Paul L. Caron

Thursday, June 18, 2015

Simkovic: Understanding Student Loans

Michael Simkovic (Seton Hall), Understanding Student Loans (1 of 2):

A shorthand approach sometimes used to compare the cost and benefits of higher education—comparing student loan balances at graduation to first year earnings—can be seriously misleading.  The implication of this approach is that student loans have to be repaid in full shortly after graduation, and that graduates’ low initial earnings will persist for the rest of their lives.  

This is an apples to oranges comparison.  An investment in education pays dividends throughout one’s life. First-year earnings are one small, unrepresentative, slice of lifetime earnings. Comparing a lifetime investment to one year of expected returns on it feeds ignorance about how student loans and lifetime earnings actually work.  It thus risks misleading prospective students into making financially disastrous decisions to underinvest in education. ...

Because the benefits of education accrue over the course of a career—perhaps 40 years or more—and earnings typically do not peak until middle age, the costs of education should ideally also be spread over a similar time frame. 


10-years to pay for an education that provides benefits over 40 years makes little sense.  For law graduates, real earnings typically continue to grow for 30 years after graduation.

Michael Simkovic (Seton Hall), Understanding Student Loans (2 of 2):

So how should our understanding of student loans apply to law students?  Mortgages are routinely repaid over 30-years, even though owner-occupied housing is close to pure consumption (most of the value of housing is consumed as imputed rental income, with appreciation averaging only around 1 percent above inflation). Legal education typically provides a much higher rate of return than real estate, and is probably closer to investment than consumption.  

Rather than focus on initial salaries at graduation alongside student loan balances, it would be more appropriate to emphasize student loan debt service payments, assuming students pay their loans over several decades and with payments that match the expected trajectory of earnings. This would be an apples-to-apples comparison—initial cash flows compared to initial cash flows.*

* If student loan balances or initial cost of education are presented, these should be compared to the expected present value of the boost to earnings from the degree over the course of a lifetime.  Thus, for example, whenever reporting that law school costs around $100,000 on average, it should also be reported that the average value before taxes and tuition is around $1,000,000 and that the median value is around $750,000. ...

Journalists and education experts should also be careful to discuss student loans using apples-to-apples comparison—cash flows to cash flows, and lifetime present values to lifetime present values.

Legal Education | Permalink


1. Past performance does not guarantee future returns, as investment professionals are required to tell their marks, and essentially every lawyer in the country save for S and his followers acknowledge that the legal profession is undergoing profound structural change that will almost certainly wreak havoc with earnings of newbie lawyers.

2. From an earlier TaxProf article this week, here's the perspective of a 50-year legal professional (S has practiced law for one year, IIRC): "I think everyone who is 50 years old and older — including me — ought to be ashamed of themselves for what we're doing to our young people, making an education all but unaffordable," he said.

"When Mitch McConnell and Steve Beshear were in my classroom, I doubt they paid much more than $100 a semester for their tuition. They went to school almost without any cost, substantially free," Lawson said. "A resident law student next year will pay between $21,000 and $22,000 in tuition. You can't work your way through school at that level. I have students graduating with $100,000 or more in loan debts that will affect them for the rest of their lives. Shame on us."

3. This is probably obvious to people who have spent more than 3 years in the private sector, but age discrimination is barring a whole lot of people from enjoying anything resembling a 40 year career. If one searches for terms like "Age discrimination legal profession," they can read all sorts of articles about how fun it is to get a new job in the profession after about the age of 45 or 50.

4. The graph of lawyer earnings over time is pretty amusing if you look at the >$90k datum point for the 26-30 year old cohort and compare it to either NALP data for new attorneys ($62k, I believe) or Seton Hall's (S's employer) employment disclosures to the ABA, where we see that maybe 19 of 285 graduates in the Class of 2014 made that much money - if we are to generously assume that every law firm with >51 lawyers starts their newbies at $90k or higher.

5. With respect to "emphasize student loan debt service payments, assuming students pay their loans over several decades," I'll just repeat the usual boilerplate about most law grads not being able to afford their student loan payments without the aid of IBR/PAYE/PSLF - and of course the latter two are on the chopping block in every Higher Education Act reauthorization proposal I have seen from the party currently holding a majority in Congress. It's too bad the DOE adamantly refuses to publish information like the % of law school grads on those financial hardship-cum-welfare programs or the % of law school grads whose loans are in active and current repayment - no IBR/PSLF/PAYE enrollment - with the balance decreasing each month.

6. Despite following the usual law prof standard of declaring oneself in expert in A, B, C,... X, Y, Z Law after one year of legal practice and a few years in the ivory tower, S's knowledge concerning student loans and lending policy is considerably rudimentary next to that of the financial aid professionals with whom I regularly correspond, even though none of them have one of those magic JDs.

- The Real Unemployed Northeastern, not the doppleganger recently spamming Wikipedia with pro-S&M and pro-Leiter edits and quite hysterically and risibly babbling about some Law School Transparency-funded conspiracy when *my* edits were excised by multiple Wikipedia editors.

Posted by: Unemployed Northeastern | Jun 18, 2015 12:14:27 PM

What we really need are stats on the lifetime earnings potential of someone accepted to law school who did not attend compared to the same person who was accepted and graduated law school, especially for STEM majors. Impossible to do, of course, though one could average out the earnings of all those others of the same cohort who were accepted but didn't attend.

In my case, holding an MS in Physics, I was offered lucrative jobs at DC law firms before even applying to law school and then I chose not to practice law after graduation, figuring the earnings and lifestyle of a Contract Computer Software Engineer to be much better. I figure that law school did not add to my lifetime earnings, though it certainly would have detracted from my lifestyle options and quality.

Incorporating my data in the stats presented would entirely skew the results.

Posted by: Jimbino | Jun 18, 2015 12:09:59 PM


Isn't that 200,000 dischargeable in bankruptcy if the business fails? Isn't it less likely that a loan will be provided to a business that will almost surely fail? Won't there be at least some assets that can be resold?

Finally, do people say (or think) that individual is lucky? I wouldn't unless the business idea was sound.

Posted by: JM | Jun 18, 2015 9:45:47 AM

Good point. If someone leaves college owing $200,000 he's just been loaned to start his own business, we call him lucky to be able to borrow the money, not a victim of the banking system.

Posted by: Eric Rasmusen | Jun 18, 2015 5:38:40 AM