9/16 Update: Correction of Numbers using proper amortization calculator
In my mind, people go to law school in the same way that people bought all of those houses during the bubble. Were the houses as expensive as hell? Yes. Were the mortgage payments overwhelming? Yes. But goddamn if it wasn't your own personal piggy bank!
Entire neighborhoods in foreclosure do not suggest that a group of people teamed up and decided to be stupid together.
Where was I?
Oh yes. Personal piggy banks.
People who attend law school generally think that an attorney job is their own personal piggy bank. It's easy money. It's a place where you sit out 3 years of your life and pop out on other side with great earning potential.
Student loans don't even make you feel the gravity of your investment. You got the paperwork in the mail showing what your monthly payments will look like, but you don't actually look at them. For one thing, you can't do much to control how much your monthly payments will be. Even if you lived cheaply, there is still the question of both tuition and the interest rate on those loans. What was the lending rate just a few short years ago for graduate students? It hovered somewhere around 3-4% (the same rate applying to all students regardless of being a graduate or undergraduate) And not only that, tuition skyrocketed over the past few years. Together, the interest rate and tuition have made law school tens of thousands of dollars more expensive for the average borrower. Even if your tuition "only" went up a measly $200 a semester hour over the course of your stint in law school, thanks to 6.8% interest rates, you will end up paying substantially more for your education over the following 10 years than somebody who graduated about 5 years ago (in 2005).
Let's say that you borrowed $100,000 at 6.8% and paid it off over 10 years. According to calculators, you will have paid a grand total of $138,100 at the end of your loan.
If you borrowed $100,000 at 3.6% (which is an average of the interest rates between 2002-2005), you will have paid a grand total of $119,225.99 at the end of 10 years.
As you can see, you are paying an extra $19,000 for borrowing the same amount of money over the next ten years for interest alone!
Yes, that presumes that tuition was exactly the same as it was 5 years ago. Now, you will have to borrow even more money to buy the same product.
Let's pretend that tuition is now (when averaged over 3 years) is about $150 a semester hour more than what a 2005 graduate had to pay. Let's also say that a 2005 graduate paid $700 a semester hour while a 2009 graduate paid $850.
$700 X 90 hours = $ 63,000
$850 X 90 hours = $76,500
Subtracting the difference:
$150 X 90 semester hours = $13,500.
Yes, the recent graduate paid an extra $13,500 in interest-free tuition.
Of course, that presumes that the student paid cash up front.
If the student borrowed money, at my chosen interest rates, here is what it would look like:
$700 X 90 hours X 3.6% interest over 10 years = $89730.09
$850 X 90 hours X 6.8 % interest over 10 years = $147697.78
By the time that the loans have been paid off, the new graduate has actually paid $57,967 more for their schooling than the 2005 graduate!
No, wait. That isn't right. That figure is actually too low!
Granted, I simplified things and didn't calculate for the fact that you obviously won't borrow the full 90 hour amount in the same year, and I didn't calculate for the fact that interest begins accruing on Unsubsidized Stafford Loans and private loans while you are in school!
But the figure is obviously on the cheap side as I presumed that all of the tuition expenses would be fully covered by Stafford loans, which is a lower interest rate than private loans. When tuition is cheaper, more of it can be covered by government subsidized loans as opposed to having to borrow more money in expensive private loans with interest rates at 8%+ (depending upon your credit score. I've heard of cases where the interest was 12%). If you are capped at $22,500 per year when borrowing federal loans, tuition is $850 a semester hour, and you want to borrow the entire tuition amount of $25,500, then you will need to take out an additional $3,000 in private loans just to cover the shortfall (at $700 per semester hour, the cost would have been $21,000 per semester, which would leave $1500 of federal loans before being maxed out)....never mind that you will need to take out money just to cover books for class, living expenses, suits for work, food, and the occasional social activity. All of that money will be borrowed at private loan rates.
So, what, exactly, are the totals for a year of schooling for a 2005 graduate vs a 2010 graduate (without counting for the accrued interest while the student is in school)?
$21,000 X 3.6% Stafford Loan over 10 years of repayment
$29910.03 per year.
($22,500 X 6.8% Stafford Loan over 10 year repayment) + ($3,000 X 8.5% PLUS loan at 10 years repayment)
which reduces to:
$43440.52 + $6782.95
$50,222 per year.
That is a difference of $20,300+ per year!
Multiply that number by 3 years of law school, and you actually end up paying $60,000+ more than a 2005 graduate from the start of your repayment!
Ok, the addition of PLUS loans 'only' tacked on an additional $3,000 in interest, but still...
(Naturally, this number balloons if you have to defer your loans, go on Income Based Repayment, or any other graduated repayment option because interest continues to compound on top of your owed amount!
Yes, you get the picture.
On top of that, chances are fairly slim that you'll acquire any employment in law school that will lessen your need for borrowing money. Remember: the rules state that you CANNOT work in your first year, and chances are, unless you got a job waiting tables at Chili's, the chances are small that you're going to see very little income from any of your clerkships. You're either going to be working for free in an internship, or making $10 an hour working for a solo. Depending upon which school you get into and your grades and connections, you MAY land one of those BIGLAW jobs where you clear 5 digits over the course of the summer.
Obviously, people don't think about the interest rate and loan repayment because they have it in their heads that nobody would charge that kind of tuition or interest if you can pay it back. A big part of the draw of law school is that people view it as an "easy" way to start making good money. To them, it's like purchasing an annuity at 15% interest. "I may pay you $100,000 for my education, but my income will not only cover the amount of the loan, it will be significantly enough to completely increase my standard of living over what it would have been had I not attended law school."
(I'll save "how many hours/days/years you need to work to pay off $100,000" for another time).
And without further adieu, this is where I proudly introduce (for your own reading and my own vindication) a blog that I have just found:
Shit Law Jobs.
Yes, reading over these tasty morsels of actual jobs makes any person want to fork out that extra $30,000 over the next 10 years....let alone $100,000, or $200,000.
These are not outliers or starting salaries, people! After a year of fruitless job search, I am now a proud expert in the "there ain't no jobs out there" field. I can tell you that these are the jobs that most of you will be LUCKY to get.
And that additional $60,000 that you paid over a 2005 graduate? That is if you are on standard repayment. At $35,000 per year, if you want to eat, you will probably have to find alternative payment options. Imagine that $60,000 compounded over an additional 20 years (my calculator just broke at hearing that) if you switch to a 30 year repayment plan or a graduated payment option. Or the interest that accrues if you can't pay because of economic hardship. I'll let your imagination run wild with what you could be paying, which is probably the sensible thing because nobody can foresee what life is going to be like for you. Whether you become ill and go broke because you have no health insurance, your employer runs out of work and has to let you go, or you work for somebody who decides after two years that they can hire a new graduate for much cheaper, it's hard to say. All I know is that, on the whole, there are a lot of hard luck stories, and that you either really need to be an opportunist or know how to take advantage of that one opening if you really want to get anywhere.