March-April 2008

Yes! You can pay off law school loans on a county salary

Sarah Wolf

TDCAA Communications Director

You don’t have to leave your office after a few years just so you can pay off your debt and start saving. Here’s how to manage your money, pay off loans, and live well on a prosecutor’s salary.

The numbers are astounding, even for non-mathy lawyers.

Loaded with student loans and perhaps credit card debt, the average new lawyer graduates from law school with an astounding $90,000 in loans. Settled into a 10-year repayment plan, such debt amounts to over $1,000 a month in payments, according to the Law School Admission Council (online at www .lsac.org)—more than a mortgage in many cities.

But wait, there’s more.

Those lawyers who take entry-level jobs in prosecutors’ offices might earn a salary of $36,000 to $50,000, judging by a few recent job postings on TDCAA’s website. Take-home pay on a $43,000 salary—the average of those starting salaries—nets just over $2,400 each month (calculated at the 25-percent tax bracket and including federal withholdings). After shelling out $1,000 for student loans, that doesn’t leave a whole lot for rent, car payments, utilities, and food, let alone any luxuries. It’s enough to make people who want to be prosecutors leave public service after a very short time because they feel like they must choose between a job they love and the lifestyle they want.

But smart money management and advice from some expert financial types can help those saddled with heavy loans pay them off and start saving money for emergencies and retirement—without defecting to a deep-rug firm. It won’t be easy, but it is more than doable if you make smart choices early in your prosecutorial career. “Those first few years are critical with how prudent you are with your money,” says Andrew Keller, a certified financial planner in Houston. “The more you can do while you’re still single and young is critical in not getting behind in everything.” Here is advice from money wizards and career prosecutors who’ve been there, paid off that, and kept wearing the white hats.

Loan repayment options

Federal student loans, such as Stafford and PLUS loans, can be repaid according to one of four plans: standard, extended, graduated, and income contingent. (A fifth option, income-based, will be available in July 2009.) Simply choose the plan once you graduate. The interest rate on each is the same (currently 6.8 percent on new Stafford loans), but the length and amount of the repayment varies widely.

Using our example of a lawyer earning $43,000 a year and owing $90,000 in loans at 6.8 percent interest, here’s how the different repayment plans compare:

Repayment Plan     Term (in mos.)      Monthly Payments (first 24 mos.)      Total Payments
Standard               120                      $1,035.72                                        $124,286.40
Extended               360                      $586.73                                           $211,222.80
Graduated             360                      $517.86                                           $224,798.16
Income contingent 201                      $546.50                                           $159,850.13

(Go to www.ed.gov/offices/OSFAP/DirectLoan/calc.html for a repayment calculator.)

Note that by spreading payments over a longer term, the total amount you repay overall grows astronomically—but doing so leaves more money in your checking account every month. Mr. Keller advises extending your loans over the longest period you can. “That just gives more flexibility rather than being strapped every month,” he says.

Also remember that your salary will increase over the years through cost-of-living raises, promotions, and prosecutor longevity pay (which kicks in after four years of employment and now applies to all assistant county and district attorneys), so paying more each month down the road, as the repayment structure for the last three options dictates, is feasible. And you can always pay more than the prescribed monthly payment—in fact, financial advisers recommend doing just that once your budget allows it.

Visit www.ed.gov/offices/OSFAP/ DirectLoan/callus.html for a list of contacts at the Department of Education, which can help you with repayment options.

Foregoing luxuries

People’s definition of “luxury” swings wildly from “a morning Starbucks fix” and “eating out for dinner” to “annual family vacations” and “a shiny new car every three years.” But when you get right down to basics, all we humans truly need are food, shelter, clothing, and companionship. “Food” can mean home-cooked dinners and brown-bag lunches or restaurant meals every night of the week—but guess which option makes more sense for someone with a modest income?

“We always like to say we don’t want people to have to sacrifice,” says Marilyn Macha, a certified financial planner in Houston, “but there will certainly be sacrifices in those first three years with that kind of debt on that income. There’s no way around it. It’s tough if a third of what you earn is going toward student loans. You’ve still gotta make rent, and you’ve still gotta eat.”

One prosecutor in a mid-size jurisdiction notes that he and his wife ate out no more than twice a week while he repaid his loans. They also lived in an apartment rather than buying a house. (Mr. Keller also recommends holding off on buying a home until you get a handle on your student-loan payments. “The student loan payment is your mortgage,” he notes.) Another assistant DA recounts how much money he saves by buying used cars. “The single best thing I did when I started working as a prosecutor was to sell my new pick-up,” he says. “It was just like getting a raise.” He replaces old vehicles with late-model used ones, many of which still have warranties and “new car smell.” What they lack, though, is the huge mark-up of new cars.

Financial advisers say to draw up a budget, listing your after-tax income, your fixed expenses (rent, insurance, utilities, etc.), and those expenses with wiggle room (groceries, entertainment, clothing, etc.). “Be honest with the debt you have,” Ms. Macha says. “Don’t inflate it or deflate it. That’ll take the power of the debt away and put the power back with you.” Then draw up a plan (with advice below) for paying down your debt.

Good debt vs. bad debt

Ms. Macha differentiates between “good debt” and “bad debt,” and so should you. Good debt is an investment in your future; examples are a mortgage and student loans. Taking on such debt may require a hard swallow in the short term, but over the long haul, it reaps big rewards, such as a place to live, a career with growth potential, and financial security. In addition, such debt is somewhat offset because the interest is tax-deductible, so be sure to take advantage of these IRS benefits by itemizing your tax returns.

Bad debt, on the other hand, doesn’t leave anything to show for itself—think high-interest credit cards and new-car loans. Retiring bad debt first is key to digging out from under its load.

How to pay it all off

Ms. Macha tells her clients to play “the zero game”: List your debts according to how much you owe on each, and pay off the smallest debt first. (Some financial planners call this practice “snowballing.”)

Say you’ve racked up $2,000 on a credit card, you have a $7,000 car loan, and your student loan is $50,000. Make minimum payments on the car loan and student loan, then put all of your extra money into that credit card until the balance is down to zero. (Hence the name of the game.) Then turn your attention to the car loan; add its minimum payment to what you’d been paying on the credit card until it’s also down to zero. Once the car loan is cleared, do the same with the student loan. Macha likes this game because “it puts psychological power back with the borrower,” she says, and it efficiently pays off what you owe. It’s also very satisfying to cross off debts one by one.

An emergency fund

Once you’ve retired bad debt but you still have student loans, it’s wise to kick a little money into a savings account, even if doing so means you pay off your student loan a little later. “Things happen,” Mr. Keller notes. “Cars break down. Family members get sick. You need to have a fund for emergencies.” Be creative in eking out such money from your budget. Rather than snowballing an extra $300 toward your student loan, for example, toss $150 toward the loan and send the other half into savings. “I used to say you can have it all,” Ms. Macha says, “but I think having it all is completely overwhelming. You can’t—not right away, anyway.” Contribute to your emergency fund until you’ve built up a couple months’ salary, which both Keller and Macha say might take a couple of years. But it’s worth it “to allow yourself some cushion,” Keller says.

One assistant prosecutor agrees wholeheartedly. “Salt away some cash so that unexpected (but common) expenses like water heaters and insurance deductibles do not get put on plastic,” he says. That will prevent racking up more bad debt, which you worked so hard to eliminate.

Retirement contributions

“Retirement would be the third bucket” for contributions (after bad debt and an emergency savings account), Keller says. Most prosecutors don’t have a choice about putting money into retirement—the most common pension plan for county offices, the Texas County and District Retirement System (TCDRS), actually requires every non-contract employee to sock away a certain percentage of each paycheck; in Harris County and several others, for instance, 7 percent of employees’ paychecks go straight into the TCDRS. That money is pre-tax, so it effectively lowers your (admittedly already low) income and reduces what you owe in taxes every year. Employers match your contributions heartily—some more than double what you put into your pension fund. Because each county has its own contract with TCDRS, you’ll need to check with someone in your office to find out what your county’s plan includes, or you can visit www.tdcrs.org for more information.

So if you’re automatically setting aside a certain percentage for retirement, isn’t that enough? Financial advisers say no; they usually recommend socking away 15 percent of your pre-tax income to a retirement account, which is of course daunting to new prosecutors who have student loans hanging over them. But once you have eliminated bad debt, carved out money for emergencies, and adopted good habits about spending and saving, you should consider ramping up your retirement fund with an additional account. The one advantage young prosecutors have, when it comes to retirement, is time. Even small investments, when compounded over decades, can grow exponentially, but you must start early to take full advantage.

Ask around your office to find out if a 403(b) or 457 plan is available. These are essentially 401(k) accounts for government employees that let you invest a percentage of your pre-tax income; your employer may match part of what you kick in—a bonus you can’t pass up. “Retirement contributions would not be a priority unless there were some sort of match,” Mr. Keller says. “Then it might be advantageous to put in the minimum to get the match because that’s free money. It’s the one break you’re getting.”

Even without an employer’s matching contributions, throwing a little extra money into a retirement account early in your career will reap rewards later on. To reach the full 15-percent contribution, use some sneaky methods, and start early while you’re still in save mode. Send cost-of-living raises—those annual or biennial boosts of 2 or 3 percent—directly into a retirement fund. You’ll never even miss the money because you’ll live on your old salary just as you always did. If you get a raise, sweep all or part of it into retirement accounts.

“Paying yourself first”—setting aside savings and retirement money before paying any other bills—is a smart practice to start when you’re young. If you begin early, these good habits will become second nature. You’ll adapt to your income and after a while not miss the luxuries you’re giving up. And after several years, you’ll hit the 15-percent mark, and then you can send future raises and windfalls toward vacations or other luxuries.

Student loan forgiveness

Regular readers of this journal have likely been eagerly following the progress of bills in the U.S. Congress that would forgive the federal student loan balances of those who have spent a certain number of years in public service. The main bill on the National District Attorneys Association’s agenda, the John R. Justice Prosecutors and Defenders Incentive Act, is still winding its way through Congress (we will pass along information as it becomes available), but a different bill passed last year.

The College Cost Reduction and Access Act took effect October 1, 2007. Among other things, this federal legislation cancels the balance of interest and principal due on any federal direct loan (including Direct Stafford, PLUS, and consolidated loans—Perkins loans are not included, but see below for information on those) that is not in default for borrowers who 1) have made 120 monthly payments on a direct loan after October 1, 2007, as part of a standard, extended, graduated, income contingent, or income-based (available in July 2009) repayment plan, 2) are employed in a “public service job,” which includes prosecution and law enforcement, and 3) have been employed in a public service job during the 120-payment period.

There are currently no details on signing up for the program because it is so new and because no one can even apply for loan forgiveness until 2017. Borrowers should visit the U.S. Department of Education’s website for more information at www.studentaid.ed.gov/PORTALSWebApp/students/english/index.jsp. A PDF of frequently asked questions is also available at www.tdcaa.com; search for “loan forgiveness.”

Note that the terms of this loan forgiveness apply only to those at the beginning of their repayment schedule; it won’t help people who have almost paid off their debt. (Public service loan forgiveness is prospective, meaning that all 120 payments must be made on or after October 1, 2007.) Rather than counting on such forgiveness to wipe out your debt, view it as a windfall on the horizon, and work hard in the here and now to make payments on your loans (defaulting automatically disqualifies your forgiveness application) and keep your finances in order.

Perkins loans, unlike these other federal loans, may be eligible for deferrment or cancellation if you qualify—and one means of qualification is working in law enforcement. Go to www.ed .gov/offices/OSFAP/DCS/perkins.deferment.cancellation.html#Def-Service to read more about your options with these loans.


Paying down a huge law-school loan is a difficult task made tougher by a modest starting salary. But many prosecutors have managed to pay off their debt and stay in jobs they love by eschewing luxuries and focusing on their long-term goals rather than what’s happening right now. “It can be daunting,” Mr. Keller says, “especially because you went to school to be attorneys, not to budget and manage money. But get professional advice, and understand your cash flow and budget.”

“If you can see the bigger picture by taking a step back and knowing that this career is what you want to do, handle that decision with integrity,” Ms. Macha suggests. “If prosecution is worth it, then go for it. Don’t look back.” D

Editor’s note: Marilyn Macha and Andrew Keller are certified financial planners at Macha & Associates in Houston; they can be reached at 713/355-9910.