I find myself facing something akin to financial armageddon straight in the face. My wife has been accepted to law school, something that our current level of savings simply can't support. With some simple lifestyle cutbacks we have enough in the bank to get through the three years on one income, but shelling out for tuition, textbooks, and any other extra costs that come with going to school will be challenging. This means taking on tens of thousands in new debt, a scary prospect to say the least.
I imagine that this is a problem faced by many people, whether they are in high school and just choosing a school, or like us, a 30ish couple with a mortgage and other inflexible financial commitments. I'll never be happy about taking on debt, something for which I'm thankful, as I think this will lead to long-term financial security. So I need to justify any new debt, and this one is no different.
On the surface the debt is certainly justified simply as a lifestyle choice. My wife can continue to languish in a dead end job, or she can improve her education, and start on a new and more rewarding career path. The non-financials are solid enough to go for it. But I like numbers, and I think there's a good case to be made that it's the right financial decision as well. How much more money is my wife likely to make as a lawyer compared to her current income as an accounting clerk?
To compare, let's look at the cost of attending school:
|
1 year | 3 years |
| Lost Income (net of taxes) |
$34,850 | $104,550 |
| Less: Summer Income |
$9,500 | $28,500 |
| Tuition and textbooks |
$12,500 | $37,500 |
| Less: Tax Credits |
$3,705 | $11,115 |
| Interest on student loans* |
$2,782 | $8,346 |
| Total |
$36,927 | $110,781 |
| *based on $36,000 debt, 10 year payback at 5% APR, net of 15% tax credit |
*Whistle.* That's a lot of money. So how much extra does my wife have to make as a lawyer in order to pay for school?
Well, an education is like an annuity - you invest money up front then get an payback in small chunks over the course of your working life. In my wife's case, she'll have 30 years left to work once she's finished school. How much an annuity is worth is determined using Present Value, and depends on interest rates...when interest rates are low, as they are now, you have to spend more money to get the same payoff. At today's interest rates, a 30 year annuity yields about 4.5%, and investing $110,781 will get you an annual payoff of $6801. In more "normal" times when a 30 year annuity might yield 7.5%, the investment would pay $9880.
So that's how much extra she has to earn after graduation, compared to what her salary would have been if she'd kept working. This seems quite doable, as a salary survey seems to indicate that even a first year associate at a medium size, local, firm makes $25k more than her current wages. So it looks like law school should be a profitable venture, on top of being personally rewarding.
This is certainly a case where it is smart to take on the debt.
