Is becoming a lawyer a good investment? (part 3 and conclusions)

In part 1, we described the hypothetical students used in this investigation and calculated the opportunity cost of going to law school for each of them. In part 2, we factored in tuition and university fees and arrived the amount of income a new JD would need to earn to do “better” than their non-lawyer doppelgänger. Part 3 is where we draw conclusions. In order to do so, we’re going to revisit the concept of hurdle compensation that we developed in the last post.


Step 5: hurdle compensation, attribution, and expected salary

As mentioned above, a student’s hurdle compensation is the annual salary they would need to exceed in order to do “better” than they would have without a JD. While this figure tells us something about the costs of actually being a lawyer and how much one should earn to be better off financially in light of these costs, we can interpret it in another manner. Whatever one of our students earns in excess of their hurdle compensation is income directly attributable to their law degree.

Think about how the hurdle compensation was calculated. We took the expected fourth year non-JD income of one of the students and added overtime pay. This is pay they could have earned at their hypothetical non-lawyer jobs, meaning anything in excess is a result of their law degree. The cost of living premium is still included even though it does not represent income a student could have earned in an alternate life. It accounts for the fact some of their salaries as lawyers will be eaten up by higher than average housing.

Now, we examine each students’ expected post-JD income and see how it compares to their hurdle compensation.

Fortunately, we have good data on salaries for recent law graduates. For more than a decade, the National Association for Law Placement (NALP) has been surveying newly employed lawyers on their earnings and publishing the results. Schlunk used their 2008 report to do his analysis and I will use the 2018 data for mine.

 

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As we can see, the distribution of lawyer salaries is heavily concentrated in two areas. The NALP asserts 49.6% of salaries reported fall in the $45,000-$75,000 range, while just over 20% are greater than $180,000. As you can guess, the salaries in the high six figures are those given to new biglaw associates. The NALP also notes low salaries are under-reported, meaning the percentage of jobs paying in the 45-75k range is probably higher.

Based off of this graph, we will assume the average non-biglaw job pays $60,000 and the average biglaw one $185,000. Using the percentage chance we stipulated in part 1 of each student landing a biglaw job, we can calculate their expected first year salary and subtract their hurdle compensation to see how much income is attributable to their JD.

 

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Table 8

 

Thankfully, the results are positive. The expected income of each student exceeds their hurdle compensation, meaning on average their degree is conferring some additional financial gain. However, we must note averages can be deceiving. Solid Performer’s expected income is ~$129,000, but this is nowhere near what he will earn in the average biglaw or non-biglaw job. If he is unfortunate enough to find employment in the 60-75k range (as nearly half of all new lawyers do) his annual earnings will not exceed his hurdle compensation of ~$99,000. His law degree may have made him eligible for high paying biglaw jobs, but the alternatives are dismal given the costs. In the event he doesn’t score a biglaw job (a 45% chance), he will be worse off than if he never went to law school in the first place.

Regardless, we are going to treat the expected first year law income as the actual earnings of our students, and their incremental income as the actual income of theirs attributable to a law degree even if in specific cases the numbers may either be much higher or much lower.

Step 6: discount rates

As of now, we know what a law degree will net you your first year of employment, but what about all subsequent years until retirement? Even if we did know that, how can we value future income in today’s terms to compare it to the costs we’ve incurred in the present?

The first question we’ll tackle with an assumption. In his calculations, Schlunk assumes a 3.5% yearly growth in salary over a 35 year law career to account for increases in productivity. I see no reason to disagree, so I’ll do the same. This ignores the possibility of our students making partner or coming across fat bonuses or raises, though.

Techniques exist to answer the second question. Valuing future income isn’t as straightforward as summing it all and saying this is how much it’s worth (unless you’ve made some uncommon assumptions). Future earnings are discounted and expressed in present dollar terms in order to reflect the opportunity cost of not having the money or account for some risk to actually receiving it.

The latter reason is most relevant to our discussion. The incremental income earned attributable to the law degree is small, relative to the entire salary, and volatile. Schlunk says law students often do not appreciate the career instability of many attorneys. Not everyone gets raises and sometimes law firms “blow up.” Even if you’re an in-house lawyer, you’re as subject to corporate downsizing as any other employee.

Additionally, our students aren’t content with merely breaking even on this investment. They want as close to a guarantee as possible they will not only recoup their initial costs but make positive returns. We can think about this as them wanting the investment to pay off over a very short time horizon, which is the equivalent of applying a high discount rate to future income. Money closer to the present is much, much more valuable to them. The more they make now, the less doubt there is that law school was a bust.

These two factors make it reasonable to apply relatively high discount rates to the future income attributable to the degree. To do our calculations, we will treat each student’s incremental income as an annuity dispersed once a year that grows at a rate of 3.5%. Below are the results for different discount rates.

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Table 9

Step 7: conclusions and limitations

For context, I’ll reproduce the cost of attendance for each student.

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Table 10

For all of the given discount rates, law school is not an attractive investment. Suppose Solid Performer personally discounts future income at 17%. In other words, $100 today is worth just as much as $117 a year from now for him. If he were to attend law school under our assumptions, he would be paying $335,579 (total cost) for something that is in fact only worth $219,629 to him. Likewise, If Hot Prospect is under the impression that 12% is the correct rate (which is still significantly below Schlunk’s recommendations), she would be paying $422,140 for something that is worth $409,471. Each student would only break even if they convinced themselves something a little under 12% was the appropriate discount rate.

Does this mean law school is a poor investment in all circumstances? Definitely not. One thing our analysis neglects is the impact of financial aid and scholarships on total cost. Many law schools offer considerable assistance to students, with more than half of their enrollment receiving some type of merit or need-based funding. Clearly, the conversation surrounding law school changes significantly when you’re on a full ride versus paying entirely out of pocket.

It’s also worth repeating how averages can be deceiving. Our expected yearly income figure used to calculate the present value of a law degree captures only the average outcome of each student. We’ve assumed Solid Performer either earns $60,000 or $180,000 out of law school, but used something in between these two numbers to arrive at the salary we claim he would have made after graduation. If Solid Performer gets the biglaw job and earns the $180,000, his degree is certainly a much better financial investment, but that is not reflected in our outcomes.

The next set of limitations has to do with your author. I am an undergraduate with some time on his hands, not Herwig Schlunk, a law professor with more degrees than everyone in my family combined. The assumptions I make in this series of posts without Schlunk’s guidance are at best educated guesses and at worst ignorant stipulations. What’s more, even though I am trying my best to follow Schlunk’s analysis closely, his paper is nearly a decade old and I do not have the expertise to know to what extent his methods and assumptions are still accurate. This is an amateur attempt at something only a professional can treat with the necessary discernment.

Lastly, I expect some to take issue with the scope of this inquiry. I’ve tried to shed light on the narrow question of whether or not law school is a good financial investment, but there are clearly other reasons to be a lawyer. As mentioned in the intro to part 1, one can be motivated to practice law by the pursuit of justice or their personal vocation. I will not speculate on the ultimate reason a reader may want to pursue a JD, but our analysis suggests it should not be to make a sound investment.


 

If you got this far, thanks for reading.

I heavily recommend reading Schlunk’s original paper. While my goal was to reproduce his method with current numbers, it is almost certain I erred in some respect or missed an insightful point hidden in the original. Do give it a look for a more comprehensive understanding of how he went about answering the question.

Also, here is the Excel sheet I used to calculate everything. You can plug in different annual incomes or discount rates to get a feeling for how the results might have turned out otherwise with different assumptions.

If you have questions/concerns/feedback regarding this series of posts, feel free to leave a comment or send me an email.

riley[at]rileywilson[dot]net

Is becoming a lawyer a good investment? (part 2)

In the last post, we described the hypothetical students we are using for this investigation and considered and the type of income they would be missing if they chose to go to law school. Now, we’ll add tuition to the total cost and see how much each would need to earn as lawyers to “break even,” so to speak.


Step 3: tuition and totals

Tuition varies greatly between institutions. In the most egregious of circumstances, you can expect to pay up to $77,000 a year at fancy private law school. Yet, public law schools exist that only charge around $22,000.

From my amateur research, tuition seems to increase with the prestige of the institution. Accordingly, Also Ran, Solid Performer, and Hot Prospect will probably pay different amounts. To account for the variation, I lifted tuition information from three law schools whose standards correspond to the stated undergraduate performance of our hypothetical students. For Also Ran, a school nearly outside the top 50 in the rankings. For Solid Performer, a school hovering around the 20 mark. Hot Prospect gets the big name T14 law school with the big name prices.

I also added a couple thousand dollars extra to yearly expenses to account for books and university fees.

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Table 4

These numbers are eye-popping. For context, Let’s assume Solid Performer takes out loans to cover the entirety of her expenses. If she secures a 6.08% interest rate (the federal graduate fixed rate) and makes monthly payments of around $1,500, it would still take her 15 years to pay them off.

Adding these totals to the opportunity cost figures is truly frightening.

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Table 5

We’ll soften the blow a bit by taking into account summer employment.  Many law students are able to land lucrative summer positions that can lower the net cost of law school. In 2009, Schlunk estimated that Also Ran, Solid Performer, and Hot Prospect can each earn approximately $5,000, $7,500, and $10,000 respectively during a summer.

Rather than plug these figures into an inflation calculator, I decided to look for current data. Ziprecruiter has this helpful table on their website.

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I think it’s safe to assume Also Ran, Solid Performer, and Hot Prospect have summer earning potentials around the 25th, 50th, and 75th percentiles, respectively. Subtracting two summers of compensation yields the following total cost figures.

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Table 6

Roughly, this is how much it costs to go to law school. However, and I hadn’t actually thought about this, there are also significant costs to being a lawyer. We examine those next.

Step 4: hurdle compensation.

If you become a lawyer, it would be nice to earn more than what you would have without a JD. Financially, it would be a disaster if you invested $300,000 and three years of your life to end up with the same earning power as a similar individual who did not go to law school.

As a result, we will attempt to quantify the amount you would need to earn in order to be doing better than your non-lawyer doppelgänger. This is different than just looking at the fourth year hypothetical yearly wages calculated in table 2 of part 1. As mentioned above, actually being a lawyer entails sacrifices that ideally you would be compensated for. Imagine you make $5,000 more annually than your doppelgänger. However, you also have to live in a more expensive city than they do and pay $5,000 more in housing. Effectively, you make as much as the doppelgänger when the additional costs are considered. If you want to “actually” make $5,000 more than your twin in this scenario, you would have to be compensated for the $5,000 you spent in excess of what you would have. Thus, you would have to make $10,000 more than them.

We’ll call this figure we arrive at after adding the additional costs associated with being a lawyer “hurdle compensation.” In our toy example above, the hurdle compensation would have been whatever the non-lawyer doppelgänger had made plus the expenses tied to being a lawyer.

We will consider the cost of housing and overtime pay in calculating hurdle compensation for our hypothetical students.

Lawyers, especially high earning ones, are concentrated in a few American cities. New York, San Francisco, Los Angeles, and Washington D.C. all have ample big-shot lawyer populations and sky-high costs of living. As a result, if one of our students gets a biglaw job, they will most likely have to move to an expensive city.

Lawyers are also notoriously overworked. It’s not uncommon to only bill (charge clients for) 40 hours a week but actually work 60 or 70 hours at large law firms. Our budding lawyers should be compensated for this overtime if they so happen to get a biglaw job.

As with state taxes, I’m not even going to try and figure out an exact cost of living premium owing to the variation across cities. Schlunk assumes an additional 10% of total income is an accurate premium, so I’m going to go with that.

Getting overtime premiums involves less hand-waving and more calculation. We’ll assume the average worker puts in 2,000 hours a year (40-hour weeks), and any hours over this are overtime. We’ll also stipulate that any lawyer has to put in 200 more hours a year than average. Thus, a regular lawyer works 2,200 hours a year.

Now, it’s not unreasonable to assume that while an average lawyer is expected to work 2,200 hours, biglaw lawyers work 2,400 (46-hour weeks).

The going overtime rate is 1.5x your average hourly rate. However, each additional overtime hour is more valuable as it is taken from an ever-decreasing pool of your free time. Thus, Schlunk, and I, assume the first 200 overtime hours should be valued at 1.5x one’s average hourly rate, but the next 200 should be 2x.

Based on our assumptions about the probability of each student getting a biglaw job, Also Ran will need the cost of living premium and 400 hours of overtime pay 20% of the time, Solid Performer 55% of the time, and Hot Prospect 90% of the time.

Here are the totals:

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Table 7

As we can see, our three students must make more than approximately $64,000, $99,000, and $135,000 respectively in order to “do better” than their non-lawyer counterparts.

However, these figures do not tell the entire story. In the next part, we’ll consider discount rates and conclude whether the JD was a good investment.

Is becoming a lawyer a good investment? (part 1)

Like many in unmarketable majors, I’ve briefly toyed with the idea of becoming a lawyer. Not necessarily because I have a deep interest in the law, but because going to law school is the ultimate vindication for your humanities degree.

My personal interest passed quickly, but curiosity lingered about the profession. Why do people become lawyers? Is it really as miserable as I’ve heard? Is it even a sound financial decision?

Thankfully, someone has already answered the last question. I recently came across a paper from law professor Herwig Schlunk on whether going to law school is a good investment (spoiler alert — it isn’t).

The paper is a little outdated, being written in 2009, but I wanted to try and reproduce his analysis as best I can with current figures to see if the conclusions change. This post is the first in a series where I do just that. I’ll be following his steps as closely as possible, but will not be comparing my end results to his.

Note that Schlunk, and this series of posts, is attempting to answer the question of “should I go to law school?” from a purely financial perspective. Money aside, people might attend because they feel they could be good lawyers, or they want to contribute to a more just society. Non-monetary reasons are certainly valid, even applauded, but the costs of any type of graduate school should be considered before a prospective student writes the check or takes out the loan. Schlunk acknowledges that becoming a lawyer confers numerous benefits beyond increased earning power, but as he puts it, “you can’t eat prestige.”


Step 1: the students

Because the answer to any major life decision is highly particularized, it’s foolish to perform one set of calculations trying to settle the matter and claim the results apply to everyone. In an attempt to be less foolish, Schlunk stipulates three hypothetical undergraduates with different backgrounds and considers their situations in parallel. (Note: I’m borrowing Schlunk’s names for the students out of convenience).

Let’s meet them.

Also Ran is an undergraduate at a middle-of-the-pack university. He achieves above average grades in a relatively nonmarketable major and could have earned $47,000 in a non-legal job after graduation. He, by Schlunk’s account, “claws his way” into a second/third tier law school and has about a 20% chance of getting a lucrative “biglaw” job after graduation.

Solid performer went to a better college and made good grades in a more marketable major (think economics vs English). He makes his way into a mid tier law school but could have earned $66,000 had he chose to jump into the workforce. As a JD, he has a 55% chance of getting a cushy biglaw job.

Last, we have Hot Prospect. She is the most conventionally successful of the bunch, having a stellar academic record in a marketable major (CS/math/engineering) at an elite undergraduate institution. She gets into another elite university for law school but could have made $83,000 in her first year out of undergrad. However, biglaw jobs aren’t a certainty for anyone, including her. She has a 90% chance of getting one after law school.

Step 2: opportunity cost

If someone decides to go to law school, or pursue any other type of post-graduate education, they are missing out on potential wages. Of course, not all of what you make goes straight into your pocket. In the table below, I subtract various taxes from the salaries each student could have made in their first year of employment. The FICA tax rate I used was 6.2%, and all three students happened to fall in the same Federal income tax bracket given their first year salaries.

State taxes are trickier as schemes vary wildly across the nation. States like Minnesota and California have a multi-tiered system with differing marginal tax rates. Others, like Massachussets and Utah, have a single rate for all income. To further complicate things, Texas, Nevada, Washington, and Florida have no state income tax at all.

To simplify my calculations, I’ll make a move similar to what Schlunk did and assume a flat 4.5% state tax rate. This might significantly over or understate the amount of taxes you would pay in most states, but it’s an accurate figure if you’re living in Illionois, for example, with a 4.95% flat rate.

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Table 1

Based on the assumptions above, this is the opportuntity cost for each student of going to law school for a single year. Note that it typically takes three years of schooling to get the degree. I could multiply each figure by three, but that wouldn’t account for raises in pay commensurate with increases in productivity. In his calculations, Schlunk accounts for this by bumping pay 3.5% a year but acknowledges this figure might be too low. I assumed a 4% growth in yearly wages and ran the numbers again.

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Table 2

The hypothetical fourth year is included to illustrate what kind of earnings a potential JD could expect her fourth year post-undergrad had she joined the workforce instead of going to law school. Later, we will compare it to what she would likely earn as a freshly-minted lawyer.

Now, the (rough) financial opportunity cost can be obtained by summing the first, second, and third year after tax incomes.

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Table 3

Already, law school isn’t looking good. The financial benefits must be large in order to justify passing on $110,000-$185,000. Unfortunately, this is only the opportunity cost. In the next part, we will consider the greatest explicit expense to getting a JD.