Advice

US firm trainee: ‘Should I pay off my student loan in one go?’

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‘Qualification is by no means a given’

In the latest instalment in our Career Conundrums series, a trainee solicitor at a US law firm is unsure how to go about paying off their student loan given their “predictable but as of yet unguaranteed future income”.

“This is a question to anyone with the goodwill or sheer boredom to answer:

First seat trainee at a US firm, so years one and two are in the fifty-ish range. Qualification, which is by no means a given obvs, will lead to the big ol’ six figure salary which the authors of these articles love writing about so much.

Student debt is currently a cool £40k with interest due to hit 4.5% once they process my new employment details. Basically, what is the standard strategy for people in my position (trainee with a relatively decent whack and a predictable but as of yet unguaranteed future income) with regard to paying off their student loan? Had a look at a few Martin Lewis pieces but there’s only so much of those things a guy can read! I may or may not have the savings to be able to pay the whole thing off in one go (with precisely £0.54 left).

Ta in advance.”

If you have a career conundrum, email us at team@legalcheek.com.

40 Comments

Anonymous

yes

(8)(11)

👀

The comments on this will be a madness

(29)(0)

Sounds like he just wants to gloat re new job

I don’t even understand the question cos there’s no information, why wouldn’t he pay it off? What is his plans otherwise? House deposit? Or does he live with family and will inherit a home anyway? Big wild holiday? Does he have even more debt? Even if he crashed and burned out of this big US firm life he’d be debt free if he cleared it all now?

(11)(26)

Terrible financial advisor

Use the cash to buy an NFT of a monkey in a tuxedo

(105)(0)

Anonymous

I would say it really depends on your current interest rate and the alternative uses for those savings.

If you stand to make a greater return on your savings than your current rate of interest by putting the money elsewhere, I would personally do that. With the current inflation rates and market liquidity (Ukraine crisis aside), I would expect there to be an investment opportunity out there which will likely give you better returns than the interest being charged on a typical student loan. Some due diligence and sound financial advice will be in order here.

That said, if you plan to simply keep your savings in a bank account, then it would be far more useful to pay off your loans because those will just compound in the future.

Also very important to maintain an emergency cash fund in all circumstances. Something that would at least cover three months of living expenses plus an emergency expense. You never know what happens! Even with the job security of being a trainee.

(30)(2)

anon

Pay off a chunk of it (half or something) so that interest is accruing on a lesser amount. Then overpay for the rest of it each time you’re paid to get it down quickly. Don’t just pay off all of it, that’s not the best way to spend your money.

This is one of the advantages of US firm salaries. They will often have money left over to pay off their student loan quickly. Those working at UK firms cannot pay it off as quickly, and so they end up paying more in the long run.

Don’t assume you won’t get a position at qualification. At my US firm two trainees didn’t get a position they wanted, but they both easily got positions at other US firms.

(19)(1)

Boomer

What’s a student loan?

(26)(3)

Boomtown Ratted

It’s like a grant but you have to pay it back when you’re working at Burger Mac C!

(0)(0)

Anon

The bigger problem will be interest rate will rise with inflation in September – potentially as high as 12%. Not a bad idea to think of closing the balance if you can afford it BUT you would have to be pretty sure you would stay on high pay for the next decade or so and would have huge deductions coming your way otherwise isn’t really worth it.

(13)(0)

Forever Associate

Save 6 to (ideally) 9 months’ realistic expenses: rent, utilities and usual bills, a realistic amount for groceries and maybe a pub pint or two per week. Have that in a separate savings account or under the mattress etc. You will be amazed at how long it takes to build this in London, even with your current salary level which is by all measures already impressive.

Assuming you did the LPC/TC straight out of uni and your around 25 years old… once you have that cash set aside, get rid of that student loan ASAP from your six figure NQ-1 PQE salary. It would be different if this country was willing to deduct gov’t student loans repayments from salary PRIOR to tax, but that’s far too helpful.

Now for someone a bit older, like early 30s and recent NQ or soon to be (as I know can be common in the US firms), my strategy would be the opposite. Once the expenses savings are set aside, rather than pay down the loan more quickly I would invest as much as possible, with the majority in a low-fee index tracker, (with hopefully maxing out your ISA allowance) as well as a couple more aggressive plays, aiming for about 15% average ROI per year over say 5-10 years, and just service the interest on the loan. But even with this strategy I would hope the £40k loan is paid off by 3 or 4 PQE, assuming you stay at the American firms.

(10)(13)

realist

Pray tell where you think this “15% average ROI per year” can be found without taking SIGNIFICANT risks. If only it were that easy…

(28)(2)

Forever Associate

Going forward, it would take some effort and I concede maintaining that level could prove difficult, but not too far off. I am also aware that past performance is not the best prediction of future return…

HOWEVER, the Vanguard S&P 500 index fund averaged nearly that level of annual return over the past decade. And that’s just a low cost index. Some play on riskier share options could have easily net a compound annual return around 15-17% for those 10 years with a medium/medium-high risk portfolio (which is fine when relatively young).

Live a little. It’s just money after all.

(1)(16)

Anonymous

Have you not been following the news since November or?

The QE/low-IR driven stock surge is over. Giving OP this kind of advice would have been forgivable a year or two ago, but not now.

(4)(0)

Archibald Pomp O'City

“I am also aware that past performance is not the best prediction of future return…”

And then you go on to rely on past performance to make all your ensuing points. You dimwit.

(0)(0)

ded

15% ROI on average over 5-10 years?

In this environment?

😂 go back to your textbooks fresher, r/wallstreetbets isn’t doing your brain any good

(30)(2)

I hate boomers

Pretty easy to do if the equity you are investing in is growing > 15% + > its valuation compression cause by macro-economic environment.

Just because you cant spot opportunities doesn’t mean others can’t.

(3)(24)

ded

oh yeah, you definitely got banned from r/wallstreetbets, with bold claims like that they’d ask you to prove your positions or face a ban

(6)(0)

Finance Bro

LOLOLOLOLOL 15% in peak inflation, biggest rate hikes in history and most debt on the federal reserve (and BOE) balance sheets.

LOLOLOLOL no FANG to inflate the S&P for the next 10 years fresher, off you trot to coinbase, some BEEPcoins may suit your goals.

(3)(1)

You don't sound like a finance bro but I hope that you can afford those margin calls.

Is there a point to this post?

(1)(1)

Finance bro

Why on earth would you do that?

Unless you:
– currently have >50k savings
– already have a property

Student loan is a liability, a liability with a low interest rate relative to other loans/mortgages (albeit rising giving the nature of a higher rate environment). So if you do, as the post suggests, have >40k savings, why don’t you use this (and your salary) to get a mortgage (asset- once owned). I also assume you are renting in London which is again a liability by definition, most likely setting you back >1200 a month.

It is also worth noting, (as in the US currently) rules surrounding student loan debt can change, labour promised X,Y,Z in the last election.

(7)(5)

Plan 1 privilege

That was true and good advice for those on plan 1 loans (tied to the BoE base rate), but the rates on plan 2 loans (which most current trainees will have – I was plan 1 but am old and qualified last year) are way higher and tied to RPI, our punchiest measure of inflation. They are much more expensive than, for example, mortgage debt.

In fact, mortgage debt has been so cheap recently that this is only really good advice for plan 1 borrowers because student loan repayments are income based and not a fixed liability, so if you’re out of work or take a pay cut you don’t need to find the cash. I took out an 85% LTV mortgage in January that is 0.07% CHEAPER than my plan 1 student loan.

If I were in the OP’s shoes, I’d probably work out how much I needed for a property deposit when their salary goes up on qualification, work out how much I expect to save in the interim, and put that money into the student loan repayment NOW, building up the rest of the deposit with my target date in mind, but there are plenty of reasonable approaches.

(3)(2)

Finance Bro X2

Recently? Yeah, March 2020 to Jan 2022- 0 rate environment, rate hikes of 5% every quarter now till inflations cools off.

If my nan had wheels she’d be a bike springs to mind..

(1)(1)

Plan 1 privilege

Mortgage rates track base and so do plan 1 loans – only makes a difference if mortgage spreads increase.

(0)(0)

Alan

Lots of US firms provide you with free access to wealth management advisors. Seek their advice on the point. Done.

(10)(4)

Anon

Every wealth management advisor I’ve ever spoken to (from the likes of SJP) just tell you nonsense like maximise your pension , invest in ISAs – which even a simple Google would tell you. Nothing but vultures looking for their cut

(7)(0)

lol

two tax wrappers? Seems like sound advice…?

Maybe you enjoy CGT

(1)(1)

US senior associate

LOL anyone who goes to someone like SJP is a complete fool. Just google about them on reddit or moneysavingexpert. Only do this if you want to lose your money.

(1)(0)

Anonymous

Student debt sucks and when you’re on US phat whack the monthly repayment amounts and repayments on bonii are v high – but I wouldn’t leave yourself with no savings!

(1)(1)

Kirkland NQ

Pay it bro. The last thing you’ll want to do when you get the big Q is worry about loans, your time is better spent deciding which Lambo to go for, or where in French Polynesia you should spend the summer.

(10)(3)

Makes You Think

Pre-2012, it’s 1.5% and has been plenty lower than that. Kind funny that someone with £40-60k student debt, through waiting for TC to start, through TC, through associate level to paying it off in just a few years, is probably spending £15k in interest, where someone who started uni in 2010 and paid off their student loan slowly over a decade may have spent £3k in interest.

So not are your loans larger – it used to be 3k a year, then it turned to 9k a year – but you also pay more interest on it. Because of the unfortunate accident of your birthdate.

(9)(0)

Anonymous

Love how Legal Cheek has made this seem as though its something only a ‘US’ trainee could do. Most decent firms now pay 50k minimum for trainees and so realistically this option is open to any of them (notwithstanding some of the risks mentioned above).

(12)(0)

Yesman

Literally though… even the very highest-paid US trainees are on £60-65,000. The mahoosive NQ salary doesn’t matter at this point, OP has two years on a lower salary ahead of them. Even if they qualify into a US firm in two years’ time, they may not enjoy that salary for very long (hi attrition!), and it probably won’t change their mortgage calculations very much.

(4)(0)

Elo

If you can get rid of the debt, get rid of it.

It took me a few years at the Bar and that was when fees were £1K a year.

(5)(0)

US senior associate

The AVERAGE size of a house deposit for first time buyers in London is £64k.

Personally I would prioritise buying a flat above paying off the student loan. The money you’ll be saving by paying a mortgage rather than renting is worth it. You can start overpaying your student loan then.

Even on a US NQ salary, after tax and living costs that’s still several years before you’ll be able to afford a deposit on a pokey 2-bed flat.

(3)(1)

Anonymous

+1 for it depends

(0)(0)

ANONYMOUS

You are extremely blessed to be in your position mate. I am an Associate in a top 50 supporting my family by myself. I am in overdraft every month a week before payday.

I would say wait until you have a confirmed role. You might that 40k. I would love to have just a quarter of that in savings…

(7)(1)

elite newcastle 1st year

then move? no one asked for your sob story

(4)(11)

ANONYMOUS

I’m in the largest firm in my city. Move where? Firm? City? I am caring for a very ill relative and can’t exactly move city. My current firm provides me with the flexibility to care for that relative twice a week. My children are settled in school and have assessments they are preparing for. There are many other reasons why I cannot simply “move”.

Baby faced, idealistic, snotty nosed juniors always think life is so simple. Wait until something happens that complicates your life. You are probably a privileged little brat, judging by your reply to my comment. Eat dirt, among other things.

(5)(4)

elite llb @ newcastle (68% average first year aka basically a first)

1. shouldn’t have trapped yourself in a city/region with no alternatives

2. should’ve made real £ and outsourced the caring to someone else

3. you presumably chose where you settled down and which school your kids go to – this goes back to 1, you should have chosen to settle down in an area with more opportunities re: schools

(2)(4)

Alan

I am not talking about SJP. No US firm has a relationship with SJP so far as I am aware.

(0)(0)

Comments are closed.

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