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CHARLES WIDGER SCHOOL OF LAW

FINANCIAL MANAGEMENT

Debt Management
 

For those of you who will rely predominately on student loans to finance your law school education, it is crucial that you realize the implications and responsibilities of your borrowing. Keep in mind that what you borrow while in school will have an impact on how quickly you will achieve your financial and career goals once you graduate. One guide book to money management is the National Endowment for Financial Education’s 40 Money Management Tips Every College Student Should Know. Another reference tool is the U.S. government’s website called MyMoney.gov to teach you the basics about financial education.

 

Establishing a budget while you are in school is one of the most important tools you can use regarding debt management.  Budgeting provides a guide for students with a plan to "live within your means".  To create a realistic budget, you must first assess your lifestyle and spending habits and recognize that when you become a full-time student, more than likely these patterns will drastically change.  

In creating a budget, it is a good idea to establish a monthly budget as opposed to a semester budget as it allows you to assess your short term as well as long term (semester, academic year) expenses and thus, budget accordingly.  

You should start by itemizing your basic monthly living expenses like rent, utilities, food/sundries, clothing/laundry, transportation, entertainment etc.  Students should also include educational expenses for tuition, fees, books, and supplies.  Traditionally, these expenses tend to be incurred at the beginning of each semester rather than a regular monthly expense.  

Finally, you should list your other monthly financial obligations, such as credit card debt or car loans.  It is highly recommended that students satisfy their consumer loan obligations prior to undertaking law school to relieve themselves of additional monthly debt burden while in school.  At this point you should have a realistic idea of your projected expenses for the school year.

The next step is to itemize your financial resources such as parental/family support, savings, part-time work income, etc.  

Again, it is recommended that this information be listed on a per-month basis to create an accurate representation of your situation.  At this point you should be able to review your anticipated monthly expenses versus your projected monthly income and thus assess your need (if any) for student loans to bridge the difference.  

For more information about budgeting, please review Federal Student Aid’s video about budgeting which can be found on studentaid.gov.  A few suggestions to cut your monthly expenses include getting a roommate, packing your meals as opposed to eating out, using coupons, as well as seeking out more economical options for entertainment.

A conservative approach to borrowing loan funds for your education is highly recommended.  You should first identify all other resources available prior to taking out student loans to limit your loan indebtedness.  Thus, any gap between what your resources are and what your anticipated educationally related expenses will be satisfied by student loans.  Student loans should be used to "bridge" the gap between personal resources and educationally related expenses.

It is critical to consistently monitor your loan indebtedness throughout your educational career to have a realistic understanding of your financial obligations once you graduate.  To assist you with this important task, the Office of Financial Aid provides an individual loan history to all financial aid students upon request.  Another resource to assist you in tracking your loan indebtedness is to access Loan History through studentaid.gov. Here you will find a complete listing of all federal loans utilized.  Keep in mind that some student loans begin to accrue interest at the time of disbursement, so the amounts you borrow initially will undoubtedly increase by the time you go into repayment.  

A helpful tool is the The Federal Student Loan Simulator which highlights the various loan repayment options available as a guide. It should be noted that this tool is recommended only as a resource and should not to be used as a true repayment figure.  You should contact your individual loan servicer to obtain exact loan totals and monthly repayment figures.

As you monitor your monthly student loan repayment obligation, we strongly encourage you to cross reference this information with "realistic" salary expectations.  It is important to keep in mind that starting salaries are not "take home" pay and further research into what you will earn is a critical step when assessing employment opportunities.

When calculating your take home pay, you should not only factor in federal and state taxes, but also savings plans, health insurance and other important deductions.  Since a gap exists between your gross salary and what you earn, consistent monitoring of your loan indebtedness coupled with realistic salary expectations for your chosen field of interest contributes toward a sound debt management strategy.

While having credit cards is a convenience, when it is used to "supplement" income it may very well become a barrier to finical wellness. The use of credit cards, for students who are on a limited budget, tends to be a tempting option.  However, using a credit card irresponsibly may have long lasting negative effects on your credit history, which can jeopardize your ability to secure a mortgage, car loan, as well as other lines of credit in the future. 

Additionally, if you plan to take out a Private/Alternative loan or a Graduate PLUS Loan, poor credit, adverse credit and/or maxed out credit cards may prevent you from securing these types of loans without a co-endorser. It is recommended (if possible) for students to pay off all consumer debt prior to entering school to alleviate any additional financial obligation.  Some strategies you may want to consider regarding the use of credit cards include:

  • Limit yourself to one credit card.
  • Use credit wisely and ask yourself the following questions before making your purchases with credit:
    • Is this something I need?
    • Do I need it now?
    • Do I have the ability to repay?
    • How long will it take me to repay?
    • How much will it ultimately cost me?
  • Avoid “impulse” purchasing whenever possible.
  • Always make sure that monthly debt payments do not exceed 20 percent of your monthly net income.
  • Shop around for credit cards with low interest rates, low annual fees and reasonable grace periods before finance charges begin.
  • Pay your entire balance when it's due and review your spending habits to cut unnecessary purchases.
  • Pay your bills as soon as you receive them and if you can't pay the entire balance pay more than the minimum amount due when possible.
  • When you use credit to pay for an item, keep track of your purchases and the amounts and use it to subtract from your funds to ensure you can pay the amount at the end of the month.
  • Think ahead. Plan for different obligations now and after graduation.
  • Keep your credit card account information and contact information in a safe place in case a card is lost or stolen. If a card is lost or stolen, report it as soon as you notice it is missing.
  • Use your credit card for emergency purposes only.

It is highly recommended that you maintain financial/education files. Students should maintain or reference loan applications, promissory notes, lender correspondence, disclosure statements, along with any documents of financial importance.  By actively maintaining this file you can ensure the accuracy of your info and that of your lender.

When you apply for either a Federal Graduate PLUS Loan or a Private/Alternative loan, your lender will request a copy of your credit report to review your credit to determine and assess risk.  If the lender is evaluating your credit for the Federal Graduate PLUS Loan, the lender will only be looking for adverse or negative credit; a credit score will not be used.  Adverse credit includes such items as:

  • Any current delinquency of 90 days or more
  • Default
  • Bankruptcy
  • Discharge
  • Foreclosure
  • Repossession
  • Tax lien
  • Wage garnishment
  • Write-off of Title IV debt
  • Open collection  

If you are denied a Graduate PLUS Loan, you will have the option of correcting the adverse credit, appealing the decision if you feel there was an error on your report, or applying with a co-endorser.  If the lender is evaluating your credit for a Private/Alternative loan, not only will they review your credit report, but they will also look at your credit score.  

Credit scoring is the process where your credit is assigned a numerical score that identifies your level of future credit risk to the lender; in other words, your willingness to repay your loan.  Your score reflects your credit history based on payment history, types of credit, and outstanding debt in addition to the proportion of credit used as compared to available credit.  Credit information can be used to determine whether you will be approved for a Private/Alternative loan on your own, or whether a co-endorser is required if a student is denied a loan.

It is recommended to be proactive and monitor your credit report to ensure accuracy.  You should review your credit report at least once a year to check for possible errors and evaluate whether there are ways to improve your credit score.  It should be noted that the major credit bureaus (listed below) each maintain their independent information so the accuracy from each bureau may differ, so it is important to check your credit with all three of the major credit bureaus.  

The Fair Credit Reporting Act now requires the three national credit reporting agencies to provide a free copy of your credit report once every 12 months.  This free copy of your credit report can be obtained at annualcreditreport.com.  If you have been denied credit, you are entitled to get a free copy of your credit report from the agency used in the credit decision within 60 days of the denial.

For a more comprehensive explanation on credit reports and scoring and how to maintain and protect your good credit, please visit the website of the Federal Trade Commission.

The Internal Revenue Service's Publication 970 explains the tax benefits that may be applicable to you if you are saving for or paying education costs.  It is in your best interest to familiarize yourself with these benefits before preparing your tax return.