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Defining Our Terms

In order to make this complex undertaking manageable, we needed 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 can 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 or 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 divide 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. 

Fourteen markets comprise this version of the model.



City

Housing Allowance Level 1

Housing Allowance Level 2

Boston

$2100

$2550

Chicago

$1700

$1950

Dallas

$1425

$1850

Detroit

$1250

$1700

Houston

$1450

$1875

Los Angeles

$1850

$2100

Miami

$1800

$2100

Minneapolis

$1300

$1675

New York City

$2350

$2750

Philadelphia

$1640

$1710

Phoenix

$1325

$1575

San Francisco

$2500

$2950

Seattle

$1450

$1900

Washington, D.C.

$1825

$2225

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 city taxes in New York City, Philadelphia, and Detroit)—in other words, the monthly income from which debt and housing are deducted is after-tax income. Finally, we used 2013 NALP data (the most recent available at this time; 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.

New Interest Rates for Federal Loans. On August 9, 2013, after we had updated the Debt Wizard (v 2.0), the President signed into law a bill providing fixed interest rates for federal education loans. Under the statute, student loan interest rates are 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 were set at 5.41% for the Stafford loans and 6.41% for the GRAD Plus loans. The table below illustrates the impact of the increasing and different interest rates on original principal values of $100,000 and $150,000.

2011-12 and prior

2012 - 13

2013 - 14

2014 - 15

2015 - 16

Model A

Model B

Model C

Model D

Model E

Current Year

2011 - 12

2012 - 13

2013 - 14

2014 - 15

2015 - 16

sub Stafford

6.80%

na

na

na

na

unsub Stafford

6.80%

6.80%

5.41%

6.21%

5.84%

(unsub) GradPLUS

7.90%

7.90%

6.41%

7.21%

6.84%

Prior Year

pre 2011-12

2011 - 12

2012 - 13

2013 - 14

2014 - 15

sub Stafford

6.80%

6.80%

na

na

na

unsub Stafford

6.80%

6.80%

6.80%

5.41%

6.21%

(unsub) GradPLUS

7.90%

7.90%

7.90%

6.41%

7.21%

Two Years Prior

pre 2011-12

pre 2011-12

2011 - 12

2012 - 13

2013 - 14

sub Stafford

6.80%

6.80%

6.80%

na

na

unsub Stafford

6.80%

6.80%

6.80%

6.80%

5.41%

(unsub) GradPLUS

7.90%

7.90%

7.90%

7.90%

6.41%

Total Debt at Graduation from Principal and Capitalized Interest

$100K Principal

$108,193

$108,478

$109,106

$109,966

$109,117

sub Stafford

$25,500

$17,000

$8,500

$0

$0

unsub Stafford

$39,653

$48,438

$57,660

$67,255

$66,753

Total Stafford ($61,500)

$65,153

$65,438

$66,160

$67,255

$66,753

GradPLUS ($38,500)

$43,040

$43,040

$42,946

$42,711

$42,364

$150K Principal

$164,085

$164,370

$164,876

$165,431

$164,132

sub Stafford

$25,500

$17,000

$8,500

$0

$0

unsub Stafford

$39,653

$48,483

$57,660

$67,255

$67,753

total Stafford ($61,500)

$65,153

$65,438

$66,160

$67,255

$67,753

GradPLUS ($88,500)

$98,932

$98,932

$98,716

$98,176

$97,379

The difference in total principal at the time of graduation between the four most recent models was roughly ten percent or less, and the difference in monthly loan payment in the standard 10-year and 25-year repayment models was $50 and $90 or less, respectively.

We chose Model B under the observation that the the federal interest rates are returning to the higher historical rates. We would be delighted to be wrong! However, the difference in the final capitalized amounts is quite modest. As a result, the conversative estimate that Model B provides is the responsible choice and a concrete one, enabling Debt Wizard to be relevant to most of our alumni and current students. 

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) and $130,000 (our 2014 average). Each increment is meant to represent anticipated loan principal, i.e., the approximate amount of disbursement received.

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 during law school. Our model recognizes the accumulation of the interest associated with the loans in two ways. First, Debt Wizard accounts for the interest accruing during the entire life of the loan but does not calculate the estimated total debt, i.e., the amount paid over the entire life of the loan, because individuals may adopt strategies that allow them to minimize the total debt by paying off their loans more quickly than required or maybe eligible for debt forgiveness.

Our model incorporates the second type of interest accrual, a relatively recent 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.  (Note that some of the Stafford loans received by current students before July 1, 2012, had 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.)

An example of the underlying calculation in the Debt Wizard for capitalized interest on $120,000 debt during law school is:



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 (subsidized)

$17,000

$0

$17,000

Stafford Loan (unsubsidized)

$44,500

$3,938

$48,438

Grad Plus

$58,500

$6,896

$65,396

Total

$120,000

$10,834

$130,834

In general, the capitalizing accrued interest after three years of law school adds less than ten percent to the loan principal, and monthly payments under the 10- and 25-year repayment plans are correspondingly higher than they would be on principal alone.

Repayment. Our model displays the calculated payments for six different approaches to repayment: a 10-year repayment plan; a 25-year repayment plan; the federal Income-Based Repayment (IBR) plan at 10 percent of income; the Michigan Law Income-Based Debt Management Program (dependent on participation in the 10% IBR); 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 15% 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 six choices are not for the faint of heart, if you have a wolverine constitution and a stomach for  financial prose, read on.

Accelerated Debt Reduction. Law school debt can seem overwhelming, particularly to those who engage in relatively lower income legal positions while still carrying $100,000 or more in student loan debt.  Debt Wizard and our financial aid counselors can help you identify the best repayment plan for your situation.  In the event you opt for 10-year or 25-year repayment schedules (and some other options), there are ways to reduce the debt at an accelerated rate.  The primary strategy to reduce debt at an accelerated rate is the rollover strategy – once one loan is paid off, you use the payment you were making and apply it to what is now your smallest loan.  Another accelerated debt reduction strategy is to simply add a modest extra amount to your payment – $10, $25, or even $50 – and see the difference it makes in retiring the debt. Also note that, in this case, you pay less overall debt, too, since this strategy reduces the principal that is used to calculate the interest. Read on for additional details about accelerated debt reduction.

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.

Custom Inputs. We eliminated the custom inputs, as we strongly desire our alumni and current students to contact our Office of Financial Aid for counseling specific to your individual needs and specific financial situation, particularly with regard to the MLaw LRAP.  As it is, Debt Wizard will bracket your repayment scenario, and our Financial Aid counselors will help you calculate it exactly.

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.

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