Posted Apr 01, 2007 12:24 pm CDT
Redoing the Math
Lawyers with staggering student loan debt have options, but many mean extra interest payments down the road
Janelle Jordan was never under any illusions about the amount of money she was borrowing to put herself through school. But she didn’t really appreciate how tough it would be to repay the loans. Jordan graduated from law school with some $200,000 in student loans accumulated over the course of her collegiate and graduate education. She’s put off paying them back for as long as possible, but time has run out on all of her lender-sanctioned delays. And the 31-year-old government attorney has no idea where she is going to find the extra $850 a month to make her loan repayments.
“It’s kind of depressing, but I have hope that it will not always be like this,” says Jordan of Fairmount Heights, Md.
So far, Jordan has little more than hope to go on.
Jordan makes a bit less than $50,000 as an associate county attorney for the Prince George’s County Department of Environmental Resources. While she knows she could be making more in private practice, she’s attained something much more important to her: professional fulfillment.
“I like getting up and going to work every day. If you have to get up and go to work every day and hate it, that is much more stress than owing a big debt,” she says. “So would I trade happiness for paying off my student loans? No.”
But her professional satisfaction has come at a price. Jordan’s salary, which is on the high end for public interest lawyers, gives her little financial wiggle room to repay her loans, live a comfortable lifestyle and save for her future. And Jordan has been looking for a little room to maneuver ever since graduating from Michigan State University law school in 2005.
Working toward Solvency
Upon graduation from law school, she immediately consolidated her $160,000 in federal government-backed loans at a 4 percent interest rate. She also was given an economic hardship forbearance that delayed the start of her payments until this July. She had fewer choices with the $48,000 in private loans she borrowed at a hefty 9.2 percent interest rate. She received a forbearance on those loans and was supposed to start paying them back earlier this year.
Her student loan burden is, however, only part of the problem. For the first time in her life, Jordan is racking up credit card debt. Her savings are minimal, and she also cannot afford to put any money toward retirement. Instead, Jordan plans to stay with her job as long as possible to vest fully in the county’s pension fund.
Personal financial advisers have told Jordan to cut back on her lifestyle, but there’s little left to cut. In a last-ditch effort to find money to start paying off her loans, she cut off her cable television subscription and at-home Internet access and has started looking for a second job.
Right now, Jordan’s primary focus is on her private student loans. Last year she hatched a plan to pay them off by buying an apartment for about $165,000 with a no-money-down mortgage loan at just over 6 percent interest. She had hoped to use the appreciation on her condominium to pay off the loans. While the unit has appreciated some $30,000 in value since she bought it, Jordan realizes she could not afford to refinance it.
Jordan’s situation may seem extreme, but student loan experts say that it really is not when one considers the most recent statistics. According to the ABA Section of Legal Education and Admissions to the Bar, students borrowed an average of $51,056 in 2005 to attend a public law school and $78,763 for a private law school.
When factoring in interest and other costs, that debt can quickly rise to almost $100,000, says Dan Thibeault, president of Graduate Leverage, a Boston-based company that advises graduate students on loans.
These figures are only expected to grow as the price of a legal education continues to rise, says Jeffrey Hanson, director of borrower education services for the Wilmington, Del.-based Access Group, a nonprofit student loan provider with a focus on law students.
While the news may be filled with reports of young lawyers making $160,000 starting salaries, the reality is that this group of high earners represents only a small fraction of the profession. According to the National Association for Law Placement in Washington, D.C., the median starting salary for 2005 law school grads was $60,000. It’s not hard to do the math and see why so many young lawyers like Jordan are struggling to get ahead.
In fact, most students do not know they are in trouble until they land their first job, and by then it is too late. Hanson says young lawyers should know they will have difficulty repaying their student loans when their debt exceeds their starting salary.
Considering All Approaches
So is there a solution to the likes of Jordan’s student loan cash crunch? Chicago-based money coach Sharon Durling says Jordan and other debt-ridden young lawyers might be able to dig out if they reassess their priorities. “You need to know your financial obligations. Only after that can you make lifestyle decisions,” says Durling, author of A Girl and Her Money.
Durling wants Jordan to, at a minimum, put into her retirement plan the same amount of money her employer matches. “Otherwise it is literally throwing money away,” she says. High-interest credit card debt also is a bad use of her money. To accomplish any of what Durling advises, Jordan will need to make further lifestyle cuts. Durling suggests Jordan look for a roommate, sell her car and ramp up her search for a second job. Otherwise, Durling fears, Jordan will be facing bankruptcy and lose what little she has everything, that is, but her student loans.
But the system does have some built-in solutions to help ease the student loan burden. Thibeault suggests that, instead of further cutting into her bare-bones lifestyle, Jordan look into further consolidating her student loans. Consolidation allows borrowers to lower their monthly payments by extending the term of repayment.
Like most young professionals, Jordan has been led to believe that only federal government-backed student loans can be consolidated. That is no longer true, says Thibeault.
Both Thibeault and Hanson also encourage debt-ridden young lawyers to explore loan deferments or forbearances. Though the terms often are used synonymously, they are different. Both suspend a borrower’s repayment obligation for a period of time, Thibeault explains. But loan deferments also suspend the accrual of interest while forbearances do not.
Thibeault says lenders often are reluctant to offer deferments to borrowers because it costs them money. But he encourages young lawyers to inquire about this as an option. Lenders have different eligibility requirements for deferments and usually offer them for only three years. Forbearances, by contrast, can be extended to seven years with most lenders.
Some lenders of federal loans also may offer lawyers with high debt-to-income ratios an income-contingent repayment plan that relieves them of paying the interest on their loan. “It is negative amortization,” says Hanson, and is another way to lower a borrower’s monthly payment.
Another option for Jordan, whose job places her in the public interest practice sector, is help through a loan repayment assistance program.
These programs encourage young lawyers to go into public interest law by offering various types of loan repayment help through grants and loan forgiveness. However, only 20 states have any type of repayment assistance program, and eligibility varies greatly, says Phoenix lawyer Kelly Carmody, who advises states on such programs.
Carmody says many law schools offer loan repayment assistance programs that have broader eligibility. She encourages Jordan to explore such programs through her alma mater.
If all else fails, Hanson encourages Jordan and other similarly debt-ridden young lawyers to be in constant communication with their lenders. Lenders would rather work with their borrowers on repayment options than have them default.
“Lenders will do everything they can within the terms of the promissory note to help,” says Hanson. “But a lender cannot do anything if a borrower does not contact them to work with them. The sooner the borrower contacts them, the better. It becomes more difficult if you miss a payment because then you have to get current before they can offer you any options.”
Risks and Rewards Save on professional liability insurance by shopping around and using smart management practices
Frustrated by the cost of his lawyers’ professional liability insurance, Seattle lawyer Marc Stern decided to take matters into his own hands.
Stern had always used an insurance broker to help him with his professional liability insurance needs, but he was skeptical about whether he was getting the best value for his dollar, considering his clean claims record.
So last year Stern, a solo practitioner, undertook his own search for a new lawyers’ professional liability insurance provider. Much to his delight–and with less effort than he expected –Stern found an insurer offering better coverage for less money. Much less. According to Stern, his annual premium dropped by nearly a third, to $2,600 from $3,600.
Was Stern just lucky? Not really, according to market observers. In today’s increasingly competitive lawyers’ professional liability insurance market, Stern just may have played a winning hand that allowed him to parlay his insurance dollars into better, cheaper coverage for his bankruptcy practice.
While the lawyers’ professional liability market tightened dramatically 10 years ago, the tide has again turned in favor of the consumer. An influx of new carriers servicing lawyers, along with an expansion of insurance lines by existing carriers, has made the lawyers’ liability insurance market more competitive, says Gerald Merritt of Monmouth Junction, N.J., vice president of underwriting for insurer CNA’s professional liability lines for accountants and lawyers.
As a result, lawyers may find the time is ripe to save money. But just how much money any one lawyer or law firm may save is hard to say because underwriting factors often are affected by office locations, practice areas and claims histories, says Boston professional liability insurance broker Andrew Biggio of First Indemnity Insurance Group. So while one lawyer may pay $1,600 annually for a $1 million policy, another may pay as much as $7,100 for the same thing.
Partners at Crowell & Moring have found an extra $500,000 in their coffers every year since 2001 after the firm changed its insurer of 20 years, says Barry Cohen, a Washington, D.C.-based partner who also serves as the firm’s ethics counsel.
Like other large firms with international offices, Crowell & Moring cannot find malpractice insurance on the open market like a solo or smaller firm can. Instead, the firm relies on brokers to package their high liability limits among a handful of insurers.
Because premium payments account for close to 2 percent of the firm’s overhead, its managers have made a point of paying close attention to the costs. Cohen says his firm left its longtime insurer after a new broker courted them with a package actually offering millions of dollars in savings.
Is shopping around always the solution? That depends, according to the experts. While switching malpractice insurance carriers can result in lower premiums, it may also present risks. Law firms would be wise to weigh any potential savings achieved by switching carriers against those risks, Merritt says.
“It’s the consumer’s choice, but when you make those decisions it is very, very important to understand what product you are leaving and what product you are going to,” he says. Gerard Guterl, managing director of Aon Risk Service’s professional services group in New York City, tells his law firm clients to shop around every three years, but he cautions against quick moves.
“To the extent that there is a better offer, we typically recommend that they go back to their incumbent and see if they can do better,” he says. He believes there is little benefit in changing carriers for less than 15 percent savings.
San Diego attorney Heather Rosing, a partner at Klinedinst, recommends getting at least four quotes to make sure rates are competitive. But, like Guterl, she says attorneys should stop and think before they take on the risk of changing insurance carriers.
What are those risks? A lower-quality insurer, for one thing, according to Rosing. She advises doing a little research to learn more about the financial stability of any prospective insurer before switching. Ratings companies like A.M. Best can provide a wealth of information on this issue.
Type of coverage is equally if not more important than the stability of the insurer. Merritt strongly cautions lawyers to make sure that they are getting “apples to apples” coverage. There can be critical differences between policies in coverage for prior acts as well as deductibles and policy limits, he says.
It’s also crucial to read the fine print. Rosing, who represents lawyers in malpractice claims and also manages her firm’s malpractice policy, says lawyers might not care up front about details such as whether their policy covers ethics charges, or allows them to choose their own defense counsel and have a decision in settlements. But they certainly will wish they had taken the time to read the policy if they ever need it.
Laying the Groundwork for Savings
Having good risk-management policies can be an equally effective way to lower costs or at least keep a cap on them.
While rates usually are set based on a variety of underwriting factors including location, practice areas and claims history, firms can make themselves look better–or worse–to underwriters through their risk management practices, Biggio says.
One key area of concern for underwriters is conflict-checking systems. Conflicts pose one of the most significant risks for larger firms, says Cohen. But solo and small-firm practitioners often have problems in this area because they rely on memory instead of automated procedures.
Invest in automated conflict-checking systems and docketing systems and use them, underwriters urge it reduces risk and therefore may help lower premiums. Automated conflict-checking and docketing systems go hand-in-hand with good client intake practices. Underwriters are increasingly looking at what types of systems firms have in place to make sure they are investigating potential clients before representing them.
Doug Richmond, senior vice president for risk management and loss prevention at Aon, sees more firms making client background checks a formal step in their intake process. Doing so, he says, helps make a firm look like a better risk to underwriters. Rosing also encourages firms to regularly use carefully worded fee agreements. If structured correctly, she says, such fee agreements can have the effect of reducing claims because they limit the scope of the engagement.
These fee agreements should also be used in conjunction with good collection practices so that lawyers do not reach the point of suing a client over fees. This is important because insurers say the single biggest reason for a malpractice claim is a counterclaim to a fee suit. “Don’t let clients get behind on their bills,” Rosing says.
A general awareness of risk management also matters, underwriters say. Lawyers can show their commitment to risk management by regularly attending seminars on the topic or even devoting a senior lawyer’s time to it.
While underwriters take note of these types of actions, Richmond says firms often struggle with whether the benefits of creating such nonbillable responsibility is worth the lost billable time.
“It’s tough to assign any kind of dollar figure to in-house loss prevention because you can’t assign a value to a firm’s reputation,” he says.
While the decision is ultimately up to the firm, “a loss does not have to be catastrophic to be a huge loss to reputation,” he says.
The Big Easy Retiring well requires a wealth of information and careful planning
As she approached retirement, wisconsin lawyer Mary Alice Coan had three goals for herself: to own a home, be able to travel and not have to worry about every last penny. In short, she wanted to live as well in retirement as she did when she was practicing law.
While such goals used to be highly attainable, in today’s environment of disappearing pension plans, mandatory retirement and doubts about the future of Social Security, the goal of retiring well–even for lawyers–can be illusive.
Coan, now 72, considers herself lucky. When she retired seven years ago at age 65, she had achieved all of her goals. She came home to a nest egg worth nearly $700,000, a condominium valued at $250,000, and two pensions that together provide a monthly income of about $2,100. Taken together, it totals a very comfortable monthly income of just over $5,000. “I live better now than I did when I was working because I can spend more money,” jokes Coan, who lives in Madison.
But Coan’s financial situation had little to do with luck and everything to do with careful planning. Had she been less diligent about planning for her retirement, she could have just as easily found herself working well into her golden years.
Her financial planning is especially impressive considering her late start. Coan did not start working until her mid-40s. Fresh from a divorce, she started law school at 42 and began working as a lawyer for the Wisconsin state government at 45. Although her divorce settlement provided her with some financial security, she knew she had to get serious about long-term planning if she was to retire as well as she wanted.
At first, Coan did little more than contribute what she could to the state’s retirement plan; she initially worked as a bill drafter for Wisconsin’s legislative reference bureau. At the advice of another lawyer, Coan hired a financial planner who urged her to start maximizing her retirement plan contributions.
Under the guidance of the financial adviser, Coan also sold the individual stocks she received in her divorce settlement and reinvested the funds into high-growth mutual funds. Coan later invested in a family member’s REIT fund, purchased a $55,000 insurance annuity and bought a house.
Most of all, though, Coan saved her money. “A lot of my colleagues were spending a lot more on clothing and travel and vacations and houses than I was. I was always very conservative and made savings a top priority.”
Because there’s no crystal ball that will tell you how long you’re going to live or exactly how much money you’ll need along the way, experts agree that it’s imperative to start early and keep your eyes on the prize.
“The buck is now stopping with you,” says financial planner Thomas Haunty of North Star Resource Group in Madison. “You have to think like an entrepreneur and fund your own retirement.”
It also doesn’t hurt to start thinking like a mathematician, using some basic financial formulas to approximate target amounts necessary to fund your retirement.
As a general rule of thumb, financial planners estimate that most people need about 70 percent of their working income to live comfortably in retirement. Most advise clients to accumulate enough wealth during their work years so that they can live off the interest income for the rest of their life–an amount that should approximate this 70 percent number, calculated at a reasonable 5 percent return.
With time and compound interest on their side, most lawyers should be able to achieve this level of prosperity for retirement by setting aside a mere 10 percent of their income at the beginning of their career and then continually increasing the set-aside as their personal wealth grows.
Of course, this can be hard to do in the face of student loans and kids’ braces, acknowledges financial planner Alexandra Armstrong of Armstrong, Fleming & Moore in Washington, D.C. But the results are worth it, she says.
Consider that a 25-year-old who invests $200 a month continuously for 40 years will see that $96,000 sum grow into nearly $700,000, assuming a modest 8 percent rate of return. Most employment settings make this kind of investing easy through deferred compensation plans commonly known as the 401(k) or 403(b), depending on the type of employer and type of plan. Use the plans, says Armstrong, and further maximize your benefits by contributing the highest amount allowed by law.
So how much is enough? While that “right amount” of retirement savings will always vary depending on the person, Armstrong says that lawyers can make a more educated estimate by thinking about retirement in three phases.
The first phase typically is more active and more money-intensive because the newly retired lawyers are eager to do all the activities that they never before had time to do. This period tends to be followed by a second, quieter phase when the novelty of time has worn off and health issues may come closer to the forefront. In the final phase of retirement, health costs can escalate.
Understanding your current and future expenses is crucial to creating a retirement plan. Which is why you need to examine expenses and work out a realistic budget, say Haunty and Armstrong.
This can be a difficult proposition for high-earning professionals like lawyers, whose incomes often allow them to spend freely, Armstrong says. “You need to get an idea of how you spend your income,” she counsels. “You don’t have to count every penny, but you should know what your expenses are.”
When crunching the numbers, Armstrong tells lawyers to remember to factor in the cost of services and expenses often covered by–or made deductible because of–private law firms and other employers. “As a lawyer, a lot is paid for that you take for granted–your travel, meetings, publications, wining and dining. All of that is paid for as expenses and deductible. When you retire, you don’t have that anymore.”
Armstrong also cautions lawyers in private practice not to count on the immediate return of their capital contributions. She’s seen many instances in which firms withhold these sums for several years or return the money over time.
The same thing goes for receivables, she says. The current trend of law firm merger mania is only complicating the situation, underscoring the need for lawyers to plan their retirement around these sometimes large sums of money.
Similar allowances must be made for health insurance, according to Armstrong, especially if you retire before you are eligible for Medicare. While many employers, especially law firms, used to provide health insurance benefits for their retired employees, that benefit has become extremely costly–too costly for many businesses to continue to maintain.
Ditto the costs of assisted living or nursing home care, says Albany, N.Y., lawyer Walter Burke, an estate planning lawyer who is chair-elect of the ABA’s Senior Lawyers Division. Long-term care insurance for assisted living facilities, nursing homes and in-home care is available, but it is pricey and gets less and less affordable as you get older, he says.
Burke believes all lawyers should start shopping for this type of insurance coverage between the ages of 50 and 65, when the rates generally are still affordable and their health is still good enough that they are eligible for it.
Once you have completed a budget, Armstrong suggests reviewing it annually, especially during the five years before your target retirement date. The five years before a lawyer plans to retire and the first five years after retirement are crucial in making sure money lasts, Armstrong says.
“Right now we do retirement projections to age 100 because we think the better-educated people live longer,” she says. And, with proper retirement planning, they can also live better.