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Saturday, September 27, 2008

What Is the Net Present Value of a J.D.?

$470,000, says Karl Okamoto (Drexel):

Is law school a good value? ...  Using crude numbers, the answer looks like a resounding “yes.” As they say in the investment business, it looks like a “three bagger.” Even if you have to put $230,000 in, you get over $700,00 back! ...

What crude numbers, you may ask? Well the Wall Street Journal reported recently on salary statistics. While the median salary for persons holding just a BA has slipped to $47,240, those of us with professional degrees have gone up to $89,602. Even better, recent Labor Department numbers show the median salary for lawyers at $106,120. So, as I say to my students, think of your law degree as an annuity. It represents a payment stream that lasts for a career (say 40 years) that equals the spread between what you would have earned without your law degree versus what you can with it. Using the median salary numbers, that spread is almost $60,000. Discounted at 8%, the annuity has a present value of over $700,000. The present value of three years of tuition (at $40,000 a year), books and foregone salary (at the median) is about $230,000. So, as your stockbroker used to say about Lehman bonds, a “no brainer!”

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Comments

Becoming a lawyer is as good a shot as one may have to grab the brass ring, and do well, perhaps even some good.

Posted by: Shag from Brookline | Sep 27, 2008 4:18:00 AM

Doesn't this depend on what you major in as an undergrad? Engineers, Computer Science, Economics, and Finance majors can do quite nicely: http://thinkingonthemargin.blogspot.com/2008/07/expected-salary-by-college-major.html

At what point do the median attorney salaries kick in and how many hours per week do they work on average relative to other professions? Attorney salaries could be high on an annual basis, but are they on a per-hour basis relative to some of these other professions?

Posted by: Brian Hollar | Sep 27, 2008 6:40:55 AM

William Shakspeare ( and belive me , I am no big fan) was right. He said "first thing, let's kill all the lawyers".
Parasites on decent society, I kid you not. Scum sucking bottom feeders .No wonder most of our politicians are lawyers. It is the quickest way to riches for those that have no other contibutions to make.

Posted by: tom robinson | Sep 27, 2008 9:50:57 AM

Hurray!

Posted by: Leigh | Sep 27, 2008 9:56:51 AM

Well, that income stream isn't free. You have to actually work.

And there's a built-in selection bias. I would think that the kind of person who could finish law school (I dunno, studious, industrious, clever, greedy) would make a higher salary than someone who couldn't, regardless of what profession he entered.

Posted by: Malvolio | Sep 27, 2008 10:23:35 AM

yeah, but where do you factor in that 60% of attorneys say that their number one complaint is that they don't get to spend enough time with their children?

Posted by: john | Sep 27, 2008 10:40:57 AM

The median salary for all lawyers will not be the expected earning power of a given law student, however. The school one attends, one's grades, as well as one's future proficiency at the law all impact one's earning power.

For example, the earning power of a student in the bottom half of your class might place him or her in the bottom 25% of the distribution, which would suggest earnings of 40,000-60,000. This would result in a negative NPV.

Another thing to consider is the undergraduate degree of the student in question. Someone with a degree in communications or politicial science could expect to make less than 47,000 with just an undergraduate degree, whereas someone with a degree in accounting, finance, chemical engineering, etc can expect to make significantly more with just an undergraduate degree.

Posted by: Greg | Sep 27, 2008 11:24:46 AM

I strongly disagree with statistics like this that lump all law school graduate salaries together into one big average. It misleads tons of wide-eyed undergrads into making a catastrophic financial decision. There is no middle ground where most attorneys make 80k/year. You either make 160k/year or 45k/year. For the 160k people it worked out great. For the 45k/year people it was a massive financial mistake to go to law school.

From endofesq.com:

>>Feel sorry for the law students for they will enter a profession in irreversible decline. From the utter disintegration of a main artery of revenue for the profession–Wall Street– to an absurdly large and growing pool of lawyers who can’t find real jobs, to the unauthorized practice of law by accountants and title companies and financial planners, to the accreditation of more and more lawyer factories, to outsourcing of good legal jobs to India, the profession is not the one that existed just five years ago. The legal profession has become the most expensive house on Dead End Street in America. Graduating with massive debts and little prospects of success, law students today face the very real possibility that they will not be able to find any employment in the profession.To those of our viewers that are in law school, we urge you to reconsider your career choice and start fresh while you still are young. Don’t wait or hope for better days that will never come. The profession is broken at its core and crashing around you. Do not listen to those teachers in law schools with vested interests in growing the size of their law school classes, and don’t listen to the gibberish of young associates at big firms who don’t know the difference between practicing law and being a . . . secretary.<<

Posted by: TTT | Sep 27, 2008 12:33:16 PM

I'm a 3L law student and this article just makes me realize that I am entering into a crappy job market with little to no job prospects as the economy further collapses. The math might look wonderful (key word: look) but it really means nothing when you've become forced into take whatever position necessary to pay off rent and loans. Your law degree is worth nothing if you're not getting any use out of it.

So I really doubt that fantasy return investment in 40 years is going to be worth the loans, the time, the 80 hour work weeks, and the misery that all lawyers seem to feel.

Posted by: L.R. | Sep 27, 2008 3:43:05 PM

There are lots of people who make excellent money as lawyers who would be virtually unemployable at any other lawful endeavor, but they are using skills that they did not pick up in school - such as a talent for selling B.S. to juries. An unfortunately growing number of people who go through law school believe that the diploma creates the skills needed to succeed. While it is necessary to have the diploma in order to get the law license, the skills to do the work are not purchased at law school. People who have the pre-existing aptitude to be successful lawyers can get a reasonable return for their investment, but most folks would be wasting their money to go to law school. Do not fall victim to the Wizard of Oz theory that equates the diploma with the underlying skills. A scarecrow with a law school diploma is still a scarecrow.

Posted by: Al | Sep 27, 2008 4:55:35 PM

I would gladly sell my JD back from my top 100 law school where I got middle of the class grades for HALF of my student loan debt burden.

Law school is a huge waste of time and money for most people.

Posted by: Brad | Sep 27, 2008 5:07:59 PM

Karl Okamoto went to Columbia and then made a fortune sitting on the board of a hedge fund. He can try to sell Drexel Law all he wants, but it's precious few attorneys who make anywhere near what he made due to his corporate board positions and his degrees from Columbia.

If you don't graduate from a top-tier school, you're facing literally decades to pay off your law school debt. It's disingenuous, if not misleading, for law professors to keep scamming people into law school by promising the riches to come.

Posted by: Margaret Jones | Sep 27, 2008 5:09:52 PM

Just for folks who haven't actually read any Shakespeare, Shakespeare did NOT say, "first thing, let's kill all the lawyers." Actually, a character in a Shakespeare play who is a complete tool says "first thing, let's kill all the lawyers" to a group of criminals, because the character is afraid of being brought to justice.

Posted by: ed | Sep 27, 2008 5:33:42 PM

While many of these comments may be true, why can't there be a compromise of sorts? I know a couple of J.D. holders who have gone into the financial business. Combined with a Series 7 and a CFP, CFA, or softer designation, a person can become quite successful offering financial AND legal advice to wealthy individuals and groups.

While a J.D. by itself does not guarantee success, it opens many doors. In an era where the law profession may be in decline a mote of creativitiy would go a long way.

As it was mentioned by a few people, though, students expect money and prestige to begin pouring forth once the J.D. shows up, but without the real skills necessary to perform the job adequately it is nothing more than a few letters next to one's name. Of course, skill can also come from experience, let's not forget.

Me? I've only met 2 lawyers, ever, who acted like honorable, helpful, decent people. I try to give the benefit of the doubt, but it is terribly difficult when one has seen half a dozen friends go from being nice, sensible people to being unctious, vile, mean-hearted snobs in the course of a few years.

Does that speak about the person, the process, or the job? Perhaps only about human nature, and that it is a soft and mercurial, pusillanimous gremlin. Given enough power and the proper motivation out comes the worst.

Posted by: David K. | Sep 28, 2008 8:44:42 AM

Me likey my Engineering degree that I got for free through scholarships. I am using it to make $90k/year

Me likey even more my Masters degree in engineering that my job is paying 100% for me to get...It will help me get $120k/year.

Nevermind the 5 weeks vacation and company car...and my hours aren't long; I work when I want to, take breaks when I want to, and get to travel all around the U.S. when I want to.

I have 0 student loans...talk about a good argument against law school.

Posted by: John | Sep 28, 2008 8:47:37 AM

The learned professor would do well to consider the quality and heterogeneity of his statistical inputs in his calculations. One would think someone with an obvious financial bent would have learned this lesson considering the current economic issues at hand. Some people, alas, never learn b/c they don't have to. The fantasy NPVs of those fantasy median earning attorneys are little consolation to the armies of us that go to state schools (or worse, private schools that will accept anyone with a pulse and a bucket of cash... thanks ABA), the super-majority of us that aren't in the top 1/3rd of our class. We, that can look forward to the luxurious lifestyles that our teacher-esque salaries (but not teacher-esque hours nor student debt obligations) can afford us, might have a slightly different perspective than those of you that suffer your long hours in the ivory towers of academia and BigLaw. About 10% of the attorneys I know make good money, everyone else could have done as well with a B.A. Unless you know you can go to a law school where they don't rank you or you're independently wealthy, for god's sakes, stay out of law... you'll enjoy being the smartest guy in the room full of average people in whatever profession you choose.

Posted by: damon | Sep 29, 2008 8:19:34 AM

Why don't you do a spread and show your students how much $106,000/ yr. looks vs. 60-70-80 hour work weeks?

Posted by: Blues Bob | Sep 29, 2008 9:30:38 AM

to David K.:
Have you ever considered that you could combine your engineering degrees with a law degree (plus passing the Federal patent bar and your state bar) to become a patent attorney? This is one area of law that is growing dramatically and you can easily double your current salary within a few years of practice. I found combining my nearly 18 years of R&D engineering experience with a JD made for an enjoyable and rewarding career move.

Just a thought for those with technical undergrad degrees considering a career change.

Posted by: Patent Attorney | Sep 29, 2008 1:42:01 PM

It is interesting that the salary figure here is approximately $106,000. I wonder how this determination of what a J.D. is worth intersects with the study a few weeks ago examining the salary discrepancies for male lawyers and female lawyers. If I remember correctly, the salary figure for male lawyers was approximately $105,000 with female lawyers lagging significantly behind.

Posted by: Suzanne L. Wynn, Esq., LLM Tax. | Sep 29, 2008 8:30:50 PM

Wow, lots of gloomy Guses. Well, I'm at a top 20 law school, and I know several people who made over 3k a week during their first summer.

Say what you want about those at the bottom half of the class, and outside of the top 25. Had you have done your homework, you'd have known that you couldn't cut it a day in your life against someone with the smarts, skill, and drive to make it in school, their profession, and even life.

I don't know what statistics you guys are looking at, but making 45k or $160k is too simplistic. First of all, there are many areas of law that you can practice. From Private firms of all sizes where you usually see the largest salaries, to being a government prosecutor where you usually see salaries between 40-50k, to an in-house counsel, law professor etc etc etc.

I find it interesting how many people bag on attorneys, and the minute they get into a jam, they find out attorney's aren't that bad a lot afterall. Just like any other profession, you've got the good, the bad, and the ugly all lumped in.

Posted by: | Sep 29, 2008 9:48:55 PM