Paul L. Caron

Monday, July 30, 2012

Schlunk: Is a Law Degree a Good Investment Today?

Tax Prof Herwig Schlunk (Vanderbilt), Mamas 2011: Is a Law Degree a Good Investment Today?, 36 J. Legal Prof. 301 (2012):

There continues to be an active debate on the question of whether or not law school is a good investment. I prefer to think of the question not in terms of “whether,” but in terms of “when.” In this essay, I conduct an analysis for three current undergraduates who are considering attending private law schools. I demonstrate how such individuals should take all known costs and all expected benefits into account in making their “investment” decision. As the calculation necessarily differs dramatically from one potential law student to another, my conclusions are far less important than my methodology.

[I]n terms of lost salary, the opportunity cost of law school attendees will vary greatly from one potential attendee to another. To reflect this variation, I will undertake an analysis for each of three very different but hopefully somewhat typical potential attendees. My first such potential law student is a college graduate whom I will name Also Ran. Also Ran achieves above average grades in a relatively nonmarketable major from a middle-of-the-pack undergraduate institution; he could have earned a mere $35,000 in a non-legal job. Also Ran manages to claw his way into a third-tier private law school (with a blended US News and World Report rank of 88th) and has only a poor prospect, which I will set equal to 5% in the current market, of landing an NLJ 250 job (i.e., a “Biglaw” job). My second potential law student is a college graduate whom I will name Solid Performer. Solid Performer achieves relatively good grades in a somewhat more marketable major from a better institution; he could have earned $42,500 in a non-legal job. Solid Performer makes his way into a second tier law school (with a blended US News and World Report rank of 50th) and has a better prospect than Also Ran, but still a relatively small prospect, of landing an NLJ 250 job. Specifically, I will assume that there is an 8% chance that Solid Performer ends up starting at Biglaw. My third potential law student is a college graduate whom I will name Hot Prospect. Hot Prospect earns strong grades in a relatively marketable major from a highly-ranked undergraduate institution; she could have earned $50,000 in a non-legal job. Hot Prospect attends a first tier law school (with a blended US News and World Report rank of 19th) and has a relatively strong chance, which I will set equal to 25% for purposes of my analysis, of ending up in an NLJ 250 entry-level position.

Chart G

Chart J

Chart K

These numbers are bleak. What they say, in plain English, is that with the benefit of twenty-twenty hindsight, two-thirds of the graduates from Also Ran’s institution, four-fifths of the graduates from Solid Performer’s institution, and two-thirds of the graduates from Hot Prospect’s institution will know, as they are receiving their diplomas, that they made what has turned out ex post to be a bad investment!

Finally, it is interesting to turn the mode of calculation on its head, and thus directly confront the question of how much a legal education is worth. ...

Chart Z

[L]aw school is a very risky (and expensive) investment; it should not be entered into lightly. However, as I have already mentioned, and worth repeating again, each potential student’s calculus will be based on a host of factors unique to him or her. For some, like an English major (relatively low opportunity costs) who gets some scholarship assistance (somewhat lower out-of-pocket costs) to attend Harvard Law School (relatively high pay-off), the investment in a legal education is almost surely a no-brainer. Moreover, even for individuals facing a more challenging calculus, it may be the case that a legal education confers benefits beyond the incremental compensation that I have used to analyze the pure investment decision. For example, a law degree opens up many more avenues of potential employment, including importantly self-employment, than does a typical undergraduate degree; lawyers are found in all parts of the workforce performing all manner of jobs. Does this imply, perhaps, that some option value should be added to a law degree’s payoffs? If so, how would one measure such option value? And lastly, of course, a law degree is a professional degree; it confers considerable prestige. But alas, as I first pointed out two years ago, you cannot eat prestige.

For the 2009 numbers, see here. (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).)

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This analysis is flawed on many levels.

1. Starting salary does not equal life time salary. In every field, people start low and work their way up. A lawyer making $80K per year is not a solid performer. He or she is in the bottom 25 to 30 percent of the profession. A lawyer making $55K per year is not an "also ran." They are a worst case scenario--the bottom 10th percentile.

A lawyer making $115K per year is the median, and $130K per year is the mean, and that excludes law firm partners who can make millions per year.

The wage premium estimates are outrageously low.

2. There is absolutely no justification for a 12% discount rate. The cost of federal student loans for graduate school is between 5% and 7.9%, and the government turns a profit on the loans.

The discount rate is outrageously high.

3. Not getting a law degree is even riskier, because the chance of being unemployed is much higher.

4. $35,000 is not a bad salary for a non-lawyer. In fact, it is higher than the median starting salary in 2011 for undergrads with liberal arts, social science, and psychology degrees, and less than half of those students found work at all. The opportunity cost for many students is close to zero.

If solid performer could have earned $42,000 per year, he most likely majored in a technical field like Engineering, Computer science, Math, accounting, economics or healthcare--and very few students in those fields go on to law school. It's mostly low-earning liberal arts majors who go to law school.

5. Only 9% of law grads were unemployed in 2011 according to the ABA data. Only 2.5% of lawyers were unemployed.

6. The numbers presented in this article are bleak by design.

The author of the article made them up out of thin air and intended them to be bleak.

If you actually look at the data on the performance of law graduates, law school is a phenomenal investment, with a lifetime value of roughly $1 million on average--and that's ignoring all of the benefits other than increased earnings.

Posted by: Anon | Jul 30, 2012 5:43:16 AM

Anon, your analysis is flawed on many levels.

1. It is not true that in every field people start low and work their way up. Law is one such example. Large law firms often have attrition rates of 75% or higher (over 10 years). Upon leaving a job paying $200,000, a young attorney will not just drop to a job paying $180,000 or $160,000, as those jobs are also in large firms with high attrition. Instead, the associate will likely land at a firm paying him less than his original starting salary and where there is a much lower cap on his future potential earnings.

Your discussion about the median and the "worst case scenario" is off point. Median lawyer salaries are fairly meaningless to a prospective student, as they fail to take into account graduates who are not in the legal profession. People who leave are disproportionately those who were on the lower end of the income scale, and so by removing them from the calculation, the median is inflated.

3. It's true that law school graduates have a lower unemployment rate than non-JDs, but that doesn't make not going to law school a bigger risk. You have to account for student loans. Law school presents a smaller chance of failure, but a much larger downside in that event. It also greatly raises the minimum you need to get by. A fresh college graduate earning $35,000 may well be content. A law school graduate with $100,000 of debt would not be. Law school is not less risky, it is differently risky.

5. 9% unemployment is higher than the national unemployment rate. That speaks a lot to the demand and versatility of a JD. As for the 2.5% unemployment rate for all lawyers, the number is completely meaningless. Not only does it suffer from the same problem of not counting people who have left the profession, it fails to recognize some nuances of the legal profession. For instance, roughly 70% of attorneys in private practice cannot become unemployed as they are either solo practitioners or partners in 2-10 attorney shops. Even if their revenue drops to nothing and their practice is running in the red, they remain "employed." And of course, people who can be fired or laid off can quickly lose their unemployment classification by hanging up a shingle.

Posted by: Derek Tokaz | Jul 30, 2012 9:48:41 AM

" A lawyer making $80K per year is not a solid performer. He or she is in the bottom 25 to 30 percent of the profession."


My guess is all of your analysis is created on the assumption that the year is 2006, and will be until the end of time. You also seem to think BLS or some other database is providing numbers worth going on. You can't tell what the average pay for an attorney will be in 2022, so best to let a law grad know what their life will be like for the next decade. For all the partners he isn't counting, there are many more solos not being counted either, the total affect would be to lower the average.

If anything, the numbers for the starting salary listed above are unnecessarily optimistic and are based on a minority percentage of reporting grads.

What's even more frustrating is to get the numbers you declare to be below reality, many succumb to fluffing hour sheets, doing unnecessary work, and charging rates so that those most in need of legal help cannot afford it.

"A lawyer making $55K per year is not an "also ran." They are a worst case scenario--the bottom 10th percentile."

HAHAHAHAHAHA - clueless by design

Posted by: Anon | Jul 30, 2012 10:53:14 AM

Perhaps you could read the entire article before offering your critique. Had you done so, you would have found a thorough explanation of the discount rate which goes far beyond your limited view that focuses solely on federal student loans.

Further, your unsupported statements really offer little to the substance of the debate. For example, your point #3 looks solely at undisclosed employment rates. However, you fail to consider the fact the cost of the education. Although law school may reduce the likelihood of unemployment, as you claim, those who go to law school and wind up unemployed are also carrying perhaps $120,000 of debt. Yes, the number of individuals may be lower, but the severity of the impact might be much higher.

Posted by: . | Jul 30, 2012 11:25:26 AM

"A lawyer making $80K per year is not a solid performer. He or she is in the bottom 25 to 30 percent of the profession."

This is demonstrably false. The 2011 report indicates almost (but not quite) double that, at 15%. That's with 88% reporting status, by the way. What do you think the likelihood is that those 12% not reporting are 50-50 employed (so as to not affect the 85% employment number)? Pretty slim is my guess. I'd guess the majority of non-reports are non-working as well.

But let's pretend for a moment you're not just pulling a number from a damp dark smelly place, okay? If 9% is an accurate number, then what this implies is that some of the smartest people in the nation can't manage to be employed at any higher a rate than the general population.

Wow. Law degree then does wonders, neh?

But you're not correct, and it is closer to 15%, not 9%. And even then, people go to law school to become lawyers, dangit. Not schlepping donuts from Dunkin, etc.

According to the 2011 report, just over half managed to get actual law jobs. And a larger percentage of those than usual are "solo practitioners". Guess what that means? Yep, most of them aren't really employed. They're starving.

Fun times.

Posted by: Anon_You_Too | Jul 30, 2012 5:54:36 PM

I'm a 2011 graduate of an "also ran" 86th ranked public law school. My loans total just over 110k. Just prior to graduation, I was lucky enough to land a "JD Preferred" job in house at a very large US company. The position was precisely in the area of law that I had pursued since beginning law school. Unfortunately, the lone boutique firm in my locality that litigates in this area hadn't hired a new associate (new graduate or lateral) since 2007. So the next best thing was in house, supporting litigation in this area and investigating and settling the disputes prior to litigation. My salary right out of the gate was 65k and was increased 10% shortly thereafter. My wife gave up her well paying job that had supported our family throughout law school in order to relocate. Even with the reduced income-based payments, we are literally down to our last penny every month. Down to our last penny, with a household income solidly above the average in our area. In March, we welcomed a new addition to the family. In June, we were denied a mortgage for a new home in our new town because our debt to income ratio was too high. This, because of the student loans. That was a low point, to be sure.

I'm not sure why I'm replying to this post. I frequently find links to postings like this and they always leave an undefined, contrary, bad taste in my mouth. There were even a few floating around during the summer of 2008. My feelings then are the same now. I never looked at law school as an investment. I still don't. There has always been, primarily, an ethereal element to earning my JD. Perhaps it arises from some grandiose self-perception of having overcome my family's blue collar legacy. I think I always have had a great respect for problem solvers. For scholars and thinkers and good writers. I don't know. I know that I really liked law school. And I like being a lawyer - even though I don't litigate. Yet. Or maybe ever. I'm not sure I mind either way.

I don't know why a person would base their decision to become an attorney on these numbers. If they are - and even if the model suggests they are making a 'good investment' - I'm not sure they should do it. They'll likely be miserable anyway. I have never - even in light of the above-mentioned circumstances - regretted earning my JD and becoming an attorney. Even when we renewed our lease in our moldy, spider infested rental last month - even when we moved both boys into our room this summer (only window air conditioner), I never considered that I had maybe, possibly, made a bad investment in law school. Even as I sit here, knowing, that the economic challenges are far from over. I'm an attorney. That I made a good investment seems self-evident.

Posted by: Jack | Jul 30, 2012 8:46:54 PM

If you are really a good employer, you will earn a much more higher salary than 80k per year!lol

Posted by: Brian Green | Jul 31, 2012 3:28:57 AM

"My loans total just over 110k... Even with the reduced income-based payments, we are literally down to our last penny every month....That I made a good investment seems self-evident"

Self evident? What you appear to be saying is that the status which you feel is inherent in being an attorney is worth the significant financial sacrifice which you have had to make in order to achieve it. I'm happy for you that you feel things have worked out for you, but I don't see how in any objective sense this has been a sound investment.

I have an in house position (corporate counsel in the construction industry) I am happy with as well - however I graduated from law school when it was cheap and incurred no significant debt, a good thing as the job market was very tight even then (1997) for anyone not at the top of their class (I wasn't). I left the profession after a few years of practice to work in IT, and only got my present position because in the meantime I did a part time MBA (funded by my then employer) and amassed a significant amount of business experience. All that being said, while things worked out well for me in the end, I cannot recommend my circuitous career path to anyone, and with tuition costing what it does today, I would say that law school is objectively speaking a terrible investment for the vast majority of law students.

Posted by: Jonathan W | Jul 31, 2012 6:40:39 AM

@ Derek,

The data on lawyer and JD incomes is unambiguous--income rises as people get older and typically peaks in their 50s. I'm sure some lawyers may start out in high paying jobs and transition down, but far more move up, as the data clearly shows.

Unemployment also falls with age, experience, and education. You need to compare 9% not to the country as a whole, but to similar people with no law degree.

A 9% unemployment rate for new law school graduates is much lower than the average for recent college graduates in liberal arts fields or for workers who are the same age as recent law graduates. And incomes for those with law degrees are much higher.

@ Anon You Too

The numbers I presented for median and percentile lawyer incomes are based on 2011 BLS data.

BLS data is biased down because it excludes law firm partners and is top-coded to remove high incomes.

The actual figures are even higher.

@ .

There is no possible justification for a 12% discount rate for an investment that can be financed 100% with debt at between 5% and 7.9%.

The Weighted Average Cost of Capital must be between 5% and 7.9%.

These are basic principles of finance.

The author can provide whatever explanation he wants for his absurd assumptions, but anyone who has taken even the most introductory class in finance or valuation knows he made a whopper of a mistake and has completely discredited himself.

This article would never have survived peer review in a finance journal.

Posted by: Anon | Jul 31, 2012 7:23:42 AM

While the data on lawyers might be unambiguous, the data on non-lawyers JDs (many of whom these days never get to practice law and be considered attorneys) is anything but.

Does unemployment fall, with age, for non-lawyers JDs? It probably does, as it does for most everyone else. But does that make a JD worth the investment at its present, ridiculous cost?

Most comparable, recent college grads don't have anywhere close to the same debt level as a recent law grad, who typically has JD debt in addition to UG debt. Taking out insane amounts of money in loans to attend law school, in most cases does not justify this increase in employment prospects, especially when JD "employment" now includes doc review, school-funded positions and retail work.

The BLS is biased up because it includes only those practicing law, and not law grads working at Starbucks.

Posted by: Anonymous | Jul 31, 2012 10:09:04 PM

Yes, the data for JDs (both lawyer and non lawyer) suggests that the JD is well worth the cost.

The NPV of the degree, including opportunity costs and interest cost, is around $1 million, so at $150K tuition, 85 percent of the income boost ends up going to the JD instead of the law school.

The mean salary for all JDs is actually higher than the mean salary for lawyers. The median for all JDs is slightly lower.

In other words, JDs who don't work as lawyers for the most part eventually find something else to do that pays well.

Or at least they have for the last 30 years or so.

Earnings for lawyers actually peak around 5 to 10 years later in life than for most of the population, i.e., lawyers are more likely to be able to work for longer, whereas other people are more likely to be forced into early retirement.

Is borrowing $150,000 for something that is worth $1,000,000 insane?

It's insane not to borrow the $150,000, unless you plan to work for less than 5 years (i.e., you want to stay home with the kids; you have a health issue that will make your lifespan unusually short, etc.).

Posted by: Anon | Aug 2, 2012 7:51:51 AM

Correction: Earnings for *JDs* actually peak around 5 to 10 years later, i.e., *JDs* are able to stay in the workforce longer.

Posted by: Anon | Aug 2, 2012 8:17:55 AM

FTM, that ~600K mention is for someone who attends a cheap law school.

Posted by: Anonymous | Aug 2, 2012 7:00:56 PM

Sorry, my previous comment ("FTM...") was actually a correction/addition comment. My first comment didn't post, but basically said the following:

- What is the data for non-practicing JDs (or the combined data for practicing and non-practicing JDs)?

- Also consider interest. Law students don't borrow $150K and pay back $150K. A student at an "inexpensive" law school who borrows $150K and chooses a 25-year repayment plan will end up paying ~$600K back. And $150K is less and less the norm as many law schools now cost over $200K for three or four years of education.

- Borrowing $150K can be insane for other reasons, such as the fact that having that debt load could preclude a person from taking on alternative debt that could lead to a higher payoff with less work and time requirements, such as a business loan.

- (The following is new to this post) Regardless, though I'll have to look at the data, I'm still not seeing the great benefit of a law degree. Lawyers earn $1M more over their lifetime, but they stay in the work force longer than other professionals do. In fact there have been recent stories about how many attorneys simply don't retire. Moreover those who borrow money to attend law school pay back a lot more than the cost of their tuition. Essentially borrowing to attend law school, especially as tuition continues to sky-rocket, increasingly means less flexibility and more debt-servitude due to one's loans, a shrinking economic benefit from the JD, and a need to stay in the workforce longer than others to see any potential benefit.

- (This is from my un-posted post) If I were a 22 year old with $150K in cash I can tell you that one of the last things I would spend that money on is a legal education.

Posted by: Anonymous | Aug 3, 2012 10:43:37 PM