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 good guide book to money management is the National Endowment for Financial Education’s 40 Money Management Tips Every College Student Should Know. Another good reference tool is the U.S. government’s website called MyMoney.gov to teach you the basics about financial education.
Some other suggestions which may be useful in establishing a debt management strategy plan include:
Establishing a budget while you are in school is one of the most important tools you can use regarding debt management. It essentially provides a framework for you to work within and a plan to "live within your means". In order to create a realistic budget, you must first assess your current 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 such as rent, utilities, food/sundries, clothing/laundry, transportation, entertainment etc. In addition you should include your educational expenses such as 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 so as 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 so as to create a fuller picture of your situation. At this point you should be able to analyze your projected monthly expenses versus your projected monthly income and thus assess your need (if any) for student loans to bridge the difference. A general Budget Calculator is available to assist you with this process. 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.
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A conservative approach to borrowing loan funds for your education is highly recommended. You should first identify all other resources you have available prior to taking out student loans in an effort to limit your loan indebtedness. Thus any gap between what your resources are and what your anticipated educationally related expenses will be may be satisfied by student loans. Student loans should be used to "bridge" the gap between personal resources and educationally related expenses.
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It is critical to consistently monitor your loan indebtedness throughout your educational career so as to have a realistic understanding of your financial obligations once you graduate. In an effort to assist you with this important task, the Office of Financial Aid provides an individual loan history to all financial aid students usually during the spring semester. Another resource to assist you in tracking your loan indebtedness is to access the National Student Loan Database System at www.nslds.ed.gov where you will find a complete listing of all your federal loans. 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 a Basic Loan Repayment Chart that shows loan repayment amounts with various interest rates.
In addition to monitoring your total loan indebtedness, we recommend that you periodically take the time to calculate what your monthly payments will be once you enter repayment. There are a number of loan repayment calculators via the internet that can assist you with these calculations. It should be noted that these tools are recommended only as a resource and should not to be used as a true repayment figure. You should contact your individual lenders to obtain exact loan totals and monthly repayment figures.
As you monitor your monthly student loan repayment obligation throughout your academic career, 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 actually be taking home is a critical step when planning/assessing what you will need to earn in order to meet your basic financial obligations once you enter the work force. 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 actually take home, consistent monitoring of your loan indebtedness coupled with realistic salary expectations for your chosen field of interest contributes toward a sound debt management strategy.
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While having credit cards is a convenience for most consumers, when it is used to "supplement" your income it may very well become a pitfall. The use of credit cards, particularly for students who are on a limited budget, tends to be a tempting option at times. However, using a credit card irresponsibly now may very well have long lasting negative effects on your credit history, thus possibly jeopardizing your ability to secure a mortgage, car loan, as well as other lines of credit in the future. Also, if you plan to take out a private loan or a Graduate PLUS Loan (in addition to the Federal Stafford Loan) for your education, poor credit, adverse credit and/or maxed out credit cards may prevent you from securing these types of loans. It is highly recommended that you pay off all consumer debt prior to entering school so as to alleviate an additional monthly financial obligation while a student. 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” use of credit cards.
- 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 if at all 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.
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It is highly recommended that you create and maintain a file of all financial paperwork that you accumulate while obtaining your education. This file should include copies of all applications, promissory notes, lender correspondence, disclosure statements, as well as any other documents you deem important. By actively keeping this file current you will be provided with an additional opportunity to monitor your loan indebtedness as well as double check the accuracy of yours and your lenders records.
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When you apply for either a Federal Graduate PLUS Loan or a private student alternative loan, your lender will request a copy of your credit report and will evaluate your credit to determine your credit worthiness. 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
- 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 an endorser. If the lender is evaluating your credit for a private student alternative loan, not only will they review your credit report, but they will also look at your credit score. Credit scoring is the process by which 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 considers both positive and negative information in your credit report and is based on factors such as payment history, types of credit, and outstanding debt as well as the proportion of credit used as compared to available credit. This information will be used to determine whether you will be approved for a private loan on your own signature, denied a loan or will be required to obtain a co-signer in order to be approved.
It is recommended that you be proactive and check your credit report on a regular basis to maintain control of your credit. You should review your credit report at least once a year to check for possible errors and re-evaluate your "credit picture" for ways to improve your score. It should be noted that the three major credit bureaus (listed below) each maintain their information independently so the information each bureau has on file for you may differ and the score they provide to the lender may differ. For this reason, it is advisable 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 www.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.
Equifax - 800-685-1111 - www.equifax.com
Experian - 888-397-3742 - www.experian.com
Trans Union - 800- 888-4213 - www.transunion.com
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.
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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.
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The above debt management information is provided solely as a guideline and is not intended to serve as professional financial advising.