# TaxProf Blog

Paul L. Caron
Dean

Wednesday, November 11, 2009

### Schlunk: Law School Is a Bad Investment

Tax Prof Herwig J. Schlunk (Vanderbilt) has posted Mamas Don't Let Your Babies Grow Up To Be...Lawyers on SSRN.  Here is the abstract:

This essay treats a legal education as an investment, and asks the question of whether, based on known costs and expected benefits, such investment should be undertaken. The inquiry will necessarily differ from one potential law student to another. But for three posited “typical students,” the investment is shown to be a bad one. ...

Based on 2009 tax rates, the following table presents the foregone after-all-tax income of each of my potential law school attendees during his first year of gainful employment.

...  The table also presents the salary-level that would have been attained by the start of the fourth year, i.e., the year in which a law graduate enters the workforce.

...  [T]he following table presents the initial compensation hurdle that the law degree must overcome to provide any positive value to each of my three potential law school attendees:

I assume that each of my law school graduates has an expected 35-year legal career. I also assume that the incremental earnings from a law degree are earned as an annuity with a 3.5% annual growth factor reflecting increased productivity. The question is: what must be the initial payment of such annuity in order to justify the investment made in the law degree? The answers are surprisingly high, as can be seen in the following table:

What does this mean? Suppose we convince ourselves that 18% is the appropriate discount rate. Then Solid Performer would need to expect to earn, on average, \$36,449 more in his first year of legal employment than he would have earned had he not gone to law school. Given that his hurdle compensation is \$87,312, it follows that he must expect to earn \$123,761 in his first year. Moreover, the \$36,449 wage differential would need to be maintained, and indeed increased at a rate of 3% per annum, throughout the remainder of his career. The following table sets forth the result of this same calculation of the required expected first year compensation for each of my three hypothetical individuals:

The title, of course, brought to mind my article, Tax Myopia, or Mamas Don't Let Your Babies Grow Up to be Tax Lawyers, 13 Va. Tax Rev. 517 (1994).

Update: New York Times, Law School as an Investment.

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Great article. One of the best points is made in the last paragraph -- law school makes economic sense for the joke (i.e., liberal arts) majors.

Posted by: NYC Lawyer | Nov 16, 2009 10:42:50 PM

"Now, I make well over \$1 million per year. I'm twelve years out of law school, so according to this professor's calculations, I have 23 years of earning power left."

Lies. One visit to Millionaire Christa's blog above should tell you something about her "career." Why a current law student with a thing for Gertrude Stein and bad taste in colors would want to pose as a millionaire lawyer is beyond me. But she definitely does not reek of the millionaire Biglaw type. Maybe daddy was one, but anybody with the time to write about unicorns and cats has no business pretending to be a bigshot lawyer. Nice try.

Posted by: Harry Houdini | Nov 16, 2009 10:37:54 PM

This is an interesting study, based on the comments and article it appears that many people are forgetting that some Top Students, get scholarships to law school or get financial support from their family.

The study does not factor in the other non tangible aspects of becoming a lawyer. I would argue becoming a lawyer puts you in a strong position to do very well in finance/real estate or any other business field. While I wouldn't advocate everybody go to law school to become a business person. I do think some take the JD and head into high level business positions.

Also, being a lawyer can allow many to work for themselves with varying degrees of success. Money is not the only thing to measure here, WORKING FOR YOURSELF vs. TAKING ORDERS..... very valuable to some.

Overall, I generally agree with this assessment, not so much with the numbers but the idea. If you are gonna go to law school to make less than <100k a year after 10 years and you are not a public service person, and you do NOT dream of being a lawyer its probably not the best idea. But if you think you are top performer and will take your Legal Degree and use it to make big bucks then its worth it.

Having a legal degree may allow you to get into position to make a million dollars whereas no legal degree may not.

Also the reality is most post grad workers make less than 70k a year, the only ones doing 100k or more are superstars in finance and engineering of some sort. Presumably if these people go to law school they will end up doing very well in it as well, so yes their opportunity cost is high but, the law degree coupled with their experience may be worth 500k a year 7 years down the road....

Posted by: mike | Nov 16, 2009 8:07:14 PM

As noted above, these numbers look wrong. They understate the cost of a law school education for most law schools, while overestimating the three year income loss for most people out of college.

However, the analytical method is correct. Anyone who wants to go to law school should consider this. I did. I passed on going to NYU Law School to attend UCLA Law School. Why? I paid a total of \$5,000 in tuition to go to the latter as opposed to \$80,000+ for the former in the 1980's. I initially worked at a top echelon firm, and had more flexibility in my career because I did not have to worry about grueling repayments.

Posted by: UCLA Law Grad | Nov 13, 2009 1:26:47 PM

I borrowed \$250k to attend law school. It was a great investment, since I now make over a million dollars a year as a highly sophisticated plaintiff's attorney doing car accidents and slip-and-falls. Amazingly enough, my penis grew 3 inches in length after I passed the bar, thus doubling in length; this is a tangible benefit for which the above formula fails to account.

I think my situation is quite common for young lawyers. I encourage everyone to borrow heavily. Think about it: one day, YOUR name can be on those billboards. "Got into an accident? Call Joe! Se habla espanol!"

Posted by: Joe Camel | Nov 13, 2009 6:22:35 AM

Many of the comments above make good points, but some posters are confused about the lost salary/ opportunity cost chart. The 1st row contains the 3-year opportunity cost, which is probably based on the entire lost earnings for 3 years, not what the salary would have been in one year. Thus, a "solid performer" need only earn an average of \$46k per year to make the \$139k over 3 years. The "also ran" only needs to average \$33k.

Perhaps these figures sound high, but remember that all students going to even mediocre law schools were generally among the better college students, so they could be expected to earn more than the average student in their major would.

Posted by: Law Grad | Nov 12, 2009 8:04:30 PM

I'm fascinated that TaxProf gets few if any comments on academic articles but dozens when the conversation turns to money or politics. Does that something about the topics or the readers?

Posted by: mike livingston | Nov 12, 2009 7:34:30 PM

The only job I can think of where you make 130k as a fourth year is investment banking (and even they don't make overtime, just bonuses). I agree, you probably don't make as much money as a lawyer, but I don't think that's a surprise to anyone, and I don't think anyone is giving up a lucrative career out of business school to go to law school for the *money*. The numbers for what people make out of undergrad are ridiculously inflated, especially the overtime pay. What job pays that much base and isn't salaried? I would guess less than 1% of college grads are "Hot Prospects" under your analysis, and "Also Ran" is near average (above average in this economy). The discount rates are also way too high (where should we have invested our money? the stock market?). That doesn't mean law school is a good deal for everyone, it's probably a bad deal for anyone who comes out making less than 60k and borrowed too much (most law students), but it is a good financial investment for those that start at 160k and couldn't be making 130k otherwise, which accounts for most of the people in my T10 law school class.

Posted by: Ruby | Nov 12, 2009 12:57:39 PM

The overtime assumption seems flawed; it is highly doubtful that a 60k a year solid performer or an 80k a year Hot Prospect would earn overtime as they would most likely be salaried employees. If you subtract out overtime for these two employees, this greatly changes the resulting number to be

Discount Rate is 10% \$65,600 \$88,886 \$122236
Discount Rate is 18% \$80,231 \$107,130 \$143846
Discount Rate is 26% \$95,998 \$126,791 \$167135

Posted by: J | Nov 12, 2009 10:53:20 AM

If Schlunk used some more realistic undergraduate salaries (this opportunity cost is the crux of the analysis), he may have arrived at a different conclusion....

http://www.employmentwebsites.org/salary-offers-college-class-2009-are-flat (I assume the 2006 numbers were even lower)

Posted by: Illinois Law Grad | Nov 12, 2009 8:40:20 AM

Um. Boy am I glad I didn't try to do a "statistical" analysis before pursuing the career I love. Aside from a small financial aid stipend, I borrowed every penny for the cost of a full-freight, top-tier law school education. That was after borrowing most of the cost of my Ivy League undergraduate degree as well.

My loans were all paid off within 6 years.

Now, I make well over \$1 million per year. I'm twelve years out of law school, so according to this professor's calculations, I have 23 years of earning power left.

I don't do it for the money. I love practicing law. But I sure am glad I didn't let financial considerations scare me away from trying!

Posted by: BigLaw Partner | Nov 12, 2009 7:22:57 AM

I find your numbers eye-opening and well thought out. But, I would like to share my situation, one of the endless number of alternative situations.

I am a patent law student at GW. The reason GW fell in general law ranking last year is because US News started including part-time students in the same calculation as full-time and excluded adjunct professors-- most of GW's professors are adjuncts-- from the student:teacher ratio. However, GW still ranks #3 in intellectual property law, and IP firms in the east coast, where most of BigLaw sits, find GW IP students highly attractive. Even for other types of law, employers know the change in ranking has nothing to do with a change in the quality or reputation of the law school.

Nonetheless, the economy is terrible right now. Even T20 students can't get paid work, even in IP. The only exception is if they already have either a Ph.D. in hard sciences, an M.D., or a degree in Electrical Engineering. These are all degrees that have high earning capacity outside of law, even in today's economy. I would argue that in the current economy, law is not the place to work at all, even for hot shots. Hot shots in today's market are those who have good enough experience that they can work in the external market while the law market crash recovers.

The worst part of being in school during a bad economy is that there aren't enough 2L jobs at BigLaw. Without such a summer job, BigLaw won't hire you after you graduate. This year's and next year's graduating classes will be the lost generation, unable to find jobs. BigLaw won't notice because there is a constant stream of fresh blood when they are ready to resume 2L hiring, and they will again only accept 3Ls who had 2L BigLaw jobs.

Posted by: Christa | Nov 12, 2009 7:19:20 AM

I know no calculations can take all factors into considerations...but lots of schools offer scholarships, decreasing the total amount of money that students have to invest in the education.

so for example, someone at one of the top schools may only take out \$60-\$70K in loans (living expenses plus bar costs)...putting that person in a better position financially.

That said, I agree with the initial commenter about entering the law because of wanting to do a legal job...rather than just thinking of it as a way of making money.

Posted by: kathryn | Nov 12, 2009 7:08:06 AM

Consider what I believe to be a better investment. I am a part-time student working full-time while attending a Low 2nd/High 3rd Tier Law School. I have enough scholarships to cover 95% of tuition and books cost, so my out of pocket cost is less than \$2000 per year. Say for arguments sake that my current salary is \$50,000 and I fall under the Solid Performer category. Sure, for the four to five years that I am in school part-time, I am earning less than I would be if I were not attending school (owing to paying \$2,000 per year out of pocket) but in year 6, my salary takes a leap from \$59,000, which it would have been had I stayed in business to \$72,000 (using the salary figures for a Solid Performer in the example above), an increase of 30%. If I push hard and graduate a year earlier, still assuming a \$72K salary, my increase jumps to 35% over what I would be making if I stay in business. I make my \$10,000 investment (\$2K for 5 years) back in a single year and from there on out, the additional income is gravy. Ten years after graduation, I am making \$17K per year more than I would have been had I stayed in business.

Of course, this is all speculation and does not take taxes, etc into consideration. BUT, getting through law school with little or no student loan debt and NOT giving up the opportunity cost of 3 years worth of full-time salary while I'm doing it is a FAR smarter investment (in my eyes) than my fellow 1Ls who are taking out tens of thousands of dollars in student loans in what will likely turn out to be a bad investment.

Posted by: Aaron | Nov 12, 2009 7:02:18 AM

I am a part-time law student at a private law school in Washington, D.C., still earning a nice salary by day as a CPA. My opportunity cost is about \$10,000 per year, the pay cut I took to work fewer hours during the school year.

I performed this same analysis prior to entering law school, although my discount rates were lower. The discount rate is a measure of risk associated with the expected future benefit stream. A 26% discount rate is too high, even by today's poor economic standards for law students. It suggests your money is better invested in GM stock right now than going to law school. I think a discount rate between 8 and 15% is more in line with the risk associated with not realizing the expected future benefit stream, i.e. higher wages out of school.

The only other change that should be made to the analysis is tax-effecting the differential between the hurdle compensation and the first-year law job wages.

Lastly, I question whether opportunity cost of lost earning while in school should enter the analysis at all. Under this logic, we should all become plumbers right out of high school.

Posted by: Chris Wright | Nov 12, 2009 6:24:16 AM

"the top 10-20 schools are still a solid bet."

BWAHAHAHAHAHA. You mean a T20 like GW was last year (before it dropped to the mid 30s) is a good bet? People are being no offered in the top 5.

Posted by: TTT Avenger | Nov 12, 2009 5:08:53 AM

The problem is that many people leave the law, or get pushed out early. Expected 35 year legal career is a questionable assumption.

Posted by: Guest | Nov 11, 2009 10:20:04 PM

The message behind this is correct (if you run the numbers, law school is a massive fraud). The numbers are dubious though and you don't go far enough to connect the dots.

First, you dramatically overstate undergraduate salaries. Half of recent graduates are unemployed, and half of those employed are working at jobs that do not require a college degree. Even before the economy turned, a very large percentage of grads made \$25k-\$35k. Relying on those salary surveys that claim a \$50K+ national average for recent grads is just as dubious as relying on TTTulane's \$140k median law salary. The discount rates are also absurd. Only a present-time-oriented inner city thug would have a time preference for consumption high enough to justify 18% or 26%.

The second problem is that you stop too soon by only calculating the required legal salary, when that salary should have been compared to actual legal salaries to definitively show that law school is generally a bad choice. The majority of JD's awarded do not increase earning power. This was true even in good economic times, with the majority of students from bad law schools (and incidentally, most law schools are bad) unable to get jobs as practicing lawyers. Of the total law school population, perhaps 10% realized a solid ROI. Now that percentage is cut in half or worse because of layoffs, no-offers, and greatly reduced hiring. The job prospects available to me coming out of a Top 15 school ranked in the top quarter are absolutely embarrassing. How does \$50k/yr for 2600 billables at an insurance defense sweatshop sound? I can get a job with humane hours paying almost that much with just my undergrad degree.

Lastly, the "expected 35-year legal career" is a ridiculous assumption. Most of your "also-rans" are looking at a 0 year legal career. The number of washouts is pretty high even among top students at top schools.

Posted by: TTTexasLaw | Nov 11, 2009 6:59:08 PM

If his numbers don't track well with earning potential for liberal arts majors and liberal arts majors are disproportionately represented in law school then...

Posted by: Salazar | Nov 11, 2009 6:09:37 PM

I can't believe anyone would borrow six figures to go to law school without running an analysis like this one. The problem is that the first-year attorney salary totally determines the outcome. There is really nothing you can do to earn more in your fourth year out of college than you would as a "biglaw" first year. But, if don't get a biglaw job when you graduate from law school, you're probably going to be making 50% less and the opportunity cost will dwarf the payoff no matter what your other inputs are. In short, your analysis shows that if you can get a biglaw job, going to law school is a no brainer, and if you can't get a biglaw job, NOT going to law school is a no brainer. Prospective law students should certainly run these numbers for their own circumstances, especially if they have to pay for school themselves, but the conclusion is really this: don't go into law for economic reasons unless you can go to a top school and are willing to work for a biglaw firm.

Posted by: N4 | Nov 11, 2009 5:56:13 PM

The opportunity cost is too high, because a large share of law school students are liberal arts graduates who would need further education to command large salaries. Those graduates who go onto the highest paying law jobs, for example, often would have taken a couple years to earn MBAs or PhDs or some other graduate degree had they not become lawyers, and often would have made little without further education.

This isn't a coincidence. The ability set that makes one successful in law school admissions, law school and the early years of a career of a lawyer are generally speaking the kinds of abilities that are most useful in careers that require graduate education. A very large share of high income earners of all types have graduate educations, and if one looks at those high income earners who don't have graduate educations. Professional athletes, musicians and actors have abilities outside academics that distinguish them. The more boring high income earners without high levels of education are often risk seeking owners of mundane small businesses with strong marketing abilities. Neither group of high income earners with low educations look very much like the smart liberal arts graduates with few marketable skills who tend to go to law school, who often lack non-academic skills, tend to be risk averse, and often have now clue about how to market themselves.

The differences in opportunity cost are particularly great on the back end. While finding a job that pays well in lower or middle management without graduate education isn't impossible in the early years, it is very hard to find careers that pay people with lots of experience that well to people with only modest experience. A K-12 teacher with three years of experience (and probably tenure and good benefits) can make close to what an entry level prosecutor, public defender, entry level government lawyer or small firm lawyer makes, particularly in light of the three years of additional income and avoided tuition. But, most K-12 teachers will max out at one-third of the pay or less of a typical lawyer at peak career earnings. Many prosecutors, public defenders and law clerks follow low earnings at the start of their careers, by very lucrative ones at private practices afterwards.

The starting salaries used are also generally low and it really makes sense to use two numbers, rather than three, since law school graduate salaries are bimodal. The high mode is about \$145,000, the low mode is about \$55,000.

On average, some of the biggest differences in return on investment are based on gender (women, on average, receive a much lower return on their investment, in part, because many don't have thirty-five years of uninterrupted work at growing incomes), and in-state v. out-of-state/private tuition costs, neither of which are included in this model.

Posted by: ohwilleke | Nov 11, 2009 5:45:43 PM

Back in the 90s, when I was teaching Digital Legal Practice Skills, I had the students, as an assignment, create a spreadsheet to do this analysis. Even then, there were some interesting outcomes. A student who did well in law school and earned top dollar was better off if he or she majored in something in college that would have generated little or no income. Students who would have pulled in big bucks out of college barely got back their law school investment. I wonder if pre-law advisors have their advisees think about this, or, better yet, crank out some numbers. But for some college graduates, it isn't a choice of work versus law school, it's law school versus some other graduate education.

Posted by: Jim Maule | Nov 11, 2009 5:10:17 PM

This is an insanely interesting article. Though some of the numbers are generalized (they have to be), it gives a good benchmark for those considering making the jump into 150K of law debt. Most non-business oriented people would never consider the opportunity cost implications of law school education, and even fewer considered the tax implications of it discounted back 4 years. Great work

Posted by: Jim | Nov 11, 2009 4:34:46 PM

I did a similar break even analysis 6 years ago before transitioning from Big 4 accounting to law school, and came out with similar numbers (except with \$200K student loan debt). At the time, biglaw starting salaries were \$145K, and I determined I'd break even in about 7 working years. Based on the current salaries of my old accounting co-workers, I'm well ahead of the game.

Posted by: Tax Attny #4 | Nov 11, 2009 4:10:35 PM

This seems very suspect. Is this proceeding under the assumption that a "hot prospect" graduating from Vanderbilt will have a starting salary of \$80,000? I think that's very, very wrong. Even in this economy.

Posted by: Justin | Nov 11, 2009 3:53:45 PM

I'm a smart guy, but the fields I was interested in and qualified for out of undergrad (politics, english) would never have yielded \$80,000 in my first year no matter how smart I was. So I was basically able to jump from the "Also Ran" salary column out of undergrad to the "Hot Prospect" column after law school. That jump definitely made financial sense.

Posted by: Anonymous | Nov 11, 2009 3:41:20 PM

As an English major, my earning potential was roughly 0 before law school so I can't say this is making me rethink my choices in life.

Posted by: Urquhart | Nov 11, 2009 2:42:39 PM

Don't forget the state school option as well. My tuition and fee costs were under \$40,000 for three years, significantly less than the 113,000 to 140,000 that this study assumed. Even including cost of living expenses, my loans were less than 60k.

Posted by: Nick | Nov 11, 2009 2:39:05 PM

Richard, a majority of students from "the top 10-20" schools are left out in the cold this summer and won't get a \$160,000 job. Many firms are cutting back on those \$160,000 salaries, dramatically reducing class sizes, or eliminating summer programs entirely.

Posted by: anon | Nov 11, 2009 2:37:32 PM

These stats don't look at how a BIGLAW prospect would do. "Hot Prospect" needs to take this into account, complete with 160K salary, bar stipends, etc.

Posted by: whereisBIGLAW? | Nov 11, 2009 2:31:39 PM

I like the study but there is at least one big stretch in your assumptions: I don't know very many, virtually any, solid performers who are earning \$130k per year after 3 years, especially in this economy. Except for perhaps maybe engineers but chances are if you are thinking about law school, engineering has not been a realistic option for a number of years. Therefore, I would argue that the 4th year salary level figures are a bit high, which skews the entire conclusion. I would like to see how you calculated those figures.

Posted by: jake | Nov 11, 2009 2:28:20 PM

Well... although I concur that law school is a losing investment for many, I've never quite agreed with some of the opportunity cost arguments.

We'll never know what could have been if we choose to not go to law school. It's just hard to believe some of those starting salary figures for college grads. Not entirely sure by what "Also Ran" would mean, but I interpreted it to mean someone around the 50th %tile of their graduating class. I would not agree that an "also ran" could garner 40k to start. Fact is, I would think some might have a hard time even pulling in 30k to start. It's just a sad reality these days.

In addition, some people "wait out" bad economic times because there are simply no jobs to be had for fresh bachelor degree holders. Their opportunity cost is essentially zero since they'd be unemployed otherwise. Now, I'm not saying law school is necessarily a good investment. The debt is no joke. But the opportunity cost factors can be overblown, both in a horrible economy and also to a some degree in a decent economy.

Posted by: Aji Ichiban | Nov 11, 2009 2:26:17 PM

I think these numbers are spot on. However, it's worth noting that many people go to law school because they can't do math, so I'm not sure they'll understand (and therefore trust) numbers. Except the tax students. :-)

Posted by: 40 Year Old 3L | Nov 11, 2009 2:25:49 PM

The numbers just don't add up. Where the heck can you do the bar exam for \$2K? My NY bar review course is 3K, Kaplan PMBR will run \$500, and add in the application fee, transportation, lodging and meals and I am looking at \$4K-\$5K.

Also, if the hot prospect is so hot s/he should have a 1L and 2L big law job which will bring total summer compensation close to \$50k.

Posted by: SeeJaneGetRich | Nov 11, 2009 2:12:28 PM

I don't see a "\$160,000" starting salary option. I may be mistaken, but, I'm almost certain Biglaw is still hiring a few people. Sure, it may not make sense to go to a second tier school, but, the top 10-20 schools are still a solid bet.

Posted by: Richard | Nov 11, 2009 2:04:01 PM

I hope people are paying attention to these studies. The law as a profession will benefit if those who enter it primarily for economic reasons cease to do so. I went to law school because I wanted to learn how to "think like a lawyer." My entire 35-year legal career has been spent in public service. I have never made a huge, or even a large salary. But I have enjoyed going to work every single day.

Posted by: Michael J Salem | Nov 11, 2009 12:02:31 PM