Wednesday, July 24, 2013
How the "Million Dollar Law Degree" Study Understates Risk (Part I)
In my last post, I argued that Michael Simkovic and Frank McIntyre’s study, “The Economic Value of a Law Degree” (new title), substantially overstates the value of a law degree. Their article challenges my argument in Failing Law Schools that getting a law degree today can be financially risky, especially for students who attend expensive low ranked law schools. As Simkovic writes, “we disagree with [Tamanaha’s] conclusions about the riskiness of a law degree because data on law degree holders does not support his conclusions.” Their study proves, they say, that even law grads at the bottom quartile stand to obtain “hundreds of thousands of dollars” in net lifetime earnings above what they would have earned had they not gone to law school.
Is there a JD/Student Loan Institutional Complex? Apparently the costs imposed by law schools cannot - will not - be reduced in order to address concerns with JD student debt. JD students have been, for the most part, unsuccessful in legal challenges of representations by law schools of success with legal careers. If costs do not come down - and continue to increase - law schools are concerned with decreases in applications. While first tier law schools most likely will survive, some of those in lower tiers may not. Potential law school students may examine with care the economics of attending law school, especially those in the lower tiers. What impact might that have on the Complex, especially for administration and faculties of lower tier law schools that fall by the wayside?
Are we hearing directly from the law schools in the Complex? Surely Brian is not their spokesperson. Are S/M serving in that role indirectly (job protection?)?
Who is addressing the public's concerns with the problems of the Complex? Is the public served well by the Complex in providing the public's needs for competent legal services? Big Law may accommodate JD student debt by paying adequate salaries. But the JD student who does not make it into Big Law may not be able to repay student loans as readily.
Frankly, I'd like to hear from more independent voices on the impact of the Complex on the public. Some years back medical education faced similar issues. Perhaps the public interest was greater since healthcare was involved. But there are real public interest issues involved with the delivery of legal services.
It is important to compare apples to apples.
The debt numbers used here do not deduct cost of living, which a non-JD holder also incurs in the first three years out of school, and are not discounted to present value. Thus, they are not comparable to the earnings premium data provided by the Simkovic and McIntyre paper. This has been explained in several places on the web and is made clear in the paper.
Derek Tokarz of Law School Transparency has publicly stated his agreement with the authors of the paper that deducting 90,000 from the earnings premium is the appropriate metric.
Of course, if one wants to "skip" analysis altogether and throw out random questions then we are in a different kind of discussion.
It is also a bit disingenuous to imply that the paper suggests that anyone should go to law school or that they should go to a particular school. The paper provides a distribution of the lifetime earnings premium and it remains up to an individual student to calculate where they will likely fall in that distribution.
The ranking of a school is no doubt a factor that must be weighed in considering where you end up in that distribution over a lifetime. But it is only one factor among many. There are many lawyers who have gone to lower ranked schools who have ended up on the higher end of the distribution. There are many lawyers who have gone to very highly ranked schools who have ended up on the lower end of the distribution (for example, law professors).
I didn't say that "deducting 90,000 from the earnings premium is the appropriate metric."
I said that a pay off of $350,000 for a $90,000 doesn't look too bad. I also in that comment pointed out that students may face far worse numbers than that.
For instance sticker price at Santa Clara is $45,000 (the majority of SCU students pay sticker). Assuming tuition were to freeze (unlikely since SCU has raised tuition every year for at least the past decade, but let's be generous), the student would have spent $135,000, not $90,000. Books and loan fees add another $7,750.
Assuming a 6.8% interest rate and a repayment period of 20 years, the student will pay an additional $61,265 of interest (after discounting for a 3% rate of inflation).
SCU also estimates students need $20,600 a year for living expenses. I won't count that figure as part of the cost of law school since you have to live either way, but normally you'd be working and paying for expenses out of pocket. If because you're attending law school you have to debt finance your cost of living I think it's fair to include the interest payments on that debt as part of the cost. That increases the cost by $26,500 (again deducting for a 3% inflation rate).
A student with the average amount of undergrad debt (roughly $27,000) will accumulate another $3,100 while his loans go unpaid during law school.
Adding this all together gives us not $90,000, but rather $233,615. The $350,000 earnings premium (the rate for the 25th percentile) doesn't look quite so good. And let's not forget that 1 in 4 law grads saw a premium less than $350,000, so it hardly represents the floor.
Deducting $90,000 from whatever earning quartile you want to look at is not the appropriate metric. Nor is deducting $233,000. The appropriate metric is deducting your actual costs. Quartiles and averages and all that are useful for prospective salaries, because you really don't know where you're going to end up at graduation or later on in your career, but when you're in the application process you do know how much law school is going to cost, and you should use your actual numbers and nothing.
Derek, Please review the primer I provided on my blog recently titled Man Bites Dog and try again. It can take a bit of effort to grasp the concept but once you do it should help you understand the mistakes you are making.
Perhaps you're referring to this concept, "If the resulting figure is positive, the rule dictates that the project should be undertaken."
$350,000 - $233,000 = $117,000. That's a positive number, and therefor the rule of NPV dictates you should attend law school!
...Yeah, except that's a rather poor analysis.
When most prospective students are thinking about whether law school is "worth it", they not just considering whether they will end up with some amount of more money. They know that law is more stressful than most jobs, has longer hours, is more demanding, not to mention all the stress of law school and the bar exam you have to go through to get into that profession that's far more likely to result in depression and alcohol abuse.
What they want to know is if those lifetime earnings outweigh the downside. $350,000 might. $117,000 might not.
The advice I give to prospective students is as follows:
1. Figure out what you want to do (and where).
2. Make sure you actually have an idea of what that entails (understand what do day to day).
3. Only consider a school that gives you a good chance of having that career path, and at a price that is reasonable compared to your prospects.
A Harvard grad with a 4.0 and a 176 LSAT could probably make many millions more dollars by going to law school and landing in a partner-track position at big firm. Should he go to law school? Well, if what would make him happiest is teaching literature to high school students, then no, he shouldn't, even if his earning premium is $1M per year.
Please forgive the typo in the previous comment.
The parenthetical in point 2. should read "understand what lawyers do day to day."
The Man Bites Dog blog post omits the fact that unlike a corporation, an individual can't undertake multiple projects by simply hiring additional personal.
Therefore the maxim "undertake all positive NPV projects" makes no sense for an individual. Does Steve Diamond suggest that an individual should go to law school, and medical school and business school because all three have positive NPV associated with them?
Furthermore, as Derek pointed out NPV is measured in dollars, when what is really needed is a measure of utility. Among other things, per the underlying paper it appears that getting a JD is associated with an additional 8000+ hours of labor over a lifetime. There's also elevated suicide and substance abuse rates, which certainly hints at the misery of many in the profession.
And as has been pointed out elsewhere, you also need to look at the *risk* involved with your NPV undertaking. And the time horizon for the project in question is a lifetime, during which a lot can, and does, happen.
Derek, Please survey the first stage I gave on my web journal as of late titled Man Bites Dog and attempt once more. It can require a touch of exertion to handle the notion however once you do it might as well help you grasp the oversights you are making. .student loan restoration
Why isn't more attention being paid to the rather shocking footnote in the S&M paper that indicates that somewhere in the neighborhood of *40%* of law grads cease practicing law - and yet still somehow manage to pull median earnings up enough to make "law" school worthwhile (per the SIPP data, allegedly).
The specifics of this magic 40% would seem to be pretty damn important (not to mention helpful to struggling grads) and yet - radio silence from the professoriat.
Lots of to'ing and fro'ing about methodology and assumptions - little to no close examination of alleged underlying "facts".
Has anybody taken a second (first?) look at the SIPP data itself?
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