Need Financial Help: Loans vs. Refi Mortgage, for Law School
August 14, 2017 9:28 AM Subscribe
Our son has applied to law schools and will most likely begin attending in August 2018. We want to help him finance this because we have access to much cheaper money than he has.
We can, for example, refinance our mortgage to get cash out to pay for school. In fact, I found, through an article in The New York Times, a company called SoFi (Social Finance) that has a Parent in school refi program. But there are many possibilities for how to do this sort of thing, and we are not that skilled in running various set of numbers. For example, here is a little chart of the various possibilities of interest rates available to us, each with it own one-time fee ("points"). I have no way of doing the calculations that will tell me which is the better deal.
also, we currently have a 30-year fixed mortgage on our home with an interest rate that's somewhat lower than these interest rates (because interest rates have gone up). So that's another factor. In other words, we could keep our current mortgage and borrow some other way (student loans, although I hate them) or a home equity loan (though I will not borrow with a variable rate).
So -- what I really want is an advisor I can pay to, well, give advice about this subject. Any recommendations?
NOW, before you are kind enough to post a response, let me please tell you:
-- Do not say my child should finance his own law school any way he can and it is none of our business, even if any loans he could take out would be at a higher interest rates and killing monthly payments because they are 10-year loans
-- Do not say that borrowing against our mortgage puts our housing at risk if we can't, at some time in the future, pay back the loan (We can and we will.)
-- Do not say that law school isn't "worth it" because nobody gets a job, or the jobs are low-paying, or that anything about going to law school is stupid or a "bad value" or etc. etc.,
in other words, NO MORALISM, thanks in advance.
We can, for example, refinance our mortgage to get cash out to pay for school. In fact, I found, through an article in The New York Times, a company called SoFi (Social Finance) that has a Parent in school refi program. But there are many possibilities for how to do this sort of thing, and we are not that skilled in running various set of numbers. For example, here is a little chart of the various possibilities of interest rates available to us, each with it own one-time fee ("points"). I have no way of doing the calculations that will tell me which is the better deal.
also, we currently have a 30-year fixed mortgage on our home with an interest rate that's somewhat lower than these interest rates (because interest rates have gone up). So that's another factor. In other words, we could keep our current mortgage and borrow some other way (student loans, although I hate them) or a home equity loan (though I will not borrow with a variable rate).
So -- what I really want is an advisor I can pay to, well, give advice about this subject. Any recommendations?
NOW, before you are kind enough to post a response, let me please tell you:
-- Do not say my child should finance his own law school any way he can and it is none of our business, even if any loans he could take out would be at a higher interest rates and killing monthly payments because they are 10-year loans
-- Do not say that borrowing against our mortgage puts our housing at risk if we can't, at some time in the future, pay back the loan (We can and we will.)
-- Do not say that law school isn't "worth it" because nobody gets a job, or the jobs are low-paying, or that anything about going to law school is stupid or a "bad value" or etc. etc.,
in other words, NO MORALISM, thanks in advance.
I have no way of doing the calculations that will tell me which is the better deal.
Getting a decent estimate of this is actually a pretty straightforward two-step process if you assume repayment of the loan will occur exactly as planned.
(1) The cost of the loan itself: The chart gives you the monthly payment over the life of the loan. So just multiply the monthly payment by the term (in months) of the loan. That will give you the cost of the loan itself.
(2) The foregone interest: You need to calculate the amount you are forgoing by paying "points"--the money that that money would earn over time if you weren't giving it to Sofi. The most conservative rate to use for that is the current "risk-free" rate: 1.22%. Take the "points" amount and plunk it into this calculator with 1.22%, compounded monthly: http://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php. The interest is what you are giving up.
Add (1) and (2). Voila: a decent estimate of the cost of the loan.
I haven't run the calculations here, but ordinarily when you are paying no points up front you are effectively financing what would otherwise be the up-front payment. You would expect a greater up-front payment to mean a lower interest rate and a lower cost over the life of the loan.
Do not say that borrowing against our mortgage puts our housing at risk if we can't, at some time in the future, pay back the loan (We can and we will.)
This is not a moralistic point: you are talking about taking out two different kinds of loans. One is secured, the other is not. One will have access as of right to deferments, income-driven repayment plans, and, potentially, public service loan forgiveness; one will not. On the other hand, one is dischargeable in bankruptcy, the other is not. These are practical considerations you would do well to consider and which any competent advisor should raise with you.
Any advisor you choose should be fee-only. For God's sake, do not go to a bank for help. They are salespeople, not advisors, and they have absolutely no requirement to act in your best interest.
posted by praemunire at 10:02 AM on August 14, 2017 [3 favorites]
Getting a decent estimate of this is actually a pretty straightforward two-step process if you assume repayment of the loan will occur exactly as planned.
(1) The cost of the loan itself: The chart gives you the monthly payment over the life of the loan. So just multiply the monthly payment by the term (in months) of the loan. That will give you the cost of the loan itself.
(2) The foregone interest: You need to calculate the amount you are forgoing by paying "points"--the money that that money would earn over time if you weren't giving it to Sofi. The most conservative rate to use for that is the current "risk-free" rate: 1.22%. Take the "points" amount and plunk it into this calculator with 1.22%, compounded monthly: http://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php. The interest is what you are giving up.
Add (1) and (2). Voila: a decent estimate of the cost of the loan.
I haven't run the calculations here, but ordinarily when you are paying no points up front you are effectively financing what would otherwise be the up-front payment. You would expect a greater up-front payment to mean a lower interest rate and a lower cost over the life of the loan.
Do not say that borrowing against our mortgage puts our housing at risk if we can't, at some time in the future, pay back the loan (We can and we will.)
This is not a moralistic point: you are talking about taking out two different kinds of loans. One is secured, the other is not. One will have access as of right to deferments, income-driven repayment plans, and, potentially, public service loan forgiveness; one will not. On the other hand, one is dischargeable in bankruptcy, the other is not. These are practical considerations you would do well to consider and which any competent advisor should raise with you.
Any advisor you choose should be fee-only. For God's sake, do not go to a bank for help. They are salespeople, not advisors, and they have absolutely no requirement to act in your best interest.
posted by praemunire at 10:02 AM on August 14, 2017 [3 favorites]
income-driven repayment plans
This is huge. Even if he does great, which maybe he will, the job that he badly wants after graduation may not be $160k/year biglaw. But with income-driven repayment, his loans will never have "killing monthly payments". Law school, for me, was a bad plan, but it's a bad plan with loans that I will continue to be able to afford to pay on a monthly basis no matter what I'm doing. For a couple years, my payments were actually zero. If your intention is that your son will still be making the payments for the most part, this is huge. Totally not the only consideration, but make sure you're taking it into account.
posted by Sequence at 10:10 AM on August 14, 2017 [5 favorites]
This is huge. Even if he does great, which maybe he will, the job that he badly wants after graduation may not be $160k/year biglaw. But with income-driven repayment, his loans will never have "killing monthly payments". Law school, for me, was a bad plan, but it's a bad plan with loans that I will continue to be able to afford to pay on a monthly basis no matter what I'm doing. For a couple years, my payments were actually zero. If your intention is that your son will still be making the payments for the most part, this is huge. Totally not the only consideration, but make sure you're taking it into account.
posted by Sequence at 10:10 AM on August 14, 2017 [5 favorites]
Echoing what Sequence said: realistically, if he's paying anywhere near full-freight at a good school, his monthly payments on a loan will be more than he can afford at almost any job except Biglaw, even with the lower interest rates you have access to. Note how SoFi's payments run $2400+/mo. That's post-tax. An entry-level public interest job might pay between $40-$60K pretax. That math is not hard. And there are very few entry-level jobs in the private sector where you can expect to make $100K or whatever--it really is a bimodal distribution.
So, if you do expect your son to be making the payments for the most part, keep in mind that, without income-driven repayment, he has few choices except the steadily diminishing number of slots available in Biglaw. If that's what he wants (and can realistically expect to get) that's fine, but if he is thinking about any other possible path, not having access to some form of IDR and taking out that kind of loan will likely close that off, unless you are in a position to subsidize him.
posted by praemunire at 10:32 AM on August 14, 2017 [1 favorite]
So, if you do expect your son to be making the payments for the most part, keep in mind that, without income-driven repayment, he has few choices except the steadily diminishing number of slots available in Biglaw. If that's what he wants (and can realistically expect to get) that's fine, but if he is thinking about any other possible path, not having access to some form of IDR and taking out that kind of loan will likely close that off, unless you are in a position to subsidize him.
posted by praemunire at 10:32 AM on August 14, 2017 [1 favorite]
One will have access as of right to deferments, income-driven repayment plans, and, potentially, public service loan forgiveness; one will not.
We recently pursued and ultimately decided against refinancing student loan debt for this very reason - we did not want to give up these perks. We don't foresee needing to modify our payment plan in the coming years, but we wanted the flexibility just in case.
posted by ThePinkSuperhero at 10:45 AM on August 14, 2017 [2 favorites]
We recently pursued and ultimately decided against refinancing student loan debt for this very reason - we did not want to give up these perks. We don't foresee needing to modify our payment plan in the coming years, but we wanted the flexibility just in case.
posted by ThePinkSuperhero at 10:45 AM on August 14, 2017 [2 favorites]
Do you have a financial advisor? If so, this is exactly the sort of thing where you get them involved, both to calculate what's cheapest and help you figure out hedges against parental job loss, death of a parent, etc.
If this is going to be a straight-up gift, aside from what a financial advisor will tell you, you'll also want to check in with your estate planner about whether you want this is an advance on the kid's eventual inheritance/whether you need to make any changes in your wills, life insurance policy, etc., to be fair to any other kids. Depending on how much money you have, gift tax could also be a consideration.
If this is going to be a loan (in that the kid repays you later at a lower or no interest), you may want to consider waiting until the kid has actually graduated from law school, then get the loan and have a lawyer draw up really simple legal documents and make any tweaks to your wills about the loan being forgiven on your death, etc. Again, gift tax could be an issue.
My parents did the we'll-borrow-and-you-repay-us method, and waited until I had graduated and had a BigLaw job. At that point, since a lot of the pricing quandaries had been eliminated AND it was clear I wasn't going to be eligible for income-based forgiveness AND they'd had an additional three years to save cash and make themselves look juicy to the bank, they did a variable rate HELOC that was basically free for the first three years. They drew down the whole amount required to repay my loans at closing, and repaid the HELOC within three years/before the reset. I kept repaying them until we were even.
It was incredibly generous of my parents, and your kid is lucky to have parents looking out for him this way.
posted by joyceanmachine at 11:17 AM on August 14, 2017 [3 favorites]
If this is going to be a straight-up gift, aside from what a financial advisor will tell you, you'll also want to check in with your estate planner about whether you want this is an advance on the kid's eventual inheritance/whether you need to make any changes in your wills, life insurance policy, etc., to be fair to any other kids. Depending on how much money you have, gift tax could also be a consideration.
If this is going to be a loan (in that the kid repays you later at a lower or no interest), you may want to consider waiting until the kid has actually graduated from law school, then get the loan and have a lawyer draw up really simple legal documents and make any tweaks to your wills about the loan being forgiven on your death, etc. Again, gift tax could be an issue.
My parents did the we'll-borrow-and-you-repay-us method, and waited until I had graduated and had a BigLaw job. At that point, since a lot of the pricing quandaries had been eliminated AND it was clear I wasn't going to be eligible for income-based forgiveness AND they'd had an additional three years to save cash and make themselves look juicy to the bank, they did a variable rate HELOC that was basically free for the first three years. They drew down the whole amount required to repay my loans at closing, and repaid the HELOC within three years/before the reset. I kept repaying them until we were even.
It was incredibly generous of my parents, and your kid is lucky to have parents looking out for him this way.
posted by joyceanmachine at 11:17 AM on August 14, 2017 [3 favorites]
Response by poster: These answers are all GREAT. NO we don't have a private financial advisor, though we do get some advising for free from TIAA because some retirement assets are there.
One note, though: this: "Note how SoFi's payments run $2400+/mo."... That is the monthly payment for $200K law-school cash-out PLUS our current outstanding mortgage of ~$320,000, in other words, that's the monthly payment on a SoFi loan of about $520,000! We currently pay about $1600 monthly on our $320,000-remaining mortgage. Therefore we would be paying about $1000 more per month and for the next 15 or so years on a 30-year mortgage that would be about 100% interest, and therefore tax-deductible. So maybe $700 a month post-tax dollars til we're (mostly, probably) dead, at which time the kid inherits the home and can sell it and pay off all debt.(cause we're pretty effing old, might I say) Or something like that.
posted by DMelanogaster at 12:34 PM on August 14, 2017
One note, though: this: "Note how SoFi's payments run $2400+/mo."... That is the monthly payment for $200K law-school cash-out PLUS our current outstanding mortgage of ~$320,000, in other words, that's the monthly payment on a SoFi loan of about $520,000! We currently pay about $1600 monthly on our $320,000-remaining mortgage. Therefore we would be paying about $1000 more per month and for the next 15 or so years on a 30-year mortgage that would be about 100% interest, and therefore tax-deductible. So maybe $700 a month post-tax dollars til we're (mostly, probably) dead, at which time the kid inherits the home and can sell it and pay off all debt.(cause we're pretty effing old, might I say) Or something like that.
posted by DMelanogaster at 12:34 PM on August 14, 2017
Best answer: If your son is considering doing some kind of public interest law, I'd at least consider the option that he take out federal student loans in his name (which you can of course pay, though he will have the legal responsibility to pay them). Some law schools have loan forgiveness programs that will pay a portion or all of monthly payments loans as long as the graduate works in a qualifying job, and there is a federal loan forgiveness program as well as mentioned above. I believe the federal program pays off the balance of student loans after 10 years of qualifying employment.
Keep in mind that if he takes out student loans and ends up in a job that doesn't qualify for loan forgiveness, he can refinance the loan at that point - or you can take out a loan or second mortgage at that point and pay off the student loan.
posted by insectosaurus at 5:12 PM on August 14, 2017 [1 favorite]
Keep in mind that if he takes out student loans and ends up in a job that doesn't qualify for loan forgiveness, he can refinance the loan at that point - or you can take out a loan or second mortgage at that point and pay off the student loan.
posted by insectosaurus at 5:12 PM on August 14, 2017 [1 favorite]
My parents let me use a long-ago-established HELOC with a variable but crazy low interest rate to pay for law school in 2013-2016 (actually, the whole transaction was more complicated: HELOC on their house paid for a cheap condo I could live in basically for free and HELOC on the condo paid for law school). We did it for the same reason that you're considering it: they had access to cheaper money than I did.
I think that one additional thing to consider--and that you may not be able to predict, yet--is what kind of scholarships he'll receive. The considerations may be very different if you expect his total law school debt to be $200k than if you expect it to be closer to $50k. To practice in my city, there isn't much reason to pay more than in-state tuition at the flagship state university, which was about $15k per year when I started. I expected that my total law school debt would be low enough that I would pay all of it off during a 25-year income based repayment period, and I didn't think it was likely enough that I would go into public interest work to make the higher interest rate worth it for the chance my loan would be forgiven after 10 years. If I had been looking at $200k in law school debt, I may have made different decisions (in my case, I would have had to, because my parents' house wasn't worth that).
Also, if your son ends up in a position where he's likely to pay off a large amount of student debt, i.e. in biglaw, then SoFi will be courting him, too. SoFi had a presentation at my law firm's new associate orientation, and they were offering us cash just to apply. If you decide not to refinance now, he won't necessarily be stuck with the high student loan interest rates forever (though he would lose various protections if he decided to refinance).
posted by capsizing at 5:39 PM on August 14, 2017 [2 favorites]
I think that one additional thing to consider--and that you may not be able to predict, yet--is what kind of scholarships he'll receive. The considerations may be very different if you expect his total law school debt to be $200k than if you expect it to be closer to $50k. To practice in my city, there isn't much reason to pay more than in-state tuition at the flagship state university, which was about $15k per year when I started. I expected that my total law school debt would be low enough that I would pay all of it off during a 25-year income based repayment period, and I didn't think it was likely enough that I would go into public interest work to make the higher interest rate worth it for the chance my loan would be forgiven after 10 years. If I had been looking at $200k in law school debt, I may have made different decisions (in my case, I would have had to, because my parents' house wasn't worth that).
Also, if your son ends up in a position where he's likely to pay off a large amount of student debt, i.e. in biglaw, then SoFi will be courting him, too. SoFi had a presentation at my law firm's new associate orientation, and they were offering us cash just to apply. If you decide not to refinance now, he won't necessarily be stuck with the high student loan interest rates forever (though he would lose various protections if he decided to refinance).
posted by capsizing at 5:39 PM on August 14, 2017 [2 favorites]
This thread is closed to new comments.
Schools' financial aid offices will also have lots of information about the educational loan piece of it and will have undoubtedly wrestled with your exact issue before. Those folks work hard to get students to enroll.
posted by GPF at 9:57 AM on August 14, 2017 [1 favorite]