In my first blog post, I mentioned that I have already made multiple mistakes in financing law school. I mentioned that I applied for law school and financial aid late in the process, I forgot to consider the capital gains taxes that I would need to pay on the money I removed from the stock market in order to pay tuition, I probably didn’t save as much as I could have before coming to law school, and I didn’t open a 529 College Savings Plan even though I knew I would probably be going back to school at some point.
Given that the point of this blog is for us to learn together about financing higher education and personal finance, it seems appropriate to begin with some of the mistakes (and lessons) I’ve learned along the way thus far. Hopefully this information will help some of you avoid the same mistakes that I made in paying for law school.
This is by no means an exhaustive list of all of the many financial mistakes I made this past academic year (and before) in paying for law school and everything that goes along with that. I’d love to hear your thoughts about the mistakes you’ve made in paying for higher education and the lessons you’ve learned from those mistakes!
1. Applying late in the process.
I’m still kicking myself for this one. I applied to law school at pretty much the last possible moment. My top choice school was in California, where I could stay close to my friends and my pre-law school life, but I was only accepted to the New York City schools to which I applied.
Applying to law school (or any higher education) late in the process is not only bad for your chances of acceptance, but also for your chances at financial aid from the university itself – your best bet for help in paying for higher education expenses. The reasons for each are similar – first, when admissions and financial aid are first going through applications, the entire class needs to be filled. The further along within the process you enter, the fewer spots within the class need to be filled and the less financial aid money is available to be given out as scholarships and incentives to enroll in that particular school. This is especially true for schools that use rolling admissions processes.
If you’re like me, you might need a deadline in order to motivate yourself to accomplish something as big as applying to law school (or, you know, to make lunch), so set a deadline for yourself, find an accountability partner, or push out applying to law school for an extra year in order to be first in the door with your application – the bottom line is do whatever you need to do in order to get that application in as early as possible to give yourself the best chance of admission and a great financial aid package that goes along with it.
2. Not appealing my financial aid package.
Okay, so I actually tried to do this one. I was just unsuccessful at it. Probably because of how late I applied. Once I was accepted to Columbia (extremely late in the game – as in, too late to go to the formal, full-process admitted students weekends for absolutely no valid reason), I quickly applied for financial aid. I thought I had an advantage in being an “older” student because FAFSA considers those older than 25 entirely independent from their parents and, therefore, does not require financial information from a student’s parent. WRONG! I quickly discovered that most schools, including Columbia, ignore such a distinction, and still require parental financial information when applying for financial aid – even if your parents have no intention to help defray the costs of school.
After applying for financial aid, Columbia responded by graciously offering me a whopping $0 in aid. I was shocked given how expensive Columbia is and, though I had saved a decent amount of money for law school, I was nowhere close to being able to pay for the entire endeavor out-of-pocket. Additionally, my parents (fairly) made it very clear that I was on my own for graduate school after they generously paid for my undergraduate education (thank you, Mom and Dad!!).
I was lucky in that the other school to which I was accepted had offered me a $10,000 scholarship, so I thought I could use the offer as leverage to convince Columbia to offer me more (i.e. some) money. I immediately called the Financial Aid Office and explained that I desperately wanted to attend Columbia, cost was a consideration for me, their neighbor to the south had offered me $10k, and asked if there was anything that she could do to help me choose Columbia. She responded that I must want to appeal my financial aid decision and explained the process to do so, which basically involved writing an e-mail begging for reconsideration.
After appealing the financial aid decision, Columbia again came back with the frustrating amount of $0. I probably could have written a more compelling letter about why I deserved a match of NYU’s offer, but my best guess is that it was so late in the admissions process that they had already met their goals for matriculation and weren’t particularly concerned about ensuring I attended. Oh well.
I’m still glad that I appealed the decision, as now I know that I exhausted the formal avenues to gain financial aid through the university and won’t spend the 10 years (20 years? 30 years?) after graduation wondering if my monthly student loan bill could have been a little bit lower.
Even if you are awarded money, it’s worth it to talk to the Financial Aid Office (if you can get in the door; see my first post) about whether there are any additional grants or aid for which you’re eligible. It never hurts to ask, and this is the easiest way to reduce the overall ticket price of higher education. It also highlights just how important it is to apply early both for admission and financial aid.
3. Not budgeting my expenses carefully.
You can find the listed cost of attendance for each school on their website. This is typically the maximum amount of federal loans for which you’re eligible as a student at that school. In my first year, I found Columbia’s listed cost fairly spot on. While I didn’t spend a ton of time over the academic year pouring over my budget, I checked at the end of the year and found that I spent about $500 over their listed cost of attendance. This is a bit disappointing as my housing costs are slightly below their budget (but not much), and I spent most of that additional money on Amazon purchases (a shoe rack and jewelry holder were both definitely necessary for my awful dorm-like room) and food (let’s be real, it was all on food).
This coming year, I think I can safely stay under the budget, partly because I won’t need to buy many of the aforementioned Amazon purchases that made our apartment a tiny bit more like a home and because I’ve lived in the neighborhood long enough to know where to buy groceries and food on a regular basis. I’ll need to reduce my average monthly spending by about $50 in order to hit the goal of coming in at or under the cost of living this upcoming year. I’ll post here perhaps after the first semester to check in on how I’m doing with this budget goal.
4. Failing to consider capital gains tax for removing brokerage funds
I have invested in the stock market since I started working after college graduation. I was fortunate to have taken a senior seminar in my undergraduate business school that was dedicated to personal finance and taught by a wealth manager at one of the top consumer banks in the country. He gave us a basic investment strategy that he uses for most of his clients that I’ve followed ever since. I’ll write more about this investment strategy in a future blog post.
For our purposes today, the important thing to keep in mind is that I saved a decent chunk of my income each month and the vast majority was put into a brokerage account with low fees (I use Vanguard – not an affiliate link). My first company provided a trust that served as retirement funds and, therefore, did not offer a 401k. I maxed out my Roth IRA (we’ll discuss the difference between Roth and Traditional 401k’s and IRA’s in a later post) each year, but the limit is so low that I merely put that money in a target date retirement fund and left it alone (i.e. it wasn’t included in my retirement investment strategy calculations).
Since a good chunk of my savings was tied up in the stock market when I decided to go to law school, I had to take out that money to pay my first year’s tuition. The problem was that I stopped working in June and needed to start paying tuition in August, meaning I had to take money out in the same year that I still earned a significant amount of money (January – June). If I could have stockpiled enough cash to get me through December tuition and other education costs without drawing down my brokerage accounts until January, I could have avoided a significant capital gains tax bill (but would have also avoided the crazy bull market in 2015). I still received a small refund from my taxes (I was taxed at a much higher tax bracket since I stopped working halfway through the year, had a few donations, and was able to deduct my expenses for moving across the country for law school, which all helped), but I had planned for a much larger refund because I forgot to consider capital gains tax on the money I pulled out of my brokerage account.
There were several ways I could have avoided such a large capital gains tax bill. The easiest solution would have been to stockpile about $60,000 in cash rather than stuffing it away in my brokerage accounts. There are a couple of downsides to this solution, however. The first such problem is that it would have required a decent amount of foresight to start saving $60,000 in cash, which I very much lacked prior to law school (see also, my lack of foresight in applying to school early). Secondly, I would have missed out on a decent chunk of dividends, compounding interest, and organic investment growth by leaving $60,000 out of my brokerage account and letting it sit in cash or a near-cash-equivalent starting a bit more than a year (roughly the time it would take me to save that much money at my former job) before I actually started law school. I haven’t calculated out the difference between those gains and the taxes, but I think I probably still came out on top. However, there was a pretty significant market correction just before I had to take out some money to cover my tuition bill, which definitely hurt me as well.
That market correction brings me to another point. It was probably a mistake to have almost all of my money in the stock market just before I needed to use it. Since I lacked significant foresight about when exactly I would be attending law school, I didn’t think much about plowing all of my money into the market, but when you’re going to take out a significant chunk (I took out about $25,000 a few times over the academic year for tuition bills), market corrections can really hurt you. Just imagine if I’d needed to make a withdrawal on September 30, 2008 – yikes! Of course, I could have always left the money in the brokerage account and taken out federal loans instead.
Another option that I should have considered before removing my money from the market was to borrow enough money from my parents or friends at a low (possibly non-existent?) interest rate until I could remove the money in January (and in a year where I will have virtually no income) to reduce the capital gains tax. Perhaps some of my tax law friends can chime in on whether this would be kosher, as I am not familiar with these particular nuances of our tax law yet.
Ultimately, I probably could have benefited from the $150 or so that it would have taken to talk to a tax attorney or financial planner before taking out so much money from the market and triggering such a large tax bill. I would suggest anyone in a similar situation spend a little bit of money upfront getting professional advice about such a decision.
5. Not saving more than I did while I was working
I thought that I was doing fairly well with my savings rate before law school. At my first job out of college I was saving roughly 50% of my income on top of what my employer was putting away for my retirement (another 20%, but I didn’t spend the 7 full years there that it took to vest, so I walked away with only about 40% of what I ultimately could have vested). When I moved to the West Coast and my rent doubled for the second time in about a year, I wasn’t able to save quite as much, but it was still a healthy rate. One of these days I’ll sit down and calculate exactly what my savings rate was to share with you.
However, I’ve since come across blogs like Retire By 40 and Afford Anything that regularly profile people who save more than 70% of their income. I certainly could have hustled more outside of my job or increased my savings rate through some pretty minor adjustments. I guess no one ever thinks they save too much.
6. Failing to open a 529 “College Savings Account”
I thought about opening a 529 account a year or so after I started working. This is essentially a tax-advantaged account that can be used for educational expenses. The typical recipient is your child. However, a lesser known advantage is that the designated beneficiary can be anyone – yourself, your spouse, your niece or nephew, your grandchildren, your best friend’s mom, anyone!
Since I knew I would probably pursue higher education at some point, it would have made sense for me to open a 529 with myself as the recipient (you can always change the recipient later if plans change) to shield some of that money from the tax repercussions. If by some chance I ended up never attending school, I could have named my children or someone else as the recipient of that money.
7. Failing to open an HSA
I’m not actually positive if I was eligible for this option at either of the places I worked before law school because I’m not sure if our health insurance plan’s deductible was high enough to qualify. If it was, I missed out on some stealth super-savings because the HSA is triple tax-advantaged. Not only do you contribute to the HSA with pre-tax money, but the growth is not taxed (similar to a Roth IRA), and withdrawals aren’t subject to federal income tax if used for certain qualified medical expenses.
Given the limitations on the usage of this money, I wouldn’t really have been able to better pay for law school by opening an HSA. However, I still might have missed out on a really great savings opportunity, so it’s definitely still a mistake! And, since I ended up having very significant expenses last year when I had surgery, I could have used probably as much money as I could’ve put in an HSA to pay those medical bills.
Wow. So I made a lot of mistakes when planning, applying, and financing law school. That’s life. I also did a lot of things well, which I can cover in another post. The point is that we’re sitting down to think about the things that we didn’t do so well in the past and trying to learn from our mistakes. Hopefully this has saved you from at least one of my mistakes and saved you a decent amount of money. Share in the comments your biggest mistake in financing your education and let’s keep the learning coming!