Servicing Your Law School Costs: Consider the Implications of Debt Before You Decide on a Law School

Almost half of the over 3,000 respondents in Above the Law’s recent survey on educational debt of lawyers said they had over $100,000 in educational debt.  That’s a depressing, though hardly surprising, report.  On the bright(er) side, many fewer reported high-interest revolving debt, such as credit card debt.  But, of course, educational debt also delayed or deferred other investments, such as buying a home, and it materially affects (for most respondents) their choice of what job they take (keeping in mind that the respondents in this survey appear to be among those lucky enough to have a legal job).

What isn’t clear is whether these lawyers were focused on the effect their debt would have before they made the decision to attend a particular law school (or attend law school at all), or whether the impact that educational debt would have only became depressingly obvious when their first student loan payments came due.

My guest bloggers and I talk a lot here about the care you should take with your law school decision, and the prospect of becoming a lawyer at all.  A lot of my concern for prospective law students (and especially Advise-In Solutions clients) has to do with the rising—and frequently staggering—amount of debt involved in paying for law school.  It’s just a different thing to be uncertain of a career choice if you’re debt-free when you find out it’s really not for you than if you have six-figure or significant five-figure debt.  In the latter cases, you’re pretty much stuck; in the former, you can decide that the time and money you spent investing in your career may have been bad bets, but they weren’t “all-in” bets.  You’re still better off doing the necessary investigation into what lawyers actually do and deciding whether that’s really right for you but the consequences of a mistake at least won’t tie you down for, potentially, the rest of your life.

If you know you want to be a lawyer, the level of debt still matters, since it will affect your career flexibility after graduation.  A high debt level drives you to a higher salary, often at a large law firm, which is great if that’s what you want, but not so great if that kind of work will make you miserable for several years or longer.

To illustrate, let’s say you come out of law school with $125,000 in educational debt and have 20 years to pay off your educational loans.  Let’s also (charitably) assume that interest rates remain at or near their current historic lows, so that you pay a 4% annual rate.  To begin with, you’ll spend about $182,000 to pay off your loan.  And if payments are regular, you’ll spend around $9,000 each year for 20 years (if you opt for a plan that escalates payments, you’ll pay more in the aggregate but less at the beginning).

That’s a big chunk of change.  If you graduated from a law school ranked below 25 in the US News rankings, and you earn the average income of such a graduate, one out of every seven dollars of your initial gross income will go to paying off your educational debt (and in the current legal employment market, no one should assume that their income will rise consistently).  If you’re an average graduate of law schools ranked 11-25, the situation isn’t a lot better—one of every 10 dollars rather than one of every 7.  “Gross income” is important—it includes a lot of money (taxes, social security, Medicare, health insurance, etc.) that you’ll never actually see.  As a proportion of disposable income, educational debt payments are obviously much, much higher, and that money just won’t be available for other things you want.

Even those numbers assume an unlikely persistence of historically low interest rates for the next 20 years.  If your educational loans are variable interest (as most are), and interest rates were to rise to a more historically normal level of, say, 5.5% (nowhere near where they would be if the economy became significantly inflationary), then you’ll pay about $207,000 to pay of the same $125,000 in debt and, more important, the annual payment will increase by over $1,200 per year.

Sobering as that is, it doesn’t necessarily make law school debt a bad investment (although it does imply that it’s a terrible investment if you’re not sure you really want to practice law).  But it’s crucial to get clear graduate employment data from law schools before you decide to attend.  You and your law school admission advisors should carefully calculate the long-term impact of law school debt (being careful to incorporate significantly higher-than-normal expenses the first few years out of law school), not just whether or not you can find the money to go.  The money to attend law school is probably available, but after you’ve tossed your graduation cap in the air, you don’t want to be surprised by the constraints that your debt will impose on your future.

~ by Kyle Pasewark at Advise-in Solutions on March 10, 2011.

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