Freedom from the Sunk Cost Fallacy: Say No to Law School
During my fourth semester of law school, having already put in two years’ patent law work at a prestigious law firm, I realized that I didn’t want to be a lawyer. All my friends told me to stick it out and finish the final year since I’d already invested two years of my life, and a lot of money, into law school.
Then I discovered the sunk cost fallacy: the mistake of incorporating past losses into current decisions. For example, consider two men who have concert tickets to a favorite band playing at an outdoor venue; the first man received his free as a promotion while the second man paid $50. On the evening of the concert, the weather is terrible and neither man wants to go. The first man rationalizes that his ticket was free anyway, so doesn’t go, while the second forces himself to go, lest he lose $50.
But, of course, the ideal rational decision should be the same. In both cases, at the time of decision, the men simply possess tickets to a show. Assuming their preferences are the same, it is irrelevant how they came by those tickets – therefore, neither should go. The second man has been duped by the sunk cost fallacy, believing that the cost already sunk in his ticket is relevant to a later decision. It isn’t.
In deciding whether to finish my final year of law school, the only relevant question was whether it was worth the additional year and expense to receive my law degree; it was irrelevant whether I’d already spent two days, two years, or two decades pursuing the degree. I finally decided that it was, considering that a law degree can be used to open a wide variety of doors (not just doors to law firms), but if I’d been in the same position after only my first year, with another two more years to go, my decision would have been to walk – nay, run.
Now that graduate degrees are what undergraduate degrees were twenty years ago, Generation Y seems to feel professionally incomplete without a master’s degree, law degree, or MBA. U.S. law schools are graduating more future lawyers than ever before, and it’s a booming business for University, Inc. Unfortunately, job opportunities and income are simply not keeping pace with the supply of graduate degrees, and Millennials now complain of debt, particularly student debt, as their “biggest financial concern.” So it’s worth asking the question: Is law school worth it? Let’s look.
Tuition. At Georgetown University Law Center, my alma mater, annual tuition for 2012-13 was $48,835.00. Just tuition. To give you an idea of how much that is, here is a picture of several stacks of $100 bills, totaling $40,000. Stare at this picture for a moment. Then repeat to yourself: All this money is NOT ENOUGH for a SINGLE SEMESTER of law school tuition.
Living expenses. Depends on where you go to law school, of course, but D.C. is not a cheap place to live. My poorest law school friends squeaked by on another $20,000 a year, but most people racked up $30,000+ a year in rent, utilities, insurance, transportation, books, fees, and entertainment.
Opportunity cost. Few Americans have enough savings for six months’ worth of unemployment; can you imagine three years of unemployment? Some students were lucky enough to get summer associate positions at law firms but they were few and far between. Most students settled for a modestly paid or even unpaid summer internship. To calculate opportunity cost, figure out how much you could have made in the same period and subtract what you actually did make. For most law students, the opportunity cost is well over $30,000 a year.
Interest. Money ain’t cheap. Most students will pay interest on their entire law school debts for many years after graduation.
Let’s assume a net expense of $70,000 per year for three years, plus an annual opportunity cost of $30,000, and amortize that over ten years at 6% per year. That comes to a monthly cost of $3,330, or about $40,000 per year – for the next ten years. But remember: that $40K premium is paid with after-tax dollars. (Yes, there is a student loan interest deduction, but it’s limited to $2500, a tiny fraction of the interest paid, and it doesn’t apply to single people whose adjusted gross income is over $75,000.) At a 30% marginal tax rate, representing federal and state income taxes, this $40K premium actually represents $57,000 of one’s nominal income.
In other words, if you go to law school under the above assumptions, then you’ll be paying $57,000 a year for the next decade just to break even, so your new job as a lawyer better account for that. But what happens if you discover you don’t like practicing law? Or what if your law degree doesn’t add $57K to your salary? The major D.C. law firms, for example, are starting new lawyers at between $100K and $140K, but these positions are highly competitive and a relatively small proportion of law school graduates, even from the highest ranked schools, can get these coveted positions.
According to Above the Law, the median starting salary for law firms in 2012 was just $85K, and for those not lucky enough to land a law firm job, the median starting salary was only $60K. Then again, over 15% of 2011 graduates had a median starting salary of $0, since they couldn’t find a job at all.
So let’s say you give up your $50K/year job to go to law school and get an $85K/year law firm job. Not only will your real income shrink by $22,000 a year ($57,000 in annual debt payments makes a big dent in your increased salary) but you’ll actually be working significantly longer hours just to make that higher salary. That’s right. To succeed in one of those high-paying law firms, expect to bill 45+ hours a week, which means actually being present for 60-70 hours a week to deal with meetings, non-billables, and other administrative and corporate bullshit. Believe me, I’ve been there. And, of course, you can’t leave – you’ve already incurred the law school debt and need the job to pay it off.
Option A: Quit your job, go to law school, incur enormous amounts of debt, compete for the coveted law firm position that will pay you, after your student loan payments, less than you made before, where you will work 50% to 75% more hours, and that you cannot leave for ten or more years because of your law school debt.
Option B: Be happy with your current job and avoid law school like the plague.