Law School Myth #2: Student Loan Debt is Good Debt

Cut up the credit cardsPeople often say you shouldn’t worry about student loan debt — that it’s “good debt.” In some cases, this might be true.

Taking out student loans is an investment in your human capital.

To the extent they enable you to do something you couldn’t otherwise do, i.e., afford to pay for law school so you can become an attorney, student loans might be justifiable.

However, it depends on the specifics:

  • what kind of loan
  • how much you borrow
  • what interest rate
  • and, critically, what sort of economic and personal payback you’ll get when you graduate.
Types of Student Loans

In a nutshell, there are two primary types of student loans: federal and private.

There are also currently two types of federal loans: subsidized and unsubsidized, but subsidized graduate loans will cease to exist as of July 2012.

What Kind of Student Loan Should You Get?

To the extent possible, avoid private loans because they’re often more expensive and offer few of the protections that are standard with federal loans. (Obviously you should evaluate this for yourself, and make your own decision based on your own circumstances. This is not legal advice.)

Subsidized federal loans should generally be your first choice — with these, the government pays the interest while you’re in school, so it doesn’t accumulate. Unsubsidized federal loans are usually the next best choice — but interest does accumulate while you’re in school, unless you pay it as you go.

Private student loans, which are offered by a variety of banks and specialized companies, vary widely in their terms, but, in general, you’ll have fewer protections than you will with a federal loan of any type, so these should be your last option and you need to be sure you understand what you’re signing up for.

Warning: Student Loans Are Not Dischargeable in Bankruptcy!

It’s extremely important to understand that student loans are not dischargeable in bankruptcy. This means that if you sign on the dotted line and take loan money, you’re stuck with it. Even if you can’t find a job, can’t pay your bills, and declare bankruptcy, you’re still going to have to pay your student loans off.

Even if you die, your loan debt might not disappear. If someone co-signed your loans (which is often required with private loans), that person may have to continue paying your loan back, even if you’ve ceased to exist.

This is serious business, people.

The Average Law School Debt Load is Astronomically High

What does a typical law school debt load look like? The Law School Admissions Council reports that over 80% of law students rely on student loans as their primary source of funding during law school. The average law school indebtedness is $100,000. This is in addition to any funds borrowed for prior educational expenses.

What Are the Monthly Payments on $100,000 in Loans?

What does this mean? If you’re a “typical” law student, you’re going to be making student loan payments of approximately $1,150 a month, for ten years after graduation. That’s $13,800 per year of after tax earnings.

(Yes, I know there are income dependent repayment plans, and that you might qualify for loan repayment programs from your school or from the government. I encourage you to investigate these options. However, at least for the sake of argument, consider the possibility that no one’s going to save you, and you have to pay all the money you borrow back on your own.)

Wow! That’s a Lot. How Much Do I Need To Earn to Pay That Comfortably?

How much money do you need to earn every year to afford these payments? About $140,000.

Think about that. The mean starting salary for law school graduates is somewhere around $85,000. Even if this were truly an average salary, you’d still have well over 50% of recent graduates struggling to make their loan payments. But the story’s much worse, since almost no one makes the mean salary. Instead, a large percentage of recent graduates will make around $50,000.

That’s about a third of what they need to comfortably pay their student loans!

How Does Anyone Pay This Much?

When you really look at these numbers, you start to understand why competition is so fierce for law firm jobs — these are the only jobs that allow young attorneys to pay off their law school loans.

Like it or not, most firm lawyers are signing up for years and years of essentially indentured servitude, where they work a job they don’t like very much in order to pay for the education that enabled them to get that job to begin with.

Does this seem like a good idea? Probably not.

Help! I Can’t Get a BigLaw Job.

But the alternative, for the 80% of recent graduates who don’t get high paying firm jobs, is worse.

These people lost three years of earning power, and acquired $100,000 of debt, only to graduate and find themselves devoting a completely unsustainable percentage of their take home pay to their law school loans.

The Bottom Line

Good debt? Think twice.

Read On:

More myths about law school, coming right up!

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Comments

  1. Could you explain why you need to earn $140,000 a year in order to pay off $13,800 per year?

    • That’s based on about 10% of your pre-tax income going to pay the loan. I’ve seen various suggested numbers, but the consensus among financial experts seems to be that you shouldn’t spend more than 8-15% of your pre-tax income on your student loans, if you want a sustainable lifestyle.

      If you want to play with some numbers of your own, this is a great calculator: http://www.finaid.org/calculators/loanpayments.phtml.

      • Respectfully, the FinAid Calculator is silly when it makes its estimates. I could go on at length about it, but I’ll rely simply on my experience. Making 75k a year, I make monthly payments of $1,825, in a high-COL city, and I eat well and go out to my heart’s desire. This is a great post to highlight the concerns of student loan debt, but I was disappointed to see you push that silly 140k figure.

        • Rather than calling the FinAid calculator figure silly, it might be more accurate to say it doesn’t apply to you directly, at this stage in your life. My guess is (correct me if I’m wrong) that you’re fairly young and are only supporting yourself. That’s a totally different scenario than someone with two kids and a family to support. (I’ve recently learned that basic child care costs friends of mine $30-40K a year! And that’s before you even think about private schools.)

          For now, your loan payments aren’t a huge burden, which is great. But lives change, and, in the not so distant future, they might pinch a lot more than they do now.

          Hopefully you can pay them off quickly, and it never becomes a issue!

          • Fair enough, and correct, assumption. But I believe my situation is that of most law school grads (no children). The FinAid calculator pumps out this artificial number (that I maintain is silly) and results in destructive thoughts like:

            “If I can’t make $150k, I will have been a failure, and I’ll never pay off my loans.”

            It also reinforces poor spending habits by those blessed to make 160k/year. For example, after my clerkship concludes and I return to Biglaw, I shouldn’t rely on the FinAid number to justify paying the same amount or a small amount more in student loans.

            In short, all I’m saying is that these tools need to be encouraging debtors who aren’t making 150k to budget and make substantially higher payments than 10 or 20% of their pay. It seems crucial to encourage more aggressive repayments from students.

        • “Making 75k a year, I make monthly payments of $1,825, in a high-COL city, and I eat well and go out to my heart’s desire. This is a great post to highlight the concerns of student loan debt, but I was disappointed to see you push that silly 140k figure.”

          75K/year is what – 55K post-tax? Subtract 22K in loan payments leaves 33K; subtract 22K in rent (you said high-COL) leaves 11K for all other expenses.

          • Everyone’s situation is different, but I think it would be hard to make those payments on 75k a year over the long haul. Maybe for a few years when you’ve got no other responsibilities, but at some point I think living on $1000/month (post-housing) isn’t going to be all that feasible. And what about saving money? Doesn’t seem like there’s much left over…

  2. It’s even worse for the many of us that will have to hang up a shingle on our own because we can’t find work at a law firm. Imagine having to pay a Lexis or Westlaw subscription and professional liability insurance on top of $13k to pay off loans per year. I am truly scared. I was earning a salary of $5,000 per month as an office manager before going to law school. I had zero debt back then. Now I will owe $180,000 after I graduate this May (and that is with a half tuition scholarship my 1L year), and probably will have a starting salary of even less than what I was paid as an office manager. I really wish I had never gone to law school. Biggest mistake of my life :(

    On a positive note, I am a new subscriber to your blog, and I have been enjoying it. You seem very intelligent and are a very good writer.

  3. How about not going to law school in the first place. Our society doesn’t need more lawyers. Many people get a law degree because of a low self esteem and think being a lawyer will make them important. It doesn’t make you important, it just makes you as common as mud. There are already way too many lawyers out there. If you want to contribute to society, consider a career as a doctor, scientist, healthcare professional, teacher or engineer. Also consider doing some volunteer work.

    • Trust me, I agree with you in a lot of cases! If people ask me if they should go to law school, my default answer is no!

    • I was reading through the comments when I came across this one and I just felt compelled to speak my mind!

      Have you ever considered that someone has a passion for the law? HELL YEAH I will have high self esteem when I finish law school, but not because I am some cocky self-centered lawyer, but because I accomplished something extremely difficult and followed my heart to pursue my dreams. Doctors, scientists, teachers, and engineers probably all feel the same way, and this is from someone who has a masters degree and stopped on my way to my doctoral degree because of a newfound passion for the law. There are different reasons for every situation, and if you think that having a law degree makes you “as common as mud” then you obviously have never attended law school, or even jury duty for that matter! But maybe with that pessimistic attitude you should consider law school, you’d fit right in ;)

  4. Guy Smiley says:

    Hi, another comment on the calculator’s 10%. It makes sense only in certain contexts having to do with a person’s amount of disposable income in view of the level of debt. Take a couple of bookends which I hope will help explain what I mean.

    If you must repay $2.4K per year in loans, it makes sense to say you should make at minimum on the order of $30K (this is the 8% part of the 8-15% banding). There’s so little likely disposable there, you need the other 92% just to live.

    However, if you have $13.8K to repay annually, it makes sense to say you need about $92K a year (this is the 15% part of the 8-15% banding). At this higher income range, I’d say 85% (or even some less) of the remainder allows for enough disposable income for the typical newgrad.

    Similarly (to go ad absurdam on ya’ll), if you needed to repay $100K annually, you’d probably agree that this does not require a $1 mio annual income, because there’s still gobs of disposable left over. I’d go so far as to say I’d be happy (at $1 mio income) having a 40% + ratio.

    disclaimer: The above was only to pick nits on the $140K proposition. Overall I heartily agree with the author’s position on debt/loans.

    • I think this is absolutely right! The people I know who handled their loans “best” lived for a few years on a firm salary as if they were still students, paying way more than 10% of their income to loans, and knocked the balance down quite fast. (Getting rid of their private loans, at least.)

      However, I also know a lot of people (myself included for the first several months) who were living in high-cost areas, paying a ton of rent, and living paycheck-to-paycheck, even on a BigLaw salary. It’s easy to think you’ll live frugally and devote a lot of your spare income to loan payments, but it’s a lot harder to actually do it!

      Thanks for running the numbers – very useful to see.

  5. Bad math. As you said yourself, the mean salary of a law school grad is $85k. Let’s assume law schools aren’t lying about this number. (They really are lying, but that’s a separate issue from the point that I want to make.) In mathematics, mean and average are the same thing. Thus the average is truly, correctly, and factually $85k. So your comment that “even if this were truly an average salary” is out of line. It is truly an average salary unless the underlying data are wrong.

    Perhaps you really meant to say “even if the median is truly $85k” or “even if salaries were normally distributed around an 85k average” or something along those lines.

    I do not think this is a nitpicky grammar point. Correct statistics and correct usage of statistics is a truly important component of public discourse.

    • I think you missed part one of this series, where I discuss the issue of the mean salary numbers in detail. In a nutshell, starting salaries (at least) are bimodal, so the “mean” or “average” can be mathematically correct, but functionally meaningless. No pun intended.

      But, absolutely, I agree that really understanding these finer points, and discussing them directly, is critical. Otherwise, prospective law students can easily think, “Oh, the mean/average starting salary for a young lawyer is $X, that’s about what I’ll make when I graduate.” Very dangerous way of thinking, in this particular industry!

      • Don’t get me wrong. I like your writing and I appreciate your honest outreach efforts. I think that your points are correct. I just want to make them better.

        The average is definitely misleading, meaningless, and dangerous. But it is the correct computed average. It’s not like the real average of the data is 70k and they lied about it being 85k.

  6. My husband makes 72,000.00 a year with 100,000 in dept. We are able to pay around 1,200 a month to student loans, and pay our bills with money to save. It is tight, but we’ve been starving students for a long time, so we are good at living within our means. I’m even able to stay home with our son! Psh, $140 a year….maybe in Manhattan.

    • Absolutely, cost of living makes a huge difference. I was paying such a ridiculous amount of rent when I first started working! After about six months, I decided it was crazy, and moved somewhere less expensive so I could actually save money. But it’s tough in really high-cost areas!

  7. I notice this hasn’t been updated in a while. Nowadays Income Based Repayment is available to all students graduating from law school. I have a friend who is paying $54/month while working as a recruiter for our law school (a top law school, she has no interest in ever practicing law). I also think it couldn’t hurt to include information about all the plethora of loan forgiveness and LRAP programs available to graduates who pursue public interest careers. It certainly feeds into the idea that you can either be miserable or poor as a lawyer – and in my experience so far that seems to be true. However, in my opinion – while all debt is bad debt – debt that is forgiven after 10 years of doing work you love while paying a manageable amount doesn’t sound too bad at all. It certainly sounds more appetizing than the golden handcuffs.

    So, if you ever do update this – considering including some information about loan forgiveness.

    • Thanks for the update! I’m definitely not a student loan expert, and it seems that things are changing quickly. My understanding is there’s a potential tax hit at the end of the repayment process, but I’d like to learn more about it.

      Open invite for you (or anyone else who’s a student loan expert) to write out the details!

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