Dana Lake '23
Editor-in-Chief
In between exit counseling and career prep for 3Ls and negotiating scholarships with incoming 1Ls, Dean Hulvey with the Law School Financial Aid Office took the time to sit down with me and talk through what the heck a 2L ought to be doing this summer. While I’m writing from a private practice point of view, the better angels of our school who are going into public service should also find some useful bits for their own financial planning.
As a regular adult working a regular job before Law School, I made $35k a year. Now going to a firm that has adopted the $215k rate, I and many members of the Class of 2023 will make $41,346.15 in only ten weeks (before taxes, of course). The BigLaw mindset and your student loan balance can obscure the fact that this is a life-changing amount of money. It’s worth taking the time to develop a plan for what to do with it.
The first question is whether to use some of your summer pay to cover some tuition and cost of living expenses, or to take loans. As with most things for the Class of 2023, there is a COVID catch—federal student loan repayments are on pause until the end of summer and likely until after the November midterms.[1] That means interest on those loans is also paused. If you have loans at a higher interest rate, it makes sense to pay off a portion of that loan now, when your dollar can get to the principal balance faster. It’s important to remember that the rate you borrow at is the rate you will be paying back years from now.[2] Dean Hulvey advises that the choice between paying back or borrowing less comes down to that year’s interest rate. For 2022, the direct unsubsidized loan rate for graduate students was 5.28%. If that rate goes up for 2023, it makes sense to borrow less next year and to use your summer funds for living expenses. If rates go down, it makes sense to take the new, cheaper loan and to instead use your summer funds to pay back the older, more expensive loan.
Dean Hulvey emphasized that this choice comes with a major caveat—what is your summer plan after graduation? 3L and 3L Summer tend to be more expensive than 1L and 2L for many reasons, ranging from going all out at Bar Review and buying your friends green tea shooters at Crozet, to purchasing wedding presents for all the couples tying the knot after graduation. You will be moving cities, expanding your professional wardrobe, maybe going on a bar trip before work starts. A frugal 3L year will still be full of unexpected expenses. You need a plan so that you can avoid taking a bar loan,[3] if possible. Your firm may provide you with a stipend, or you might be able to take a forward on your paychecks. But another option is to save your summer pay in a high interest account[4] to prepare for these costs.
I’ll touch on taxes briefly. This year is probably the last year of your working life that your federal income tax bracket will be 22%. You might even be in the 12% bracket. After graduation, you will be firmly in the 35% bracket (unless you get married, which keeps you at a cool 24%). What that means is that this is the last best year for you to contribute to an after-tax account, like a Roth IRA. With a Roth IRA, you can contribute up to $6,000 a year of income, taxed at your current rate. It then grows and can be withdrawn tax-free when you are up there in the more expensive brackets. With the power of compound interest, that becomes $64,000 if you only make one contribution and never even look at the account again.[5]
A final note on housing. It is probably too late for you to change your summer housing plan now, but this summer is the time for you to explore the city and get to know the different areas where you can live. Take the time to look for an affordable area you can be happy in the long term. For students still trying to secure summer accommodations and that have real need of financial assistance—be that making down payments on apartments or other housing cost issues—the financial aid office can help. Reach out and talk to them before putting an enormous balance on your credit card or taking a high interest personal loan.
What it all comes down to is the need for a PLAN for your summer income, and the time to start making that plan is now, before the money starts rolling in. A successful financial plan is one that supports your goals. It will allow you to pay for your wedding, own a home, travel, or achieve whatever other life events are important to you. Starting good saving habits this summer is the key. Dean Hulvey is hosting a Budgeting for Life workshop on Friday from 12:00-1:00 in WB126 that can help you craft the right plan for your goals and situation.
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dl9uh@virginia.edu
[1] This is Law Weekly conjecture, don’t quote us on it.
[2] Whatever your hope is for undergrad student loan forgiveness, Congress is not going to write a check to a bunch of yuppy corporate lawyers unless you’re billing them for it. It’s never too late to switch to public service if you want that sweet, sweet graduate PSLF relief.
[3] These are private loans specifically for students who need help paying for living expenses while studying for the Bar. They typically have high interest rates and are not eligible for flexible repayments or forgiveness. See https://www.forbes.com/advisor/student-loans/best-bar-exam-study-loans/.
[4] I use Discover Bank, which has no account balance minimum and no monthly maintenance fee, with 0.50% APY. Seehttps://thecollegeinvestor.com/22105/best-savings-accounts-students/ for other options.
[5] If you are twenty-five, let it grow to age sixty, with 7% returns.