Recently, President Barack Obama told a crowd that it took him thirteen years to pay off his law school loans. He graduated from Harvard Law School in 1991 and paid off his law school loans in 2004.
During that time, President Obama was on the faculty of the University of Chicago Law School as an instructor and also served as an attorney at Miner Barnhill & Galland. His wife, Michelle, graduated from law school three years before him and worked at Sidley Austin.
Since they did not release tax returns from 1991 through 1999, I can only speculate on the income situation of the Obamas during that time. However, they did release returns from 2000 onwards, which does give me some information to work on.
- In 2000, the Obamas reported $240,726 in income from various sources and paid a total of $73,121 in federal, state, and real estate taxes, leaving them with $167,605 in after-tax income.
- In 2001, the Obamas reported $275,123 in income from various sources and paid a total of $94,350 in federal, state, and real estate taxes, leaving them with $180,773 in after-tax income.
- In 2002, the Obamas reported $260,824 in income from various sources and paid a total of $82,631 in federal, state, and real estate taxes, leaving them with $178,193 in after-tax income.
- In 2003, the Obamas reported $238,237 in income (and, surprisingly, no interest, dividends, or capital gains–different from previous years), and paid a total of $63,210 in federal, state, and real estate taxes, leaving them with $175,027 in after-tax income.
- In 2004, the year they finally paid off their loans, the Obamas reported $207,647 in income from various sources and paid a total of $50,507 in federal, state, and real estate taxes, leaving them with $157,140 in after-tax income.
Thus, in the five years between when President Obama started releasing his tax returns and the time the last Obama student loan check went to Sallie Mae, his family averaged an after-tax income of $171,747.60. The cost of living in Chicago is approximately 16.2 percent higher than the national average. Median pre-tax household income in the United States was $42,148, so the cost of living in Chicago should have been roughly $48,891.68. Even with a generous cost of living allowance, it is not unreasonable to expect that by living frugally and within their means, the Obamas could have saved $100,000 a year at the time.
Since education inflation has been 498.31 percent from 1986 to 2011, it’s not unreasonable to expect a Harvard Law School student budget in 1991 to be 50 percent (or possibly less) of what it currently is. In 2010, the average Harvard Law School graduate had $115,239 in student loans. Given a 50 percent inflation assumption, then I feel safe in assuming that the combined Obama law school debt burden was $115,239—50 percent of $115,239 times two borrowers (President Obama and Michelle Obama).
Therefore, assuming that the Obamas paid only interest on their student loans from 1988 (in Michelle’s case) and 1991 (in President Obama’s case), they still could have lived on $75,000 a year and paid off the student loans in 2001, and still been considered to have enough money to be thought of as rich, and enough to, according to Princeton University, be happy. (Researchers there found that $75,000 a year was the level at which money stops improving the quality of everday emotional experiences.)
What lessons can we learn from the example of the Obamas?
- Be aggressive in paying down student loan debts. Student loans are not forgivable in a bankruptcy, so paying them down is paramount. Once they’re done, then you’ll have much more available money to invest or spend on other things.
- Don’t immediately ramp up your lifestyle when you graduate. The temptation is there. You’re a graduate, so you should start living like a graduate. Avoid hopping on the hedonic treadmill. Instead, when you get jealous of someone else’s nice house or nice car, remember that it’s probably not paid for, or if it is, then that person has put in the time and effort to be able to pay for it.
- When you get a raise, put a significant portion of it towards your debt. My rule of thumb is to take 75 percent of your after-tax increase and use it to pay off debt, and once you’ve paid off the debt, to invest. If you don’t reward yourself with some increase in your standard of living, you’ll get sick of working hard for no perceived rewards.
- Spending money on the trappings of happiness won’t make you happy. When I was getting my MBA, I remember having the dreams of the nice cars and the nice house, but, as research from Mihaly Csikszentmihalyi shows, experiences make you happier than material possessions.
Fortunately for President Obama, he will earn a couple of pensions and royalties from his books, so personal income will not be an issue in his future; however, given his inability to pay off his student loans more quickly despite ample income, I confess that I am glad that the Commander in Chief is not the Personal Financial Planner in Chief.
Jason Hull is a candidate for the CFP(R) Board’s certification, is a Series 65 securities license holder, and owns Hull Financial Planning.