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how long do i have to last in biglaw to make law school worth it
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Date: February 21st, 2012 10:50 AM Author: odious bearded theater Assume I would have graduated with 20k in debt and had an offer for a 50k job straight out of ugrad.
Instead I am going to graduate with 180k in debt and start biglaw in the fall.
I'm really bad at math so would like some analysis from do bros |
Date: February 21st, 2012 10:59 AM Author: motley temple (http://www.autoadmit.com/thread.php?thread_id=1879655&forum_id=2#20016456) |
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Date: February 21st, 2012 11:00 AM Author: Garnet Judgmental Dopamine Fanboi it would depend on what your future earnings would be without law school and will be after biglaw.
To be very simple, if on the first day in biglaw you are $200k in the hole, you need to last long enough to pay off all your debt and save $20k plus what you would have saved in those extra years you worked biglaw....so like $40k. |
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Date: February 21st, 2012 11:08 AM Author: french galvanic mood Graduating law school, you've taken on: 1. $160K in additional debt. 2. Interest on the $160K debt. 3. Whatever interest on the original $20K debt that accrues over the 3 years you could have been paying it down. 4. Giving up at least $150K in salary over those three years. So just making up numbers, if you don't pay down your debt very rapidly, you're looking at around $60K in interest, let's say you lost $155K in salary ($50K for two years, $55K your third year). That's a $375,000 cost to going to law school. Your first-year salary is $160K (better than your $55K job), your second year is $170K + $15K bonus (better than your $60K job, you got a raise), your third year is $185K + $20K bonus (better than your $60K job). That's a salary improvement of $105K, $120K, and $145K over your other salary. That's $370K right there. Assuming you use some of that to pay down your debt, you're ahead after three years. *Obviously, your tax rate at $50K is basically nothing and your tax rate at $160K is much higher. So if you want to be safe, four years. |
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Date: February 21st, 2012 11:19 AM Author: odious bearded theater Thanks bro (http://www.autoadmit.com/thread.php?thread_id=1879655&forum_id=2#20016562) |
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Date: February 21st, 2012 11:29 AM Author: excitant lake son of senegal famous landscape painting Also, I'm assuming you summered at a firm, so you should add $30k to your net gain (unless you used it all to pay for school). (http://www.autoadmit.com/thread.php?thread_id=1879655&forum_id=2#20016609) |
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Date: February 21st, 2012 11:27 AM Author: Heady Mildly Autistic Wagecucks I'm pretty sure you are double counting the forgone salary here. The $375k includes the opportunity cost of forgone salary. Thus, you should add up the total salary at biglaw, not just the salary improvement.
Also, your assumption of paying near nothing on $50k is misleading as social security "contributions" are flat. Also, if you are in NYC, you will be paying almost 10% in state and local tax on that $50k.
You also have to factor in return on money saved even if it is not paying down debt. Assuming a return equal to the interest rate, the amounts of debt do not make any difference to this analysis. |
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Date: February 21st, 2012 11:29 AM Author: Flickering Abode Jew so what is the right answer? (http://www.autoadmit.com/thread.php?thread_id=1879655&forum_id=2#20016608) |
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Date: February 21st, 2012 11:32 AM Author: french galvanic mood no, brother, here's how it works: Year 1: $50K v. $0 Year 2: $50K v. $0 Year 3: $55K v. $0 Year 4: $55K v. $160K Year 5: $60K v. $190K Year 6: $60K v. $205K --> brother, he is making money each year if he didn't get a law degree. The law adds value in years 4, 5 & 6 that he wouldn't have had. So, you only add the salary improvement in 4 and onward, because the law degree adds value to his original salary ---> note that I also didn't include the taxes in my calculation, just said, may have to be aware ----> and I don't think the 1% interest rates these days was much to sneeze at, assuming more like a 7% interest rate, not sure he can make that much in the market. |
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Date: February 21st, 2012 11:36 AM Author: Heady Mildly Autistic Wagecucks Ok you are right, I just realized this as soon as I posted...sorry.
The real question is regarding the discount rate. The riskiness of the investment depends largely on your chances of biglaw, which is a very large variable that is hard for the prospective student to evaluate.
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Date: February 21st, 2012 11:56 AM Author: odious bearded theater You sound like a very smart dude. How can you assume 7% interest though. I've looked around online and the best I can find are like 1% savings accounts. Obviously u are referring to real investments, what do u recommend? I was gonna try to save about 1500 every month and put the rest towards loans. Since I have no business sense I was just gonna have it sit in one of those 1% savings accounts. Any low risk investments u can recommend to push my returns closer to 3 or 4%? (http://www.autoadmit.com/thread.php?thread_id=1879655&forum_id=2#20016802) |
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Date: February 21st, 2012 11:57 AM Author: french galvanic mood I mean 7% interest rate on your loans, better to pay those down than tuck away more money at 1% savings rate In BIGLAW, you should just max out your 401K in a long-term investment. |
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Date: February 21st, 2012 12:14 PM Author: Heady Mildly Autistic Wagecucks I second this. Many people will say that 401k is not great bc of limited investment options and possibility of higher tax rates in the future but few people mention the income flattening benefit.
Contributions to 401k come off the top of your income so you save the top marginal tax rate on this. There is a good chance you will be making less after biglaw and will thus have a lower marginal rate. There are many ways you can then withdraw this money without facing a penalty, such as paying for dependent's education, or purchasing a house. For example:
I made 401k contributions while I was making about 60k. When I left I rolled this over into an IRA. Now that I am in school I pay essentially zero marginal tax (after exemptions and lifetime learning credit). I withdrew all of my IRA to pay for school, avoided the 10% penalty because this went towards education, and paid a 0% tax rate on it because I had very little other income. |
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Date: February 21st, 2012 7:00 PM Author: House-broken Box Office "avoided the 10% penalty because this went towards education"
what are the restrictions on what kind of education you can spend on, whose education you can spend on, etc.? for some reason i thought you had to save in a special for-education-only account to be eligible for tax-free, penalty-free withdrawals, and the withdrawals could only be used for education for your children |
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Date: February 21st, 2012 1:02 PM Author: Sinister useless useless brakes lodge This isn't totally accurate. You are failing to consider COL expenses that the student loan debt covered. No matter what you would have had those COL expenses (quite possibly more, had you not been in school). So yes, as a law student, you have to pay it back, but had you not been a law student, the expenses would have taken a chunk out of your income.
So if you are going to include it in the "law school" hypo (in the form of the student loans you have to pay back), you should also include it in the counter-factual in the form of a subtraction from the salary.
So either, A, eliminate the COL portion from the student loan debt, or B, subtract COL from your salary for years 1-3. |
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Date: February 21st, 2012 7:01 PM Author: House-broken Box Office good point (http://www.autoadmit.com/thread.php?thread_id=1879655&forum_id=2#20019284) |
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Date: February 21st, 2012 6:54 PM Author: shivering pit This is the correct framework, but i would make some further adjustments based on assumptions that could be tweaked infinitely. To make things a lot more simple, assume he pays out 20k right now for the right side's earnings and pays out 60k, 60k, and 60k, right now, end of this year (year 1) and end of year 2, respectively, for the left side's earnings.
Then add in more simplifying assumptions: constant average tax rate on right side is 30%, constant average tax rate on left side is 40%. Salary payment in both scenarios is lump sum annual, no tax shield for tuition payments. No interest accrual on debt (folded his avg interest rate into the discount rate to help mitigate this one). Biglaw (right hand side) pays one time bonus on 2011 cravath scale for at same time as annual lump sum salary payable and salary remains frozen at current lockstep levels. Right hand side earnings increase 5k every two years. No retirement contributions/tax deferrals in either scenario, or any other income streams present or future.
Period Cash Flows NPV Cash Flows NPV 0 -60000 N/A -20000 N/A
1 -60000 N/A 35000 $13,573.38
2 -60000 N/A 35000 $45,603.34
3 0 N/A 38500 $79,810.09
4 100500 ($85,803.85) 38500 $113,020.53
5 108000 ($13,838.89) 42000 $148,194.87
6 120000 $60,891.08 42000 $182,344.71
7 138000 $141,208.33 45500 $218,262.83
8 153000 $224,430.20 45500 $253,134.79
9 168000 $309,832.88 49000 $289,595.39
10 181500 $396,062.22 49000 $324,994.04
The right side is discounted at risk free rate (say 3%) because the job was guaranteed and at a low enough wage that he could likely find other work at a comparable wage range wage if laid off. The right hand side "biglaw" column gets a risk premium (r=7%), one because of the uncertainty of getting Biglaw and two the higher lay off potential (reason for which in part associates get such high starting salaries). It's also roughly equal to his average cost of debt.
Assuming a constant discount rate, he beats his non-biglaw scenario earnings once he's finished his 6th year as a biglaw associate. While there may be a case for more job security as a mid-senior associate level (and hence lowering the discount/raising NPV), I'm too lazy to make the model more dynamic.
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Date: February 21st, 2012 7:04 PM Author: House-broken Box Office probably no one will bother to figure out what you mean (http://www.autoadmit.com/thread.php?thread_id=1879655&forum_id=2#20019291) |
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Date: February 21st, 2012 7:07 PM Author: shivering pit it means that at his level of opportunity cost, and under the above set of assumptions, biglaw/law school isnt worth it until sometime during his 6th year as a biglaw associate. (http://www.autoadmit.com/thread.php?thread_id=1879655&forum_id=2#20019305) |
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Date: February 21st, 2012 7:07 PM Author: french galvanic mood (http://www.autoadmit.com/thread.php?thread_id=1879655&forum_id=2#20019309) |
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Date: February 21st, 2012 11:29 AM Author: hyperventilating fragrant area regret law school costs $230k (http://www.autoadmit.com/thread.php?thread_id=1879655&forum_id=2#20016613) |
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Date: February 21st, 2012 11:33 AM Author: french galvanic mood no, this brother is saying that with everything, summer income + scholarships + debt, he ended up $160K down over 3 years. (http://www.autoadmit.com/thread.php?thread_id=1879655&forum_id=2#20016642) |
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Date: February 21st, 2012 11:49 PM Author: Learning disabled painfully honest crackhouse That's not even taking into account the increased salary potential of an ex-biglaw lawyer vs. not.
With the economy the way it is now (i.e. with current lateral options), law school is probably even worth it with even one year of biglaw. You can leverage that into a decent legal career that would outpace your average poli sci shithead career.
Obviously this gets more complicated when you're dealing with bros who could have gone into finance or something. |
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Date: July 28th, 2016 8:38 PM Author: cracking mauve spot (http://www.autoadmit.com/thread.php?thread_id=1879655&forum_id=2#31054826) |
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Date: February 21st, 2012 9:31 PM Author: Angry silver cruise ship coldplay fan If you try working from your debt, there is a risk of double counting. In law school, some of your debt pays for food, beer, rent, etc. Even if you didn't go to law school, you'd have to pay those expenses, so don't count them. (http://www.autoadmit.com/thread.php?thread_id=1879655&forum_id=2#20020131) |
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Date: February 21st, 2012 9:49 PM Author: shivering pit you fold all that into the cash flows. So for his current scenario, he paid 20k to get to this point and has this certain projected stream of earnings from now on coming in. Naturally, expenses will be paid out of those earnings as they become due, but for purposes of capital budgeting, you just discount the future earnings against the cost of receiving those cashflows that he accrued to get to this point today. For the biglaw scenario, his cost of achieving the bigger earnings stream is his total cost (160k) which is netted against the present value of those future earnings, independent of whatever costs are similar or identical between the two scenarios. Then as you project out, you find the point where earnings stream B becomes bigger than earnings stream A in present value. This of course assumes that the goal of the exercise is to pick one of the two paths with the greater net present value within a given time horizon. (http://www.autoadmit.com/thread.php?thread_id=1879655&forum_id=2#20020314) |