hls student financial services understanding student loans

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

An

nu

al

Incom

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


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


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


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


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


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


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


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


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 $45,000

All taxes: 33.0% 29.6% 23.4%

Net income:

$103,230 $56,352 $34,493

Net monthly:

$8,603 $4,696 $2,874


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


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


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


For more information

Overview of Education Loans, Terms, Options

http://www.law.harvard.edu/current/sfs/myaid/education-loans/

Calculators and Planning Tools

www.law.harvard.edu/current/sfs/myaid/tools/

LIPP Guidelines

www.law.harvard.edu/current/sfs/lipp/

iGrad Graduate Student Loans module

See login link at http://www.law.harvard.edu/current/sfs/


Contact Us

1585 Massachusetts AvenueWasserstein Hall, Suite 5027

Cambridge, MA 02138

617-495-4606

[email protected]

mailto:[email protected]

hls student financial services understanding student loans

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hls value proposition

hls degreeloans

hls debt repayment

hls degree salary projections

monetary value

annual salary

year salary projections

financial perspective