Should I Go To Law School as a Financial Investment?

Law school is often seen as a big investment, but a safe bet. If you are asking yourself “Should I go to law school?”, the answer, at least from a financial perspective, might seem like a solid “yes.” This may seem particularly true given that we are starting to see little hints that job prospects for lawyers in 2010 are improving. A recent report sheds some light on the law school decision from a dollars-and-cents perspective and offers some surprising answers.

Traditionally, the law school investment has offered an implicit quid pro quo. Last summer, when the signs of an economic turnaround were still dim, the New York Times described the unspoken understanding between law schools and their students:

With the cost of law school skyrocketing over the years, the implicit arrangement between students and the most expensive and prestigious schools has only strengthened: the student takes on hefty debt to pay tuition, and the school issues the golden ticket to a job at a high-paying firm — if that’s what the student wants.

It seems fair enough: if a law student is investing up to $200,000 in a law degree (see the story of the University of Pennsylvania student), shouldn’t they have a good job waiting for them? At the very least, a potential law student needs to feel like there is a strong possibility that they can pay off their debt and lead a comfortable lifestyle after the investment of time and money they have made in law school.

The New York Times article suggests that this traditional arrangement may no longer be tenable in the current era of profound economic change and uncertainty. But a recent analysis suggests that even if economic times are good, law school may be a bad bet. Herwig J. Schlunk, Assistant Professor of Law at Vanderbilt University School of Law, has conducted an analysis that suggests it’s hard to come up with a scenario where law school is a good financial investment.

Schlunk takes the approach of considering the income from a legal career as an annuity that is paid out over time. If you think of your law degree as an annuity, you would think about it this way: If I invest x dollars today, what payouts would I need to receive over time in order to get a good return on my investment? Schlunk assumes that the first-year associate salary (after graduation) needs to include a certain payout which then needs to be maintained and increased over time (a 35-year legal career).

A simple way of thinking about it is to say that over the course of your legal career, you need to make back your law school investment through your salary. You use the additional income that your law school degree provides you to pay back (and profit from) your initial investment in law school. The “additional income” here is the income that is in excess of what you would have made had you not attended law school.

Tax Prof Blog offers a nice summary of the numbers. In brief, Schlunk divides students into three categories: Also Ran, Solid Performer and Hot Prospect. Also Ran may need a starting salary up to $101,296; Solid Performer may need to earn as much as $138,065; and Hot Prospect may need to pass the hurdle of $178,213 in order for law school to be a positive investment. Schlunk says that these numbers are in stark contrast to real average starting salaries reported by the National Association for Legal Professionals (NALP).

I would add two points here: the numbers may even look worse if you take into account shorter-term legal careers. While there is not a lot of data on the length of a legal career, it is not uncommon for attorneys to make major career changes after just five years. Second, especially when the economy improves, it’s possible that the “Hot Prospect” attending a top-five law school may actually end up in the positive column if he or she pursues a legal career for enough years.

What are Schlunk’s perspectives on the current legal market? First, his analysis suggests that in the current job market, “the cost of a legal education may be higher than I have calculated and the benefits may be lower.” Second, “the incremental stream from a law degree is actually more risky than recent law school attendees have probably been led to believe.” Finally, “there is no reason to believe that the currently-experienced changes in the legal market for freshly-minted law school graduates are temporary.” Overall, Schlunk does not paint an optimistic picture.

As a final point, would it ever make sense to invest money in something that yields a negative financial return (or perhaps just a poor positive return)? The answer for some will be “yes.” If you are passionate about law and feel like a legal career is a perfect match for your aptitudes and your personality, can you really put a price tag on the fulfillment you will receive from doing exactly what you want to do with your life? If this is you, don’t let the bare-bones financial analysis dictate a career choice that may deeply resonate with who you are and how you want to express yourself.