation, typically during a period of enrollment or unemployment
•Forbearance – like a deferment, but typically at lender’s discretion during a period of financial hardship
•Discharge – the release of a borrower from the obligation to repay, typically granted (for Federal loans) in case of death or disability
HLS and You Presentation FINAL APRILBOS
Amortization Schedule
•Typically shows the following info-Number of payments-Amount of each payment directed toward principal and interest
-Cumulative principal and interest paid-Outstanding principal balance
•Good loan payment calculator with schedule:- http://www.finaid.org/calculators/loanpayments.phtml
HLS and You Presentation FINAL APRILBOS
Amortization Schedule - example
PaymentNumber Payment Interest Principal
CumulativeInterest
CumulativePrincipal
RemainingBalance
1 $1,741.63 $875.00 $866.63 $875.00 $866.63 $149,133.37 2 $1,741.63 $869.94 $871.69 $1,744.94 $1,738.32 $148,261.68 3 $1,741.63 $864.86 $876.77 $2,609.80 $2,615.09 $147,384.91 4 $1,741.63 $859.75 $881.88 $3,469.55 $3,496.97 $146,503.03 5 $1,741.63 $854.60 $887.03 $4,324.15 $4,384.00 $145,616.00 6 $1,741.63 $849.43 $892.20 $5,173.58 $5,276.20 $144,723.80 7 $1,741.63 $844.22 $897.41 $6,017.80 $6,173.61 $143,826.39 8 $1,741.63 $838.99 $902.64 $6,856.79 $7,076.25 $142,923.75 9 $1,741.63 $833.72 $907.91 $7,690.51 $7,984.16 $142,015.84
10 $1,741.63 $828.43 $913.20 $8,518.93 $8,897.37 $141,102.63 11 $1,741.63 $823.10 $918.53 $9,342.03 $9,815.90 $140,184.10 12 $1,741.63 $817.74 $923.89 $10,159.77 $10,739.79 $139,260.21
Balance = $150,000, interest rate 7%, 10 year term
Monthly interest calculation:Beginning balance x 7%, divided by 365, x 30.41666 (percentage of year for 1 month)Example: $150,000 x .07 = $10,500, divided by 365 = $28.77, x 30.41666 = $874.9997
HLS and You Presentation FINAL APRILBOS
Loan Repayment
•Loan debt – only part of the picture-What is the monthly payment on your loan debt?
-How does that monthly payment compare to your monthly income (net, after taxes)?
-Are you likely to qualify for loan repayment assistance?
•Average starting salaries for HLS Class of 2012-Private practice (law firm): $154,092-Private business: $116,582-Government: $58,604- Judicial clerkships: $58,849-Public interest: $42,850
HLS and You Presentation FINAL APRILBOS
Managing Loan Repayment
• Calculate your net income after taxes; i.e. the money available to make your monthly loan payment
• Calculate your estimated monthly loan payment - Multiply number of thousands borrowed by 12.6
Salary: $154,000 $80,000 $45,000All taxes: 33.0% 29.6% 23.4%Net income:
$103,230 $56,352 $34,493
Net monthly:
$8,603 $4,696 $2,874
HLS and You Presentation FINAL APRILBOS
Annual income: $ 154,000
$ 60,000
minus All taxes: $ 50,770
$ 16,122
equals Net annual income: $ 103,230
$ 43,878
divided by 12
equals Monthly income: $ 8,603
$ 3,657
minus
Education loan payment:
$ 1,701
$ 1,701
plus
Monthly LIPP assistance: $ -
$ 1,334
equals
Monthly take-home pay after taxes, loan
payment: $ 6,902
$ 3,290
Loan payment-to-salary ratio: 13.3% 7.3%Gross income after loan
payment: $ 133,588
$ 55,596
Calculating Monthly Take-Home Pay
Amount borrowed while in law school: $135,000Example 1 Example 2
HLS and You Presentation FINAL APRILBOS
Managing Loan Repayment – key points
•Education is an “appreciating asset”-Education is a long-term investment-Salary typically increases over time while loan payments remain stable
•LIPP assistance is available for lower-income graduates, to keep payments manageable
•By making good budgeting decisions now, you are maximizing future take-home pay
•All borrowers must attend an Exit Interview during the last semester at HLS
HLS and You Presentation FINAL APRILBOS
Should I pay off my loans early?
•Pay yourself first-Develop a budget to manage fixed living expenses, make required loan payments, and save for short-term goals
-Establish an emergency fund, start funding your retirement, obtain insurance (health, life, disability)
-Pay off all higher-interest debt, e.g. credit cards
•Consider early repayment scenarios vs. long-term savings scenarios
•Get help from a fee-only financial planner to make decisions
HLS and You Presentation FINAL APRILBOS
For more information
Overview of Education Loans, Terms, Optionshttp://www.law.harvard.edu/current/sfs/myaid/
education-loans/
Calculators and Planning Toolswww.law.harvard.edu/current/sfs/myaid/tools/
LIPP Guidelineswww.law.harvard.edu/current/sfs/lipp/
iGrad Graduate Student Loans moduleSee login link at
http://www.law.harvard.edu/current/sfs/
HLS and You Presentation FINAL APRILBOS
Contact Us
1585 Massachusetts AvenueWasserstein Hall, Suite 5027
Cambridge, MA 02138
617-495-4606sfs@law.harvard.edu