What’s the Financial Value of a Law Degree?

March 18th, 2013 / By Deborah J. Merritt

Last year, the columnist Shawn O’Connor offered some provocative calculations about the financial value of a law degree. Drawing upon a study from Georgetown University’s Center on Education and the Workforce, O’Connor claimed that a financial investment in a law degree “is likely to produce at least a 10x return” over the graduate’s career.

O’Connor has a personal interest in encouraging students to apply to law school; he is the founder and CEO of a company that offers test prep and admissions counseling to prospective law students. That fact alone should make readers wary of O’Connor’s claims. Several legal educators, however, have asked me to comment on O’Connor’s calculations, so let’s take a close look.

Bad Math

O’Connor gets off on the wrong foot by making a basic arithmetic error. He subtracts $2.3 million from $4.03 million to get $2 million–instead of the actual difference of $1.73 million. This is much more than a rounding error; it significantly affects O’Connor’s claim that investing in a law degree “is likely to produce at least a 10x return.” The sloppy math should further increase any reader’s skepticism.

Degrees and Occupations

A more fundamental problem with O’Connor’s analysis is that he compares the financial payoff for a degree (the BA) with the payoff for an occupation (lawyering). The Georgetown report repeatedly stresses the difference between those two categories: earnings vary by both occupation and educational level. A significant number of law graduates don’t practice law. Indeed, saturation of the legal market is pushing increasing numbers of graduates into other careers. Given that, one can’t estimate the value of a degree by looking at just one of the occupations pursued by degree holders.

The Georgetown study, in fact, suggests that a professional degree provides little financial return compared to a master’s degree in some job categories. Managers with a master’s degree average $3.76 million in lifetime earnings, grossing almost as much as managers with professional degrees (who average $3.87 million) Similarly, an accountant with a master’s degree averages $3.03 million in lifetime earnings, not far below the $3.20 million expected by an accountant with a professional degree. For an elementary or middle school teacher, a master’s degree offers average lifetime earnings of $2.16 million while a professional degree yields just $2.29 million.

These comparisons suggest that a JD does not pay off financially for many law graduates who fail to practice law. O’Connor computes the cost of a law degree as $285,000, which includes three years of foregone income. In each of the comparisons cited above, the lifetime earnings differential is considerably smaller than O’Connor’s cost of a law degree. The law degree, furthermore, must be purchased today–while any earnings bonus occurs over a lifetime.

A master’s degree, of course, also requires financial investment. But many professionals earn master’s degrees while working full-time, avoiding the heavy costs of foregone income. Most master’s degrees also cost considerably less than a JD, due to lower tuition and a shorter time frame. Using O’Connor’s own calculations, law school is a bad financial bet for graduates who go into business, accounting, primary school teaching–and, most likely, other fields outside of law. A master’s degree will lead to equal or better financial success in those occupations.

If Not Law, Then What?

O’Connor assumes that a student who eschews law school will not attend any other graduate program, settling for the average lifetime earnings of a college graduate. Students who can secure law school admission, however, are not average college graduates. If they opt against law school, they are likely to pursue other types of graduate education. Even if they leave higher education with just a BA, they are unlikely to be average wage earners in that group. The same talents that bought them admission to law school will pay off in the workplace.

The Georgetown report shows that 17.2% of workers with only a BA earn more than professional degree holders. The professional category in that comparison, moreover, includes doctors–who earn considerably more than lawyers. If we looked just at lawyers, closer to 25% of college graduates (with no further education) would earn more than the average lawyer over a lifetime. Similarly, 24.2% of master’s degree holders earn more than the average professional (again including both doctors and lawyers in the latter category).

The top quarter of PhD holders also earn considerably more than the average lawyer. According to the Georgetown report, those PhD’s average $4.7 million while the average lawyer earns just $4.03 million. With lower tuition and fellowship support, doctoral students usually pay less than JD students–further enhancing their financial advantage.

The Value of Money

Even the middle-of-the-pack college graduate, who obtains no further education, can obtain better financial returns than the average lawyer. All she has to do is invest the money she would have spent on law school in a conservative mutual fund, such as a stock index fund. Then she can work at her BA job while watching her nest egg grow. O’Connor and the Georgetown report both use 40 years to calculate lifetime income, and 40 years is a long time for an investment to grow.

Even at just 6% interest, a college grad’s investment of $285,000 (the cost of law school as calculated by O’Connor) will grow over 40 years to more than $2.9 million. That’s considerably more than the $1.76 million lifetime bonus the lawyer will secure. Indeed, as long as the BA grad secures at least a 4.7% interest rate–easily achievable over 40 years–she’ll beat the lawyer’s return on the law degree.

What about lower priced law schools? A student might pay just $20,000 a year with a scholarship to a public school. Adding that $60,000 to three years of lost salary ($135,000 in O’Connor’s calculations) yields a cost of just $195,000 for a law degree. Again, however, the college graduate who invests that money in a mutual fund will easily beat the $1.76 million bonus earned by a lawyer. $195,000 invested for 40 years at just 6% interest will yield a little over $2 million as the college graduate’s bonus. (O’Connor omits any discussion of taxes in his calculations, so I do as well. Both salaries and investment income are taxed, at a variety of rates, so it is not clear how taxes would affect the comparisons.)

Most college graduates, of course, don’t have money sitting around to invest. They borrow money for law school, hoping that the financial return will pay off their debt plus more. This reality, however, doesn’t improve the financial comparison. Let’s assume that we have two college graduates, one who goes directly into the workforce and the other who borrows money for law school. To simplify the comparison, let’s eliminate living expenses; we’ll assume that they each have the same living expenses, paid for three years by their parents.

Again using O’Connor’s figures, the grad who enters the workforce will earn $135,000 over three years. Since her parents are paying her living expenses, she’ll invest all of that salary in a mutual fund. If she realizes a return of 6.5%, she’ll have $1.67 million after 40 years–plus, of course, her earnings during those 40 years as a college graduate.

The grad who attends law school, on the other hand, will borrow at least $60,000–the money needed for three years of discounted tuition at a state law school. She won’t need to borrow any money for living expenses in this comparison, because her parents are paying those. This hypothetical law student is borrowing less than $20,500 per year, so she’ll benefit from the lowest interest rate for graduate student loans (6.8%). If she’s able to repay her loan within 10 years of graduation, an optimistic scenario, she’ll pay about $32,500 in total interest (including the interest that accumulated during law school). Assuming this law school graduate works 40 full-time years as a lawyer, her financial bonus is $1.67 million (her $1.76 million premium for working as a lawyer minus her tuition and interest payments). Even with very favorable assumptions on tuition and repayment rates, the lawyer will fare no better financially than the college graduate.

Both graduates in this comparison face some risks. The college graduate, for example, might not obtain 6.5% interest on her investment. The law graduate, however, faces equal or greater risk. If she is unable to find work as a lawyer, takes time off to care for family, or suffers any months of unemployment, her earnings premium will fall. The college graduate’s mutual fund will grow regardless of her employment history.

Past, Present, and Future

No one knows what today’s law graduates will earn over their lifetimes. O’Connor, like the authors of the Georgetown report, can only try to predict the future from the past. To do that, the Georgetown authors looked at workers in different age cohorts. They collected data on the wages that lawyers (and other workers) of different ages earned between 2007 and 2009.

Each of those age cohorts started practicing at different times. The 25-year-old lawyers in the Georgetown study started practicing law after 2005. The 64-year-old ones started practicing as early as 1967. It is very unlikely that a legal career spanning the years 1967 through 2007, widely recognized as boom years for the American legal profession, will look the same as one reaching from 2005 through 2045–much less from 2016 through 2056 (the projected career span for students who will enter law school this fall). Projecting one generation’s financial success from a very different generation’s experience demands caution.

The Georgetown report, in fact, includes an ominous note on this point. The authors acknowledge that their data show salaries for professionals climbing steeply from age 25 through 40, then leveling off for the rest of the working lifespan. That pattern could suggest that professionals work hard early in their careers to build their earning potential, reaping their greatest financial returns after age 40. But it could also mean that the professionals who were over 40 in 2007-2009, those who began their careers before 1995, are riding a wave of high return on their professional degrees–while those who graduated later are doing less well. Without more longitudinal data, we can’t distinguish these explanations.

Conclusion

O’Connor’s calculations offer little reassurance that investing in law school promises high financial rewards. On the contrary, a closer look at the math suggests that law degrees are overpriced compared to their likely financial pay-off. If we want people to continue serving as lawyers, we need to reduce the cost of law school. Senior lawyers today undoubtedly benefited financially from their legal education; they averaged $1.76 million more in lifetime earnings than their college graduate peers, and they paid very low rates for law school.

The calculation for today’s law students is very different. High tuition, the need to withdraw for three years from the workplace, and uncertain job outcomes make law school a relatively poor financial investment. It’s time to shift that balance.