Saturday, September 25, 2010

Not Rich At $250k - Great Post At the Legal Dollar

I haven't been following the story about the UChicago Law professor with a doctor wife who complained in a blog post about not feeling rich even though his combined family income is more than $250k. The professor took down his post after getting a ton of flack for his whining when so many people would kill to make even a fourth of his family's income, but a BIDER reader gave us the cached link to his post which you can go to here.

When I first read the post, I immediately thought to myself, this guy doesn't feel rich because he probably owns at least two luxury cars and a McMansion in a very wealthy suburb of Chicago with more space than his family actually needs. In short, I could tell from the blog post that like so many lawyers who win the job lottery and end up in Biglaw or teaching at a top law school, this professor and his family spends well beyond their means even when they earn more than most of us could ever dream of.

The Legal Dollar proves that my initial conclusion about this law professor to be correct with a post that explains the full story behind this professor's lifestyle and the total amount of student debt he and his wife still have 12+ years after graduating from law school. This professor and his wife still owe more than $500k in student loans. Don't feel sorry for them. They should have spent their first several years out of school focused on paying off their loans instead of taking out more loans for their McMansion, but that is a mistake that many Americans have made. I have heard so many stories of seemingly upper-middle class families who lose everything because most of what they have was bought with credit cards and loans. I personally know people who make $100k but still struggle to pay the bills because they HAVE to have that nice apartment in Manhattan even if it means paying triple the amount of a smaller apartment in Jersey or the Bronx:
...Some commentators have been critical of the Professor, but let's take a
look at his situation as a way for young associates and those considering law
school to gain insight into what their life will be like if they are lucky
enough to win the law school lottery and earn top dollar. I previously
talked about why 145K/year does not go as far as new law grads think it will, but now we can get an example of what life is like for a lawyer more than 10 years out of law school.

First, read the articles linked above and let's set the context. The Professor is a 1998 graduate of law school and spent time at Kirkland & Ellis (which typically pays top dollar.) He is also married to a doctor who apparently also makes at least a $100K/year contribution to the home.

The first thing that I note is that although the Professor has been out of
law school for 12+ years and spent time at K&E, he and his wife still have
more than $500,000 worth of student loans. We don't know the exact split
of who brought what debt to the marriage, but the existence of the debt even
after 12 years in practice should help disabuse law students of the unrealistic
idea that they will somehow just "pay back their student loans in 3 years or
so." Here's someone making top dollar with a wife working a high-paying
job and they still have $500K in loans after 12 years - yikes!

For $500K in loans, assuming an interest rate of about 6.8%, they pay
$34K/year after taxes (most likely about $51K/year pre-tax) IN INTEREST
ALONE! It's hard to know what the actual total payments are, but figure an
additional 20K/year after taxes has to go to principal (about 30K before
taxes.) This means that about $80K of their pre-tax income goes to loan
payments.

What's my point? Student loans are just a monkey on your back that you will be carrying for decades. The Professor has been carrying his for 12+years - and will probably be carrying it for 20 more. For those considering law school, recognize that this means you - even if you win the "good job lottery" that is harder and harder to win these days.

Second, we note that the single biggest expense for the Professor and his
wife are TAXES! More than $100K/year. In my experience, potential law students - and even young associates - are consistently underestimating just how big a bite taxes take as your income increases. For example, remember those things like personal exemptions and loan interest deductibility that you get to deduct at lower incomes? Well, they disappear when you go higher. Also, the Alternative Minimum Tax (AMT) starts to take a much bigger bite. But it's not just federal income tax - it's state income tax, Social Security, and Medicare taxes (FICA), too. Right now these probably consume about +40% of the Professor's income.

...Third, the last thing that struck me about the articles is that the Professor mentions that his second biggest expense is his mortgage - and that it is less than $100K/year, but more than his student loan payment - and that his property tax is about $15K/year. According to Bankrate, the P&I payment on a $1.5M home loan over 30 years at 5% is about $96K/year. $80K represents about a $1.3M home loan.

Also, I am generally familiar with the Chicago real estate market and (although some suburbs deviate and are more expensive) a home that requires about $15,000/year in property tax probably costs somewhere in the $1.2-1.7M range.

This leads us to two points: First, even though the Professor has been out 12+ years and his wife works as a doctor, they probably don't have a large percentage of equity in their home. Second, the the Professor owns too much house. The total housing expenses including mortgage and tax are near to or in excess of $100K/year - which is frankly too much.

In summary, even if the Professor and his wife are paid $400K - as some commentators have suggested - they are most likely out about $100K in income taxes, $100K in mortgage and house taxes, and $80K in loans. That gets them down to about $120K, which after private school for the 2 kids (probably about $30K/year), a 401k contribution ($33K/year), and some base living expenses
for food, utilities, cars, etc (figure $3000/month = $36K/year) - the Professor
and his wife are left with a total of $21K.
This should be a lesson for anyone who still thinks that taking out $100k+ in student loans is a good investment even to go to a good school. Unless you are willing to live frugally for a decade or longer, you will have the student loan monkey on your back for the rest of your life, even if are lucky to earn in the six-figure range.

We all want nice things and to live comfortably, but there is a point when some people just become flat out greedy and when they hit a rough patch, they aren't willing to downgrade to a smaller house or a used car. They'd rather live on credit and pay off hundreds of thousands of dollars in loans until they die before giving up the luxuries they've become accustomed to. That is not the way to live. Unfortunately, people aren't realizing this until it is too late. This seems to be the case with this UChicago professor. Don't feel sorry for this guy, but do realize that a six-figure salary does not mean you are living the high life when you have six-figure student loans to pay back and you expect to send your kids to the best private schools, colleges, and graduate schools.

17 comments:

  1. I don't necessarily feel sorry for the prof (and even less for his doctor wife since she's virtually guaranteed a good job because of the shamelessly anti-compeitive medical field that she works in)but I take issue with the subtext of your post.

    I went to law school with expectations that I was delaying gratification and would be able to afford nice things and unique opportunities for my children. I didn't go to law school so that i could live in a hovel for a decade plus. I generally think that the problem is that these people are over-taxed. You've noted quite correctly that their taxes are likely over 100K a year (property and income) and even more with FICA FUTA and SS. You've also done an honest job of pointing out that there are AMT issues and loss of deductions when you hit the higher income levels.

    With bigger bites taken out of productive people who delay gratification every year (and especially during Democratic administrations) they resort to credit to have the life that they want. Look at the life of a young K&E lawyer. He's gone through three years of hell in law school, works insane hours at that shithole K&E and then is told that he needs to live like a pauper for 10 years or so before he enjoys the fruits of his delayed gratification. Is this a deal that any sane person would strike (especially if you know how bad it is to work big law)? I don't think so. The policy of taxing the productive people is, well, counterproductive. 100K+ is just too much in taxes.

    I accept your point that the reality is that high taxes are here and its crazy to live high on the hog when you have that much in debt. But I think the prof has a point and especially if you want productive people to have any incentive to continue to delay gratification and invest in education.

    Personally, I wish that I had taken a 18 months off to travel the world instead of go to law school it would have taken less time, it would have cost me less, it would be more interesting to talk about and I wouldn't have the scarletts letters "JD" on my resume. but then again, I had to go and do everything right.

    ReplyDelete
  2. proportion. percentage. the same percentage of a bigger number is guess what? a bigger number than the same percentage of a smaller number.

    ReplyDelete
  3. "The policy of taxing the productive people is, well, counterproductive. 100K+ is just too much in taxes."

    First of all, he's a professor, not a "productive" person.

    Second, $100k is only "too much" if it's too big a percentage of your income. $100k in taxes on $160k in income is too much. $100k tax on $400k income is not too much. $100k tax on $1,000k income is too little.

    ReplyDelete
  4. It sounds like this guy would be financially better off if they went with a slightly smaller house that is still in a good neighborhood and then redirected the money that they saved from mortgages and property tax towards their student loans.

    I don't know how much he and his wife took out for school and medical school, but, based upon what tuition was like about 12 years ago, I can't imagine that they took out a combined total of $750-$1 million dollars and have only now just paid off to the $500,000 mark.

    Either there was a gross sense of entitlement ("I am a professor, so I should be able to live like Elton John if I want"), or they are just terrible with money.

    I have friends who are constantly poor because they don't know how to manage their finances, and part of the mess is that there are all sorts of things out there that look like great deals for the unwary, but are actually meant to exploit these people who don't do any research and who are only thinking of the short term. Yes, there is Income Based Repayment for your loans, but you're going to end up paying about 3-5 times what the loan was initially worth, even if it sounds like a great deal that the lenders will forgive the amount remaining after 25 years. (I may have paid $300,000 more for this loan because I used IBR, but at least I didn't have to pay back that remaining $10,000 that I owed!). Yes, you can defer your loans for another 6 months while you buy that great house, but you have just compounded thousands of dollars of interest to your final payment. Yes, you can cash the equity out of your house and buy a car, but you could have bought a smaller car and used the bank's or dealer's financing and have paid less in interest than you would have in paying back your home equity loan.

    And I'm not knocking people who went on those programs because they had to. I'm talking about people who only used those programs because they could. The professor is a prime example. He's crying now because he wanted the lenders to treat it like it was free money. It was probably years of "lender X told me that if I called up lender Y and had them do Z that I can get this loan that will give me a much bigger house!" without caring in the slightest that none of these people have his interests at heart.

    ReplyDelete
  5. 2:18:

    Great point about prof not being productive. Point taken. but I disagree with you that 100K taxes on 400K is a fair amount of tax.

    If the idea is to make things "fair" let's tax accumulated wealth, not income. taxing income is the clever slight of hand that the warren buffets of the world have pulled over on everyone. if we really want to make things fair, then we'd tax accumulated wealth (like the estate tax). i think the truely rich have chosen to support high income tax because they have more than enough income to tax and to still have the high life. I propose that we tax all accumulated wealth over $10MM at 90%. Talk about the revenue that would raise!!!

    ReplyDelete
  6. Regardless of overspending fools and an entitled public sector that votes itself into bankruptcy....

    The fact is there are billion-dollar investors who gamble and ruin entire nations. They remain rich even when they lose big or destroy the economy.

    Their propaganda keeps us blaming ourselves for everything bad. They keep us voting for republicans or democrats, and any third way gets branded as radical... meaning "evil" presumably.

    ReplyDelete
  7. @10:50: I agree that taxing wealth rather than income is a good idea, though when you get into 90% land, you actually are going to discourage people from going above that mark, which means you stop having anything to tax.

    Estate ("Death") Tax is a great idea. 50% tax on inheritances over $1 million. Doesn't discourage anyone from accumulating wealth during their life time.

    Also, perhaps a progressive capital gains tax. Instead of a flat 15%, decrease it for smaller amounts to help people who are investing mainly for their retirement (though maybe we should increase it to get people into more stable investments instead of gambling), and increase it for amounts that are pure wealth accumulation.

    The mansion tax that New York has is also a good idea (1% tax on all property transfers over $1 million).

    ReplyDelete
  8. But do the people who have accumulated wealth > $10MM really do anything more anyway? I doubt it.

    ReplyDelete
  9. my ideal tax system would be based on a consumption tax and a whopper of an estate tax. i think we should tax consumption of everything and you could make the rates progressive. Say a very low percentage of .05% - 1.0% on basic necessities such as food, clothing and perhaps low rent housing. Then it could go up dramatically on items like homes worth more than $5MM. The tax could be 15% or so.

    No tax on income, captial gains etc. encourage people to invest and create new ideas. But when your life is over, your estate is taxed. No one could resonably argue that there have less incentive to work and produce. Younger generations would have greater incentive to work since they can't count on the inheritance (no more paris hiltons or ted kennedys thank goodness) and it would be great stimulus towards the end of ones life.

    ReplyDelete
  10. All of these taxes don't mean anything when they are spent by politicians expanding their own power. Programs will be as bankrupt as ever and the government demanding more from us unless choices are made not to spend on nebulous feel-good agendas like "the children" and "our future".

    ReplyDelete
  11. Support the Franken/Dodd bill (Fairness for Struggling Students Act (S 3219)) and the house version (Private Student Loan Bankruptcy Fairness Act (HR 5043)) which will stop the discrimination against students and allow private student loans to once again be dischargeable in bankruptcy. HR 5043 has been voted out of subcommittee and is now in the House judiciary committee. S 3219 has also been voted out of subcommittee and is in the Senate judiciary committee. Call your Congressmen, Senators Franken and Dodd and members of the House and Senate judiciary committee to show your support. Time is of the essence.

    A good example of how the banks actually write legislation is the bankruptcy reform legislation of 2005. In the bill Congress produced, private student loans were no longer dischargeable in bankruptcy. The banks were able to write this bill because students have no organization or lobby paying favors to congressmen.

    I have seen it done with mine own eyes. The bank's inside counsel draft the legislation and then pass it on to congressional staffers that they have quid pro quo relationships with, often the staffers and bank's attorneys went to the same schools, and the bills are then introduced into committee in the form drafted by the banks.

    No national purpose was served by this legislation. In fact, the bill has served to cause many who tried to better themselves through higher education to wind up as indentured servants slaving away for banks. American's families are impoverished and generations will live in poverty because the banks pay legislators lucrative rewards in the form of campaign contributions and high paying jobs.

    These private loans, because of little regulatory oversight, often become unpayable because the interest and fees increase to an amount larger than the original loans. The only reason former students are discriminated against in bankruptcy (other bank loans and even gambling debts are dischargeable) is because students have no lobby, and the corrupt political process favors the disproportionate influence of the banks which use the legislative process to do their own bidding.

    Americans should not have to live in indentured servitude because the economy cannot provide a job for them at a living wage, often because the banks and corporations use their undue influence in the political process to shape the economy for their own purposes, not for the good of the country.

    ReplyDelete
  12. Support the Franken/Dodd bill (Fairness for Struggling Students Act (S 3219)) and the house version (Private Student Loan Bankruptcy Fairness Act (HR 5043)) which will stop the discrimination against students and allow private student loans to once again be dischargeable in bankruptcy. HR 5043 has been voted out of subcommittee and is now in the House judiciary committee. S 3219 has also been voted out of subcommittee and is in the Senate judiciary committee. Call your Congressmen, Senators Franken and Dodd and members of the House and Senate judiciary committee to show your support. Time is of the essence.

    A good example of how the banks actually write legislation is the bankruptcy reform legislation of 2005. In the bill Congress produced, private student loans were no longer dischargeable in bankruptcy. The banks were able to write this bill because students have no organization or lobby paying favors to congressmen.

    I have seen it done with mine own eyes. The bank's inside counsel draft the legislation and then pass it on to congressional staffers that they have quid pro quo relationships with, often the staffers and bank's attorneys went to the same schools, and the bills are then introduced into committee in the form drafted by the banks.

    No national purpose was served by this legislation. In fact, the bill has served to cause many who tried to better themselves through higher education to wind up as indentured servants slaving away for banks. American's families are impoverished and generations will live in poverty because the banks pay legislators lucrative rewards in the form of campaign contributions and high paying jobs.

    These private loans, because of little regulatory oversight, often become unpayable because the interest and fees increase to an amount larger than the original loans. The only reason former students are discriminated against in bankruptcy (other bank loans and even gambling debts are dischargeable) is because students have no lobby, and the corrupt political process favors the disproportionate influence of the banks which use the legislative process to do their own bidding.

    Americans should not have to live in indentured servitude because the economy cannot provide a job for them at a living wage, often because the banks and corporations use their undue influence in the political process to shape the economy for their own purposes, not for the good of the country.

    ReplyDelete
  13. Forgive the guy for wanting to live in a decent house. I suppose anyone making more than 100K should live in a rent controlled flea bag in the Bronx to make ends meet.

    Try servicing student loan debt, living in a DECENT house in a DECENT NYC suburb, owning a DECENT car and having 2 kids, and paying all the expenss concomitant therewith and then get back to me on whether 250K household income makes you "rich" in the NYC metro area, because my wife and I make that and we are lucky if we "save" (i.e. pocket) anything outside of a 401k and mortgage payments and my house is a random 4 BR in a relatively decent suburb and I own two cars, one 10 years old and one nine years old, neither worth more than 6K.

    ReplyDelete
  14. Two simple comments:

    1. In the Eisenhower age, the top tax bracket was at 90+%. The economy expanded and the wealthy were, well, wealthy. The only "too much tax" is when the government makes bank; the only "too little tax" is when the government is in grave debts. There is zero connection b/t income tax and dropped productivity.

    2. The reason a "decent house" costs so much is because endless amounts of ridiculous credit and government programs have pumped the housing market to ridiculous levels and our politicians refuse to let prices come back to normal b/c a bunch of suckers like the professor would lose a lot of invisible equity and the illusion would be further burst.

    This schmuck is the victim of his own ridiculousness and an entitlement society that inflates prices beyond worth and then blames their fiscal inadequacies on the taxes that everyone in the same market (here, upper-class goods) pays (meaning - gasp! - they have NO effect on prices!)

    ReplyDelete
  15. Well said, J-Dogged.

    Gawd, are people seriously trying to defend this professor's actions? He puts a bad face on the student loan crisis for all of us. The only good thing about being born poor is that I know how to manage money and survive in a year on what many of these asshat whiners make in one month.

    This guy basically has made six-figures since graduating from law school 12 years ago when tuition rates were a fraction of what they are today. Instead of doing the responsible thing and paying off his loans with the $150k+ he was probably making at K&E and now at UChicago, he allowed his loans and interest rates to accrue while he moved into a $1.2 million house. If you don't call that irresponsibility, poor money management, and a huge sense of entitlement then it is obvious we both come from completely different worlds.

    Just because someone make $250k does not mean they are entitled to put their loans on the backburner and live like a celebrity. I find it amusing that people like this professor are the same folks who call unemployed graduates with student loans who will never have the same job opportunities or poor people who are barely surviving on welfare, social security, or employment benefits "entitled" while they whine about not being able to pay off their million dollar mansion and send their kids to private school. For once I'd like to see the top 2% of this country actually sound GRATEFUL for what they have. Anyone in the $250k range whining about their taxes and McMansion will not get any sympathy here.

    ReplyDelete
  16. Hardknocks - Thanks for the shout-out!

    ReplyDelete
  17. I know this is crazy, but there's a lot of us reading this blog. All of us are exceptional writers and trained advocates. How do we change the conversation into how to organize and fight back? Hit back at the people who did this do to us? I'm not saying I have the answer, but you can't let the schoolyard bully rub your face in the dirt every day without someday hitting him in the mouth.

    ReplyDelete

 

Blog Template by YummyLolly.com - Header Image by Arpi