Paying for higher education is a huge obstacle these days – and graduate school is the worst. Graduate education typically does not have the scholarships or need-based aid given in undergrad. This leads to graduate students typically borrow three times what undergraduates do. I knew I was on my own saving for law school. Thus, I worked after college and saved $65,000 to pay for law school. However, my method of saving was a bit dodgy/controversial. Read on to see if you think this was the right approach.
An Inauspicious Start
It was spring of my fourth year at college. I was barreling toward graduation with a job offer from the federal government. This was pre-recession so this was more or less average, instead of exceedingly lucky. And I, as a completely entitled millennial, pictured the next 30 years of my life working in a gray cubicle under fluorescent lights in this office.
That idea frightened me (though I tell myself the sexual harassment was the bigger issue with that job). When one of my friends excitedly told me she was going abroad for a year with some of our mutual friends, I jumped ship at the chance.
I spent one year abroad, where I saved nothing, My first six months back in the States, I floundered about at temp jobs, making $10-20/hour. Still, I managed to save thousands of dollars because I was living at home.
This is probably not the start you would expect for someone who saved $65,000 for grad school in three years, making, at most, $44k annually. Further, in my last six months before law school, I was unemployed after having been laid off, though I still collected unemployment. But for a solid two years in the middle there, I was gainfully employed as a financial analyst. I hunkered down at the whole “being an adult” thing.
A Turnaround
When I was 21, I read about 401ks and retirement in the book Financially Fearless by 40 by Jason Anthony. I was appalled that I hadn’t opened a Roth IRA yet at the ripe old age of 22. My dad is an accountant! Why didn’t he warn me?
My parents had always taught us the value of saving. I decided that when I was fully vested I would max out my 401k even while I was making $44k a year. Because the 401k is pre-tax, I saved thousands on taxes by maxing it out. Also, I still had enough money coming in my paycheck for a simple existence. With the company match, I was saving about $20k in my 401k. Then I saved $5k in my Roth IRA. On top of that I add a bit more savings, plus the savings from the time I was working temp jobs and collecting unemployment. So that’s the basic arithmetic answer of how I saved this money. Now for the nitty-gritty.
Saving for Law School
The aggressive 401k contribution was a method of forced saving. After I made the election, I was far too lazy to do anything about it so I just had to adjust my spending. I benefitted from the tax savings, which came to an extra few thousand a year. Being a natural hermit and a scrooge also helped. I was paying $800/month in rent. This was a reasonable rent 10 years ago but is on the low end for the Washington, D.C. area now, though I still see rents this low. I didn’t have a TV or cable. The furniture was sparse – scrounged from a collaboration of my office’s discarded furniture, Ikea and this sweet Jennifer Convertibles sleeper couch for $200. (Selling that couch was a huge mistake).
I ate at home and I can’t remember doing a lot during these two years, though I do remember studying for the LSAT. I went to work and I went home and did logic puzzles and wrote essays. On the weekends we visited our parents. Note: this is a highly effective way to save money and be completely lame.
The key was having the money withdrawn immediately. When my sparse paychecks arrived, that was all I could spend. And in fact, I didn’t even spend all of it. I think a lot of people may have worked jobs where they weren’t making bank right out of college. Sometimes people think, “I need to make $X before I can save money.” If $X is barely over minimum wage, then perhaps this person is correct. But I think for many people, even if we aren’t making that much money, saving small amounts of money is valuable. And making it harder to spend money is an easy way of forcing yourself to do that.
So I’m sure you’re saying, well you saved a lot of money for retirement. But how did you use that toward grad school?
Well, I rolled over my 401k into my Roth IRA in the year I started law school. I then liquidated a large portion of my retirement savings to pay for grad school. Because I used the money for qualified educational expenses, there was no penalty.
The Dodgy Part – Should One Cash Out Retirement Accounts For Higher Education?
A financial adviser would say I was foolish for withdrawing from my retirement accounts to pay for school. I probably was. I entered law school in 2009, so basically the bottom of the market. I’m not going to argue this was a smart thing to do. It was what I felt at the time was a good use of my money. I didn’t see any articles on the interwebs describing such a method so I figured I’d write my own.
It’s true that I won’t be able to get back the compound interest that I could have achieved if I had just left the money in my retirement accounts. But to be fair, I did such a poor job of investing my money, it really hasn’t grown much even as the stock market has soared. Further, my loans had an interest rate of 6.8%, which is a tough rate to beat in the stock market.
Additionally, by taking out fewer loans, I was able to save on loan origination fees, saving thousands of dollars from the get-go. (By the way, loan origination fees are such a scam. 0.5-1% of a multiple thousand-dollar loan? That’s just mean). I don’t have any regrets because, for me, it turned out ok. However, I am cognizant that, if I hadn’t gotten a high salary job to pay back my loans quickly, perhaps this whole scheme could have gone massively awry. It’s a high-risk, high reward strategy.
The Virtuous Cycle
Saving for law school had a virtuous cycle effect to provide a solid financial foundation for my future during and after law school. What’s a virtuous cycle? It’s the opposite of a vicious cycle – meaning one positive action causes another positive action, and so on, until you can’t help but have a positive result.
I took out the max federal subsidized loans for law school, but didn’t take any private loans and minimized my unsubsidized loans. Instead, I paid the rest of my costs with savings and withdrawals from my retirement accounts.
Because of this, I reduced my student debt at graduation by at least $65,000 (the max debt load was $180,000, and some of these loans have origination fees and accrue interest while you’re in school). This meant that I could aggressively pay my loans off in 18 months, rather than years. That means, starting in my second year in my law firm, I was debt-free. I did not have to keep working the long hours if I didn’t want to. I was not a slave to my debt. And that feeling was incredible.
Having the savings was a huge accomplishment in my mind. What I learned in these three years of working and saving was that I could be perfectly content on very little. That is a message that I have carried with me my entire career and has helped me avoid lifestyle creep. Even when I made five times my entry level salary as an attorney, my spending (apart from my rent) stayed roughly the same. Because of this, I was able to save enough to walk away from my job after seven years, without having to panic about my next move. And that’s where we are now – 6 months into my sabbatical. And all because I maxed out my 401k when I was 22.
Conclusion on Saving for Law School
My approach meant massive saving for law school and also the knowledge of how little I could live on. The savings led to lower loans, which meant I was debt free sooner. The knowledge of the minimum I could live on meant I could become financially free much sooner. It’s a dodgy move that financial advisors wouldn’t recommend but I am not sure, given the option, I wouldn’t do it all over again.
What do you think of my dodgy savings plan?