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Monday, May 12, 2014

It Makes Economic Sense to Attend Only 48 Law Schools at Full Sticker Price

Kelsey Webber (J.D. 2014, Georgetown), Which Law Schools Make Rational Economic Sense to Attend?:

The debate on whether or not it makes rational economic sense to attend law school has grown as the cost of law school tuition continues to rise and the job market for starting lawyers has declined. Legal academics, journalists, bloggers and even law school professors seem split on whether going to law school in the current economic climate is a rational economic decision.

Previous studies have focused on the economic value of a law degree, or whether it is economically rational to attend law school in general. I improve upon previous studies by giving students an exact cutoff point of which law schools make rational economic sense to attend. To make this determination, I use data from the class of 2012 to estimate the cost of attending each law school and the average salary that students from each law school made one year after graduation.

I estimate that if a student pays full sticker price to attend law school, then based on data from the class of 2012 there are only 48 law schools the student could attend and expect to have a positive economic return within 10 years. If a student receives a partial scholarship, there are 80 law schools the student could attend and expect to have a positive economic return within 10 years. If a student receives a full scholarship, there are 139 law schools the student could attend and expect to have a positive economic return within 10 years.

Update:  PrawsBlawg:  Is Yours One of the 45 Law Schools to Which it is Worth Going: A Look at the Broken Market for Legal Education, by Jennifer Bard (Texas Tech)

http://taxprof.typepad.com/taxprof_blog/2014/05/it-makes-economic.html

Law School Rankings, Legal Education | Permalink

Comments

The obvious flaw in this study is that it purports to measure economic return of each school's graduates over 10 years, but uses only first year salaries as the basis for estimating it. There is no indication of which salaries go up or down over those 10 years, or whether schools might have different experiences in that regard. If it purported to be a study of economic returns in the first year, it might have some validity.

Posted by: Jethro | May 12, 2014 11:50:15 AM

As a undergraduate student thinking about going to law school, I feel like this was a good read. Thanks for posting

Posted by: Nate Wilson | May 12, 2014 1:36:32 PM

Another obvious problem is that law students are typically going to live and work a lot longer than 10 years after they graduate.

There's no justification for cutting off the rate of return at 10 years, instead of looking at a full career.

The study should say, there are only 48 law schools that it makes sense to attend at full tuition if you plan to end your career at age 35.

Posted by: Anon | May 12, 2014 2:42:05 PM

As an undergraduate student considering law school, I feel like this was a good read. Thanks for posting

Posted by: Nathan | May 12, 2014 3:22:35 PM

This study seems to be very thorough and well done. But I do agree with Jethro that salaries should be looked at over the 10 year period that is discussed.

Posted by: Sarah | May 12, 2014 4:15:02 PM

Very insightful paper!!

Posted by: Rord | May 12, 2014 6:45:21 PM

I agree with Sarah and Jethro about the problem with using the first year to project the full ten. I'd also have liked to see a more detailed look at the return for other schools where the students are on scholarships of various levels. I'm willing to be a bit more forgiving of the effort, though, because this appears to be a student note. The author probably doesn't have the institutional resources (i.e., student research assistants) at her disposal that a professor would. In that light, it's a pretty impressive effort despite its flaws.

The idea that a ten year cut off for determining whether the law school investment makes sense, however, is entirely reasonable. It should not take into the middle of a professional's career before they start to see a benefit from their educational investment.

Posted by: Former Editor | May 13, 2014 7:10:43 AM

Simkovic and McIntyre show that wages rapidly rise for attorneys in their first 10 years of practice. That's a pattern that holds true for many occupations. It's embarrassing to see someone publish a paper with such an elementary error in it. Did anyone vet this?

Posted by: Jack Jaleo | May 13, 2014 9:09:13 AM

This paper is very well done and makes some great points. I do agree with some of the previous comments, but SSRN says that this is a working paper. So I would love to see the author add information regarding changes in salary.

However, even without these changes, this paper is very well done and points out some major flaws in the legal education system in the US.

Posted by: Thomas | May 14, 2014 4:08:42 AM

This needs a lot of work.

In addition to the issues with growth rates of salaries--which are actually higher at the lower ranked schools according to After the JD--and the 10-year cutoff period for a degree that will last 40+ years, the "costs" of attending law school contain errors.

Food and housing are not costs of going to law school. They are costs of being alive and not homeless or starving. Counting them for purposes of interest payments doesn't make sense. Just discount back to present value using the student loan discount rate.

The costs of student loan debt are grossly overestimated because the author forgets about Perkins loans, prepayment of lower interest rate debt, lower cost private refinancing of Stafford and PLUS loans, and--most importantly--inflation.

He somehow manages to use both student loan interest rate and discount back to present value using a different discount rate (he doesn't say what that might be other than a "treasury" rate--there are more than one). So he's double-counting the costs of financing the degree.

The author assumes the folks going to law school had a 100 percent chance of being employed full time for all 3 years after graduation with a college degree if they hadn't gone to law school. Not likely in this economy--or any economy.

And gives them credit for their GPAs without taking into account their majors (It's a lot easier to get an A in English than in Engineering, and a lot harder to get a well-paying job with the English degree).

And he ignores paid work during law school.

Posted by: Anon | May 14, 2014 7:19:31 AM

Regarding the debate about the 10 years--

The finance literature is absolutely clear on this. The value of an asset is the Discounted Cash Flows associated with the asset for the *entire life* of the asset.

10 years only makes sense if the entire life of the student as a wage earner lasts 10 only 10 years.

Impatience and placing a lower value on the future is dealt with through the discount rate.

Using both a discount rate and an arbitrary early cutoff is methodologically incorrect.

Posted by: Anon | May 14, 2014 7:34:36 AM

@10:19

- Paid work in law school? Confirmation bias much? That is not an option for most law school students these days.

- The degree lasts for 40 years? Really? There is no age discrimination in law? That will come as a shock to every lawyer over the age of 50 who finds themselves out of work. You may also want to read some of the peer-reviewed labor economics studies on the career-long effects of graduating into a recession. See Lisa Kahn of Yale and Philip Oreopoulos of the University of Toronto. And they were analyzing the much milder recessions of the 1980's and 1990's, when there were a lot fewer college grads to boot. We can logically expect much worse outcomes out of this recession.

- Perkins Loans are not grants, bub. If the author was not including them in his analysis, then he is underestimating loan debt, not overestimating it.

- Living expenses are properly included. Why? Because they are paid for with nondischargeable federal or private student loans. That is not the case when one is not in law school - living expenses are paid for with salary earnings or by living with family. All those GradPLUS loans would not exist if not for being in law school. In point of fact, I believe that taking out student loans for living expenses while not in school is actually fraud. Sorry, bub, they are included.

- Private financing of federal student loan debt? Prepayment of interest? Good lord, you really are revealing a lot about your socioeconomic background. Why don't we all just shuffle our earnings into a Swiss bank account?

- Also, with regards to college grad employment, I believe that the unemployment rate for recent college grads is 10% and the unemployment rate for law school grads is nearer to 12%, so in fact they would have a greater chance of being employed had they not gone to law school. Underemployment for both cohorts is around 50% and has been for several years in both instances.

- Oh, and let's not forget that Republicans are trying to repeal PSLF and PAYE, and Obama has already signaled that he is willing to cap PSLF forgiveness at $57k and change, or less than the cost of one year's attendance at many private law schools that are purported to have a public interest bent.

Posted by: Unemployed Northeastern | May 14, 2014 10:27:04 AM

Most law students are working part time and during the summer. Most are not working at big firms earning $30K for 10 weeks of work. But if you can't pull in a quarter to a third of what you could have been making if you weren't going to school, what's the problem? Law school is not so academically challenging that you need to spend every waking minute studying. And with 200 law schools in the country, you can find one reasonably close to work.

Simkovic & McIntyre showed that earnings stay higher later in life for law degree holders than for similar bachelors, even into the early to mid 60s. They cut off the earnings at 65, but there are presumably more law grads able to work into their 70s than there are bachelor's.

As for cohort effects, the studies are all about college grads, not law grads. So the folks who graduated college and went to law school in 2009-2011 were looking at lower than average earnings if they entered the work force instead of going to graduate school. Law school gave them a chance to graduate into a better economy.

What makes you think the people applying to law school now are going to graduate into a recession in 2017-2018?

Perkins loans carry interest rates lower than Stafford or PLUS loans. So the aggregate interest rate needs to be lower.

Counting living expenses and discounting and counting opportunity cost is double (or triple) counting. The discount rate incorporates financing costs. And money earned if not going to school would have paid living expenses.

Google "refinance student loans." Was that so hard?

Banks are tripping over themselves to refi law graduates at less than the federal rate. They're paying $200 a head for referrals.

After the JD and After the JDII show that the overwhelming majority of law graduates pay down their loans early.

"Recent college grads" is often defined as those who graduated in the last 5 to 10 years. Not graduates within the last 9 months or 1 year.

If you compare apples to apples as far as "recent" grads go, you'll see that law grads who graduated within the last 5 to 10 years have much lower unemployment rates than similar college grads--especially the liberal arts and social science majors who end up in law school.

Posted by: Anon | May 14, 2014 12:38:55 PM

S&M also believe that there is no bimodal salary distribution for new attorneys (despite decades of empirical evidence from the NALP and elsewhere concluding otherwise), that US News rank has no impact on earnings (I’m sure Simkovic worked alongside plenty of Suffolk grads at McKinsey and Davis Polk), that the 25th percentile of law school graduates is the same cohort as the 25th percentile of undergraduates, and that the profession will absolutely not undergo structural change now or ever in the future, even as everyone else, including the NALP, ABA, and sundry state bar associations say that it is undergoing permanent changes. I am not and have not ever been impressed with their work and particularly with their predictions; you will not convince me otherwise.

50% underemployment for law school graduates for the last several years; average student loan debt of about $125,000, not including interest or undergrad debt. 50% underemployment for the last several years for undergrads, too, but their average debt is only $29,000 or so. Which sounds better, I wonder? And for the 40% of law school grads working in jobs that don’t require a law degree, was that $125,000 of extra debt worthwhile?

By the way, if you have evidence that all of those 40% underemployed but not unemployed law school grads are secretly working at McKinsey or Goldman Sachs or Google or somewhere else that can justify the cost of law school, please show it.

“Perkins loans carry interest rates lower than Stafford or PLUS loans. So the aggregate interest rate needs to be lower.”

Awesome! So that law school grad from GW or NYU rocking $280,000 in student loans probably has, at most, $12,000 to $15,000 in Perkins loans. That will really cut down that blended interest rate a good tenth of a percent! And of course, not everyone has Perkins loans (and not all universities handle Perkins repayment well – see the Bloomberg piece from last year about Yale and Penn SUING their own graduates over their inability to make Perkins loan payments).

“After the JD and After the JDII show that the overwhelming majority of law graduates pay down their loans early.”

They also show that a plurality of all law school grads are booted out of the profession within ten years. What’s your point? The college premium was awesome for people who are in their mid-40’s and older. We all know that the cost of law school pre-2000, which is what those studies cover, was FAR lower than it has been for the last several years. And of course, as even S&M’s own study admits in its very first chart, real starting salaries (which determine consequent salaries) have been stagnant at the 10th, 25th, median, 75th, and even 90th percentiles since the mod 1990’s, even though law school tuition has increased hundreds of percent over inflation during that time. So it is not the investment it once was, and becomes a worse investment with each passing year as tuition climbs and wages continue to stagnate at the top and decline precipitously in the lower echelons of the profession.

I should probably note that among the interesting long-term conversations I have had with various higher education folk under this sobriquet, a few have been with career-long financial aid professionals under this pseudonym. They assure me that law school graduates are vastly overrepresented in IBR/PAYE/PSLF, and that were it not for those programs, the number of delinquencies/defaults out of law school grads would be astronomical. And as I stated earlier, two of those three programs are already on preliminary deathwatch.

Oh, and “recent college grads” almost always refers to people 25 years old or younger, not the past 5-10 years’ worth of graduates. Anyways, the college v. law school grad unemployment rates I cited earlier were both for the Class of 2013, so there you go.

“What makes you think the people applying to law school now are going to graduate into a recession in 2017-2018?”

From what I have seen, the BLS believes that there will be about 19,000 jobs for new attorneys, including retirements and attrition, each year over the next ten years. Of course, that is a reduction for 24,000 jobs/year just three years ago. And we are still on track to have 35,000 to 38,000 new attorneys in 2018, not to mention the ever-growing surplus of un/underemployed attorneys like myself acquired between now and then.

Posted by: Unemployed Northeastern | May 14, 2014 3:35:37 PM

Just as a toss-in, S&M and the After the JD studies reflect no data from after the 2008 crunch. S&M's data ends at 2008, JDII ended at 2006.

Posted by: Former Editor | May 15, 2014 7:51:24 AM

One of the more insidious practices of the law school apologists, particularly of the lower-ranked, private ones, is the umbrage they take when someone points out the discrepancy between the schools they graduated to the ones they receive a paycheck from.

Here there is a study that shows economic sense to attend only 48 of them, most of which members of the law faculty would never even consider. Yet, once again there are vicious attacks, petulant complaints about 10 years being too short a window (I'm sure Whittier and Thomas Jefferson grads will really start seeing their lives improve after a mere 10 years), and the usual citations of the Nobel winning S&M study.

Posted by: Cent Rieker | May 15, 2014 8:59:02 AM

"The degree lasts for 40 years? Really? There is no age discrimination in law? That will come as a shock to every lawyer over the age of 50 who finds themselves out of work."

Are there a lot of 10-year olds graduating with a JD?

Posted by: TomJB | May 16, 2014 12:54:17 PM

Interesting paper, but it has a lot of limitations. In particular, I think it undervalues the benefit of high employment rates for certain schools. For example:
I went to Louisiana State University law school from 2004-2007, and I now make $120,000 a year. Covering all costs of law school with instate tuition at that time, I have $55,000 in student loan debt.
Before law school I was a teacher making $38,000 a year. Had I stayed a public school teacher in Louisiana, I would now be making about $45,000 a year.
After going to LSU law, I had a one year state court clerkship at $36,000. My first year with a law firm I made in $60,000 in 2008. My salary increased approximately $10,000 per year from 2008 to the present, $120,000.
From 2004 to 2014, my salary as a public school teacher in Louisiana would have totaled approximately $454,000 before taxes.
From 2004 to 2014, my income as a lawyer (since 2007) has totaled approximately $662,000. Even with three years of virtual $0 income, and even considering $55,000 in student loans, this seems like law school has already paid me back in opportunity costs, by a margin of at least $50,000.
Every year from here on out, I will likely be at least $80,000 better off than I would have been in my prior career as a teacher.
It’s difficult for me to see why making over three times as much income as I used to make before LSU law school means going was a bad investment. To the contrary, LSU law has probably been the best investment I’ve ever made.

Posted by: Rob | May 16, 2014 2:07:29 PM

Here's none other than Supreme Court Justice Antonin Scalia weighing in on the state of legal education:

"It is no mystery what has prompted the current calls for a two-year law degree. It is, quite simply, the constantly increasing cost of a legal education... This is obviously not sustainable, given that over the last 25 years there has been a sharp contraction of the legal-services sector, compared with the rest of the American economy."

"[I]f law school is to remain three years, costs have to be cut; the system is not sustainable in its present form. The graduation into a shrunken legal sector of students with hundreds of thousands of dollars of student debt, nondischargeable in bankruptcy, cannot continue. Perhaps—just perhaps—the more prestigious law schools (and I include William and Mary among them) can continue the way they are, though that is not certain. But the vast majority of law schools will have to lower tuition. That probably means smaller law-school faculties—though not necessarily one-third smaller. That would be no huge disaster. Harvard Law School, in the year I graduated, had a faculty of 56 professors, 9 teaching fellows, and 4 lecturers; it now has a faculty of 119 professors, 53 visiting professors, and 115 lecturers in law. A total of 69 then and 287 now.13 And cutting back on law-school tuition surely means higher teaching loads. That also would not be the end of the world. When I got out of law school, the average teaching load was almost 8 hours per week.14 Currently it is about half that.15 And last but not least, professorial salaries may have to be reduced, or at least stop rising. Again, not the end of the world."

http://law.wm.edu/news/stories/2014/documents-2014/2014WMCommencementSpeech.pdf

It is particularly delicious how he cites to Professors Campos and Tamanaha on multiple occasions, and to Simkovic and Leiter... not at all.

Posted by: Unemployed Northeastern | May 16, 2014 3:06:30 PM

The issue at hand is whether a JD's premium will earn back the cost of obtaining a JD and any associated opportunity cost within 10 years. I don't know why this is such a hard concept, or why we shouldn't expect to have repaid our debts from law school within ten years of graduating with our million-dollar degrees.

Posted by: Morse Code for J | May 16, 2014 5:52:43 PM

"Just as a toss-in, S&M and the After the JD studies reflect no data from after the 2008 crunch. S&M's data ends at 2008, JDII ended at 2006."

Wrong. S&M have earnings data through 2013. The most recent graduates from law school and college finished in 2008, but the earnings go through 2013.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2379146

After the JDIII goes through 2012.
http://www.americanbar.org/news/abanews/aba-news-archives/2014/02/10_interesting_stats.html

Posted by: Anon | May 19, 2014 1:31:08 AM

"S&M also believe that there is no bimodal salary distribution for new attorneys"

S&M show the earnings premium at both the 25th percentile and 75th percentile of abilities--i.e., above and below average outcomes. The 25th percentile of the distribution is always the 25th percentile, whether there is one mode, to, three, or four, so this is really a non-sensical argument if you know what the words "mode" and "percentile" mean.

There's inequality among law grads and inequality among BAs. That has little to do with the boost that law grads get from the BA at different points in the distribution of abilities.

"S&M believe that the 25th percentile of law school graduates is the same cohort as the 25th percentile of undergraduates"

Again, this is an inaccurate description of the S&M study. S&M compare the 25th percentile of a group of Bachelor's who are above average compared to other Bachelor's degree holders, and look like law degree holders but for having a law degree, to the 25th percentile of similar law degree holders.

"S&M believe that the profession will absolutely not undergo structural change now or ever in the future"

Again, this is an inaccurate description of S&M.

S&M point out that

- for structural change to render a law degree no longer a good investment, the changes would need to be huge (around a 90 percent decline)

-there's no data suggesting that structural change uniquely affecting law grads or lawyers more than other things has happened yet, at least as far as earnings and employment go.

- the leading economists at MIT who study outsourcing and automation find that law grads should continue do better than BAs even as these forces affect everyone.

S&M actually don't make any predictions about structural change themselves.

"S&M's first chart shows earnings are flat"

No, it doesn't. They show starting salaries as reported by NALP are flat. Earnings include things like bonuses and how much people earn every year *after* they graduate. S&M assume that earnings are flat got purposes of their calculations, but state that earnings are probably actually increasing with economic growth, so their assumptions are conservative.

"I should probably note that among the interesting long-term conversations I have had with various higher education folk under this sobriquet, a few have been with career-long financial aid professionals under this pseudonym. They assure me that law school graduates are vastly overrepresented in IBR/PAYE/PSLF, and that were it not for those programs, the number of delinquencies/defaults out of law school grads would be astronomical."

Which higher education folks would those be, and what data are they using to support their claims? How do they know who is using which repayment plan? Have they done a survey? Do they have unique access to DoE data which has not been shared with the public?

Your anonymous blog posts back and forth with anonymous people claiming to be financial aid professionals is not a reliable source of information.

S&M show data from the DoE which shows that relative student loan default rates for law grads and others have remained constant, before and after PAYE, with law grads defaulting at about one third the rate of others.

"After the JD II shows a plurality of all law school grads are booted out of the profession within ten years."

By plurality, do you mean minority? And by "booted out", do you mean "choose to pursue other attractive and highly compensated opportunities"?

You're welcome to disagree with S&M or After the JD, but at least characterize the studies accurately instead of making things up.

Posted by: Anon | May 19, 2014 2:01:44 AM

Unemployed Northeastern,

You're welcome to critique S&M and After the JD, but at least characterize the studies accurately instead of making things up.

"S&M also believe that there is no bimodal salary distribution for new attorneys"

S&M show the earnings premium at both the 25th percentile and 75th percentile of abilities--i.e., above and below average outcomes. The 25th percentile of the distribution is always the 25th percentile, whether there is one mode, to, three, or four, so this is really a non-sensical argument if you know what the words "mode" and "percentile" mean.

There's inequality among law grads and inequality among BAs. That has little to do with the boost that law grads get from the BA at different points in the distribution of abilities.

"S&M believe that the 25th percentile of law school graduates is the same cohort as the 25th percentile of undergraduates"

Again, this is an inaccurate description of the S&M study. S&M compare the 25th percentile of a group of Bachelor's who are above average compared to other Bachelor's degree holders, and look like law degree holders but for having a law degree, to the 25th percentile of similar law degree holders.

"S&M believe that the profession will absolutely not undergo structural change now or ever in the future"

Again, this is an inaccurate description of S&M.

S&M point out that

- for structural change to render a law degree no longer a good investment, the changes would need to be huge (around a 90 percent decline)

-there's no data suggesting that structural change uniquely affecting law grads or lawyers more than other things has happened yet, at least as far as earnings and employment go.

- the leading economists at MIT who study outsourcing and automation find that law grads should continue do better than BAs even as these forces affect everyone.

S&M actually don't make any predictions about structural change themselves.

"S&M's first chart shows earnings are flat"

No, it doesn't. They show starting salaries as reported by NALP are flat. Earnings include things like bonuses and how much people earn every year *after* they graduate. S&M assume that earnings are flat for purposes of their calculations, but state that earnings are probably actually increasing with economic growth, so their assumptions are conservative.

"I should probably note that among the interesting long-term conversations I have had with various higher education folk under this sobriquet, a few have been with career-long financial aid professionals under this pseudonym. They assure me that law school graduates are vastly overrepresented in IBR/PAYE/PSLF, and that were it not for those programs, the number of delinquencies/defaults out of law school grads would be astronomical."

Which higher education folks would those be, and what data are they using to support their claims? How do they know who is using which repayment plan? Have they done a survey? Do they have unique access to DoE data which has not been shared with the public?

Your anonymous blog posts back and forth with anonymous people claiming to be financial aid professionals is not a reliable source of information.

S&M show data from the DoE which shows that relative student loan default rates for law grads and others have remained constant, before and after PAYE, with law grads defaulting at about one third the rate of others.

"After the JD II shows a plurality of all law school grads are booted out of the profession within ten years."

By plurality, do you mean minority? And by "booted out", do you mean "choose to pursue other attractive and highly compensated opportunities"?


Posted by: Anon | May 19, 2014 2:07:51 AM