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Defining Our Terms

In order to make this complex undertaking manageable, we need to make some limiting assumptions. For example, one constant assumption is that our user is a single individual with no dependents; the addition of people (spouse, partner, roommate, children), income, and/or expenses for other scenarios creates more complexity than we felt we could effectively model and communicate. Below, some details about other choices we made, as well as some routes we didn't take:

Housing. To estimate housing costs in different markets, we used the U.S. Military's Basic Allowance for Housing (BAH) rates. Used as a benchmarking source by many private companies to determine pay adjustments across different regions, the BAH is generally regarded as an extremely well-vetted, comprehensive, and nuanced public set of data without a private duplicate. The BAH rates are derived based on income, location, and number of dependents, and cover rent, utilities, and renter's insurance. The BAH offers multiple possible rates based on income/location, and we selected two (set out in the table below) to use for each location: Housing Allowance Level 1 for people earning $60,000 and below, and Housing Allowance Level 2 for people earning $65,000 and higher. (This allocation results in a noticeable change at the $60,000/$65,000 divided in the bar graphs generated by the Debt Wizard.) In both cases, the allowance is meant to be adequate for obtaining safe and comfortable housing. Bear in mind, of course, that individuals can adopt strategies for lowering housing costs by, for example, living with a roommate. For that reason, although our model will show that certain job types and associated income levels in New York City are financially impossible to manage, in fact, people do manage by reducing expenses—particularly housing.  You can explore these possibilities by using the custom housing input that accepts values from $0 to $10,000.

Based on feedback we received, we have added three new markets to this version of the model:  Minneapolis, Philadelphia, and Seattle.


City

Housing Allowance Level 1

Housing Allowance Level 2

Boston

$2106

$2421

Chicago

$1485

$1881

Dallas

$1263

$1728

Detroit

$1146

$1560

Houston

$1326

$1698

Los Angeles

$1731

$2073

Miami

$1692

$2055

Minneapolis

$1101

$1647

New York City

$2304

$2646

Philadelphia

$1434

$1839

Phoenix

$1494

$1548

San Francisco

$2181

$2490

Seattle

$1365

$1839

Washington, D.C.

$1770

$2139

Salary. We used 12 categories of income in varying increments between $40,000 and $160,000. We then applied a web-based paycheck calculator that accounts for federal and state taxes (and, in New York City, city taxes)—in other words, the monthly income from which debt and housing are deducted is after-tax income. Finally, we used 2011 NALP data (the most recent available at the time we put this project together; future versions will incorporate the newest NALP data available) to present the likelihood of a given first-year salary for a given type of employment.

Debt. The model presents nine increments of law school educational debt, ranging from $60,000 (the lowest amount of debt typically taken on by any of our students who take on debt) to $250,000 (the highest amount of law school debt a hypothetical Michigan Law student could borrow based on the current student budget).  Among others, we include values of $100,000 (roughly the national average), $110,000 (Michigan Law's average debt amount in 2011), and $120,000 (our 2012 average). Each increment is meant to represent anticipated loan principal, i.e., the amount of disbursement received.

Our revised model has calculations that account for the associated interest in two ways. First, a principal debt of $150,000 actually costs more to pay off than $150,000 because of interest that accumulates while paying off the loan, and our model recognizes that. (Of course, individuals may adopt strategies that allow them to minimize the total debt by paying off their loans more quickly than required.) Note that there are two different interest rates currently in effect for law school educational debt: One, for Stafford Loans, is 6.8 percent, and borrowing is capped at $61,500 over three years; the second, for GradPLUS loans, is 7.9 percent. The financial aid website we use weights this appropriately. Our original, and now secondary model labeled "Graduates in Repayment," utilizes this approach.

Second, our model accounts for the relatively new development in which interest begins to accrue during law school for both Stafford and GradPLUS loans (the two loan programs used by Michigan Law students), beginning when the loan is disbursed. This is the Debt Wizard 2.0's "Prospective & Current Students and New Graduates" default model. (Note that some of the Stafford loans received by current students before July 1, 2012, continue to have the interest subsidized by the federal government during law school.) At the time of graduation, one of two things happens to the accrued interest of unsubsidized loans: Sometimes graduates pay it off in a lump sum (possible, for example, when the graduate is heading to a firm that pays a signing bonus), or, more usually, it gets "capitalized"—added to the existing principal balance—such that going forward, future interest payments are based on the new, larger principal. (Sometimes capitalization occurs not at graduation, but after a period of loan deferral or forbearance.)

A simple example of capitalized interest for $120,000 debt follows:


Loan Type

Loan Amount and Disbursement Over Three Years

Accrued Interest Derived from Daily Interest Calculation

New Total Principal at the Time of Graduation After Three Years

Stafford Loan

$61,500

$6,240

$67,740

Grad Plus

$58,500

$6,896

$65,396

Total

$120,000

$13,136

$133,136

In general, the capitalizing accrued interest after three years of law school adds between 10 and 12 percent to the loan principal, and monthly payments under the 10- and 25-year repayment plans would be correspondingly higher.

Repayment. Our model displays the calculated payments for four different approaches to repayment: a 10-year repayment plan; a 25-year repayment plan; the federal Income-Based Repayment (IBR) plan at 15 percent of income; and the Michigan Law Income-Based Debt Management Program (dependent on participation in the IBR). All outcomes, except the one for the Michigan Law program, were calculated using a nonprofit website for financial aid information. While an inquiry into eligibility for, fluctuations in, and interactions among the four choices are not for the faint of heart, if you have a wolverine constitution and a stomach for financial prose, read on.

Custom Inputs. There are custom inputs for Income, Debt, and Housing. When the user inputs values into these fields, the appropriate bar graphs (using the custom values) are inserted into the chart created from the drop-down menu.  In other words, only the income level, with the pulsing red number, reflects the custom input values; the rest of the chart is derived from values associated with the drop-down menu selections.

Things We Didn't Do:

Non-housing expenses. We did not attempt to account for living expenses beyond housing (for most people, the single biggest living expense by a wide margin) in our model for two reasons: One, there's a great deal of variation in individual experience based both on location and on personal habits; and two, we did not find a source of data that we had adequate confidence in. We have found, however, sites that provide useful cost-of-living comparison calculators, here and here; the user may find those to be helpful additional perspectives. We are hoping to add one more Custom Input for Other Expenses in the next version of the Debt Wizard, when we have additional experience and clarity with this repayment method.

Salary increases. Most people, in most jobs, get raises. For simplicity's sake, we did not attempt to capture the annual increase in salary likely to be experienced as people progress in their careers.

10 Percent IBR and similar repayment programs. It is unclear how many current or prospective law students will be eligible for the bridging 10 percent IBR program (Pay As You Earn) by the time that they graduate. Likewise, the standard 10 percent IBR program won't come into effect until 2014. We hope to include the federal 10 percent IBR payment in Debt Wizard 3.0, when we have additional experience and clarity with this repayment method.

The initial version of the Debt Wizard was launched in February, 2013; a revised version, including the capitalized loans model, custom inputs, and three new geographic market changes, was launched in July 2013.

New Interest Rates for Federal Loans. On August 9, 2013, after we had updated the Debt Wizard, the President signed into law a bill providing fixed interest rates for federal education loans. Under the new statute, student loan interest rates will be fixed for the life of each loan, and, each July 1, professional and graduate loan interest rates will be set equal to the high yield 10 Year Treasury Note rate plus 3.6% (capped at 9.5%). For loans disbursed in the 2013-14 academic year, the rates will be set at 5.41% for the Stafford loans and 6.41% for the GRAD Plus loans. Please see the table below for the difference this will make in capitalized loans ranging from $80,000 debt to $250,000.

Estimated Change in Monthly Repayment Amounts and Total Capitalized Principal
Based on 2013 - 14 Stafford & GradPlus Loan Interest Rates Effective July 1, 2013

   

$250K Original Loan Amount

$120K Original Loan Amount

$80K Original Loan Amount

   

Monthly Repayment Amount

 

Monthly Repayment Amount

 

Monthly Repayment Amount

 
   

10 Yr Plan

25 Yr Plan

Capitalized Principal

10 Yr Plan

25 Yr Plan

Capitalized Principal

10 Yr Plan

25 Yr Plan

Capitalized Principal

New Rates (5.41% and 6.41%)

$3,054

$1,787

$272,994

$1,443

$833

$130,560

$947

$540

$86,734

Old Rates (6.8% and 7.9%)

$3,325

$2,082

$278,462

$1,569

$970

$133,136

$1,029

$628

$88,149

Change

-$271

-$295

-$5,468

-$126

-$137

$-2,576

-$82

-$88

-$1,415

Your actual savings may vary. For this table, we calculated potential savings as if loans for all three years of law school were issued at the current year's interest rate. In practice, the interest rates are likely to vary over your three years in law school.

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