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### A Calculator to Help You Determine Whether Law School Is a Good Investment

Posted: Tue Aug 15, 2017 10:17 am
Hey TLS,

I've created an Excel spreadsheet that helps you to determine whether law school is a good investment for you. It should be very easy to use.

I. How to Get It

I highly recommend reading the rest of this post (especially the caveats) before using the calculator.

II. How It Works

Ahhh, math, the bane of all (would-be) law students! Don't worry, I've done most of the math for you. You just need to fill out the info in the "Calculations" box, and the calculator does the rest. Before you blindly rely on this tool, though, I highly recommend reading the "Caveats" section of this post.

At any rate, onto the calculator. Here's how it works:

1. You input a bunch of info, such as your expected income if you don't attend law school and various stats about a specific law school.
2. The spreadsheet uses generally accepted principles of finance to estimate the "net present value" (NPV) of attending a specific law school, relative to what you would earn if you didn't attend law school at all.
3. The spreadsheet tells you whether that law school is a good investment for you, based on your individual circumstances.
The calculations are rough and rely on several questionable (and even straight-up inaccurate) assumptions. For example, I don't take taxes into account (except in a limited way in the PAYE version of the spreadsheet, to calculate the effect of the PAYE "tax bomb" that occurs when your debt is forgiven). However, I think it does a good enough job to be reasonably accurate in most cases. If it's a close call, though, you should definitely further refine the spreadsheet as necessary to reflect your individual circumstances. (Probably a good idea to do that either way, really.)

There are three versions of the model: (1) the default upfront-payment version, which assumes you pay your tuition upfront as a lump sum and do not take out loans for your cost of living during law school, (2) the debt version, which allows you to put in amount of annual debt payments and the number of payments (and also includes the option to pay for part of law school upfront), and (3) the PAYE version, which assumes you borrow the entire cost of law school and pay back your loans under the federal "Pay As You Earn" (PAYE) program.

The sheet contains as a default numbers I pulled from LST Score Reports for Loyola (Los Angeles). In the default version, the spreadsheet shows that Loyola is a terrible investment at full price if you would earn \$65,000 per year (growing at 3% annually) by not attending law school. But if you would earn only \$40,000 per year (growing at 3%) by not attending law school, Loyola starts to look like a good investment. What about if you would earn \$46,000 (growing at 3%) by not attending law school? Close call.

Things generally look similar in the debt version, assuming you're borrowing the same money that you'd otherwise be paying upfront.

In PAYE version, things change. Using the Loyola (LA) example again, Loyola still looks like a bad investment if you could earn \$65,000 per year (growing at 3% annually) by not attending law school. But if could earn only \$46,000 per year (growing at 3%) by not attending law school, Loyola looks like a great investment. (In the default version, \$46,000 looked like a close call.) Please note that PAYE is not available for all borrowers. See https://studentloanhero.com/pay-as-you- ... quirements for more information.

III. Why It Can Be Useful

There are some great tools (on TLS and elsewhere) to help you decide between law schools, such as Law School Transparency, lawschool22's COA calculator, TLS threads compiling employment stats, and scores of other TLS threads containing valuable wisdom. This tool tries to add some analytical rigor to the decision about whether to attend law school at all.

These models highlight the importance of examining individual circumstances when deciding whether law school is a worthwhile investment. In threads in which a prospective law students asks whether a particular law school is worthwhile, I've frequently observed TSLers offering one-size-fits-all recommendations without asking what the person could do if they didn't attend law school. Hopefully people will cut down on this practice after seeing that the question really depends on individual circumstances—particularly what alternative careers are available to the person. The judgment as to whether a particular law school is a good investment at a given price is different for someone who could work as a Big Four accountant than for someone could work as a barista.

The models also highlight the importance of going beyond just "assuming you'll be median" (a common piece of advice I've seen on these forums). Although the motivation underlying the "assume median" advice is good—convince prospective students they're not special cases that will outperform all their peers—the advice does not present a very accurate picture of expected outcomes, in part because even at schools where the median student has a decent outcome, a significant chunk of the class ends up unemployed or underemployed. For these schools, an assumption that you'll end up median likely overstates your expected income. To fix this problem, the default settings for each model consider the NPV of the weighted average of two different outcomes: (1) employed using the mean compensation of employed graduates and (2) unemployed using compensation given by the user. (The weights come from the percentage of graduates that are employed within nine months of graduation.) Users can customize the models to their circumstances even more by manually changing the income projections in the "Calculations" tab.

IV. Caveats

I think the spreadsheet does a reasonably good job for most cases. However, it is far from perfect. In particular, you should note the following caveats:

1. The calculator treats risk simplistically. In particular, the model does not a very good job distinguishing between law schools with a great deal of variability in employment outcomes (e.g., Hastings, with its low 55.5% employment score but respectable 19.3% BigLaw score)—which should receive a higher risk discount—and schools with less variability in employment outcomes (e.g., Penn State, with a respectable 82.4% employment score but lower 8.8% BigLaw score).
2. The calculator does not account for taxes (except the tax bomb for PAYE).
3. The calculator does not account for a potential exit from your first job (or the legal profession altogether) and lower earnings resulting from said exit. (Instead, it assumes that your compensation salary grows at a constant rate that you specify in the cover sheet.) But if you have a decent idea of your expected employment outcomes (e.g., three years in BigLaw with BigLaw-level compensation, then in-house at the mean in-house compensation for someone at that level), you could build a rough approximation of your project income into the "Calculations" tab yourself. To do this, you can just edit the "inc_emp" column to be equal to whatever you project your future income to be. If you have a couple ideas of what your career might look like, you could even build each scenario into alternative versions of the calculator. Then you might take the average (or a weighted average) of the NPVs from the different scenarios.
4. Overall, the default income projections are very rough. I highly recommend refining them to match your individual circumstances. This goes for both your non-LS career and your post-LS career. For guidance on how to change the default income projections, see #3 above.
5. PAYE isn't quite as simple as a simple "YES" on the cover sheet makes it look. First, your eligibility is conditioned on the existence of a federal program. Second, there may be a "tax bomb" at the end (when your debt is forgiven), such that all the cancelled debt is treated as taxable income. You may be taxed on that income at a very high tax rate. Although the spreadsheet attempts to account for this tax bomb (and your tax liability may be reduced by extent to which you are insolvent, if at all), getting hit with this tax bomb may feel very different when it actually comes along. Third, interest will continue to accrue (and your debt to grow) until it is forgiven. I have no clue how this affects your credit or anything like that. Do more research into PAYE if you plan to use it to pay back your debt.
6. This is only "one view of the cathedral," so to speak. There are many considerations relevant to your choice whether to attend law school. You should not treat this calculator as a substitute for those other considerations. Even if you're only thinking about law school as a financial investment (which seems foolish to me), you should look at things from different angles. For example, you might consider how you would handle living with massive amounts of debt.
There are definitely other caveats as well. If you'd like me to add anything else to this list, please reply to this thread or PM me.

V. Disclaimer

I MAKE NO REPRESENTATIONS, WARRANTIES, OR OTHER ASSURANCES OF ANY KIND, INCLUDING ABOUT THE ACCURACY OF THESE CALCULATIONS OR THE VALIDITY OF THE ASSUMPTIONS UNDERLYING THE CALCULATIONS. THIS SPREADSHEET SHOULD NOT BE A SUBSTITUTE FOR YOUR OWN INDEPENDENT ANALYSIS. THE CALCULATIONS MADE IN THE SPREADSHEET RELY ON TAX, LEGAL, AND OTHER ASSUMPTIONS THAT MAY OR MAY NOT BE ACCURATE. CONSULT YOUR OWN TAX AND LEGAL ADVISERS. I AM NOT YOUR FINANCIAL ADVISER OR LAWYER.

*** UPDATE: I've added PAYE capability. Just go to the "Cover Sheet (PAYE)" tab and input the required info, and the spreadsheet takes care of the rest. ***

*** UPDATE 2: I've added risk-aversion capability. Users can now tailor the results to their risk aversion (the assumption being that LS is riskier than not going to LS—although users can tell the spreadsheet that LS is actually the less risky option). ***

*** UPDATE 3: I've added another model that allows you to calculate the NPV where you finance law school with debt but not using PAYE. This version also allows you to do a mixture of both cash and debt. ***

### Re: A Calculator to Help You Determine Whether Law School Is a Good Investment

Posted: Tue Aug 15, 2017 10:49 am
iamgeorgebush wrote:My model highlights the importance of examining individual circumstances when deciding whether law school is a worthwhile investment. In threads in which a prospective law students asks whether a particular law school is worthwhile, I've frequently observed TSLers offering one-size-fits-all recommendations without asking what the person could do if they didn't attend law school. Hopefully people will cut down on this practice after seeing that the question really depends on individual circumstances—particularly what alternative careers are available to the person. The judgment as to whether a particular law school is a good investment at a given price for someone who could work as a Big Four accountant than for someone could work as a barista.

I'm not sure if your spreadsheet accounts for this, but it doesn't seem clear from the description. The "one-size-fits-all" (it really isn't) advice is generally that \$300,000 of debt is impossible to service on \$60,000 a year. How does your formula factor in loan repayment?

If I'm going to make more as a lawyer than as a barista, then sure, I eventually make up the sunk costs. But that also depends on whether I was a barista making thousands of dollars in loan payments on a 10-year repayment schedule, or if I'm a lawyer using LRAP/PSLF to mitigate my low salary, etc.

### Re: A Calculator to Help You Determine Whether Law School Is a Good Investment

Posted: Tue Aug 15, 2017 11:56 am
cavalier1138 wrote:
iamgeorgebush wrote:My model highlights the importance of examining individual circumstances when deciding whether law school is a worthwhile investment. In threads in which a prospective law students asks whether a particular law school is worthwhile, I've frequently observed TSLers offering one-size-fits-all recommendations without asking what the person could do if they didn't attend law school. Hopefully people will cut down on this practice after seeing that the question really depends on individual circumstances—particularly what alternative careers are available to the person. The judgment as to whether a particular law school is a good investment at a given price for someone who could work as a Big Four accountant than for someone could work as a barista.

I'm not sure if your spreadsheet accounts for this, but it doesn't seem clear from the description. The "one-size-fits-all" (it really isn't) advice is generally that \$300,000 of debt is impossible to service on \$60,000 a year. How does your formula factor in loan repayment?

If I'm going to make more as a lawyer than as a barista, then sure, I eventually make up the sunk costs. But that also depends on whether I was a barista making thousands of dollars in loan payments on a 10-year repayment schedule, or if I'm a lawyer using LRAP/PSLF to mitigate my low salary, etc.

The spreadsheet treats the sum of tuition and increased COL (relative to what the student would have to pay if she were not attending law school) as a lump sum cash outflow paid at the time of starting law school. This is equivalent to C_0 from the standard NPV formula:

(See http://www.investopedia.com/terms/n/npv.asp for further explanation of the NPV concept.)

Thus the spreadsheet does not directly account for loan repayments; rather, it assumes that you pay all costs upfront. However, I set the discount rate (r in the above NPV formula above) to 7%, which is the current interest rate on a Federal Direct Graduate PLUS Loan. This helps to account for loan repayment (albeit indirectly). If you play around with the discount rate (it's on the second tab), you'll see that a higher discount rate makes law school a worse investment, while a lower discount rate makes law school a better investment. This is because the model effectively assumes that if you did not attend law school, you would invest the money in an asset that earns a constant 7% return. This is an imperfect measure, of course—ideally you'd want to model the cost of law school as it becomes due rather than as an initial lump sum investment. I didn't do this because this would complicate the model (and I have other things to do), but this would be a good idea for anyone else wants to take a stab at it.

One other caveat I should have mentioned: The model doesn't take into account taxes. Taxes obviously change things. For example, you can deduct interest payments on loans, and the income figures will be lower. I'm not convinced taxes will be huge difference, though.

Any any rate, this whole thing is just another view of the cathedral, so to speak. People should still make sure they can service their debt, of course.

### Re: A Calculator to Help You Determine Whether Law School Is a Good Investment

Posted: Tue Aug 15, 2017 12:32 pm
Sounds interesting - Any chance you can upload it somewhere else besides tinyupload? Google Drive/Dropbox for instance?

### Re: A Calculator to Help You Determine Whether Law School Is a Good Investment

Posted: Tue Aug 15, 2017 1:18 pm
twiix wrote:Sounds interesting - Any chance you can upload it somewhere else besides tinyupload? Google Drive/Dropbox for instance?

### Re: A Calculator to Help You Determine Whether Law School Is a Good Investment

Posted: Tue Aug 15, 2017 1:32 pm
Also, I see that some people are requesting access to the Google sheet. I'm not going to grant access because I don't want people messing with the formula, but you should be able to download the Excel file by going to File -> Download As...

Let me know if there are any issues.

### Re: A Calculator to Help You Determine Whether Law School Is a Good Investment

Posted: Tue Aug 15, 2017 9:14 pm
iamgeorgebush wrote:
twiix wrote:Sounds interesting - Any chance you can upload it somewhere else besides tinyupload? Google Drive/Dropbox for instance?

Thank you so much, way easier to use that way

### Re: A Calculator to Help You Determine Whether Law School Is a Good Investment

Posted: Wed Aug 16, 2017 12:20 am
Sounds good. Haven't looked at any of the details but I'm glad tls is finally accepting that law school is a very personal decision dependent on the individual circumstances.

### Re: A Calculator to Help You Determine Whether Law School Is a Good Investment

Posted: Wed Aug 16, 2017 12:22 am
For what it's worth, you could prolly also just make an option for .9* (any school NPV) and take away he loan cost upfront to get your result according to PAYE

### Re: A Calculator to Help You Determine Whether Law School Is a Good Investment

Posted: Thu Aug 17, 2017 10:42 am
Johann wrote:For what it's worth, you could prolly also just make an option for .9* (any school NPV) and take away he loan cost upfront to get your result according to PAYE

What do you mean? Like remove the cash outflow portion of NPV (tuition/increased COL), so it's just the PV of the increased income, and then multiply that PV by 0.9? I'm not super familiar with PAYE, so how does that work?

### Re: A Calculator to Help You Determine Whether Law School Is a Good Investment

Posted: Thu Aug 17, 2017 11:34 am
iamgeorgebush wrote:
Johann wrote:For what it's worth, you could prolly also just make an option for .9* (any school NPV) and take away he loan cost upfront to get your result according to PAYE

What do you mean? Like remove the cash outflow portion of NPV (tuition/increased COL), so it's just the PV of the increased income, and then multiply that PV by 0.9? I'm not super familiar with PAYE, so how does that work?

its an income based loan repayment method where you pay 10% of your income for 20/25 years before getting your loans forgiven.

so, the cost of the law school then just becomes a function of your salary .1*annual salary. it would also help get a better picture because with the cost of law school as an up front cost rather than back end cost, you are significantly over weighting the true cost of the degree in an NPV. its not a cash outlay, its paid back years and years later.

### Re: A Calculator to Help You Determine Whether Law School Is a Good Investment

Posted: Thu Aug 17, 2017 5:01 pm
Johann wrote:
iamgeorgebush wrote:
Johann wrote:For what it's worth, you could prolly also just make an option for .9* (any school NPV) and take away he loan cost upfront to get your result according to PAYE

What do you mean? Like remove the cash outflow portion of NPV (tuition/increased COL), so it's just the PV of the increased income, and then multiply that PV by 0.9? I'm not super familiar with PAYE, so how does that work?

its an income based loan repayment method where you pay 10% of your income for 20/25 years before getting your loans forgiven.

so, the cost of the law school then just becomes a function of your salary .1*annual salary. it would also help get a better picture because with the cost of law school as an up front cost rather than back end cost, you are significantly over weighting the true cost of the degree in an NPV. its not a cash outlay, its paid back years and years later.

Okay, I've updated to spreadsheet (available here: https://docs.google.com/spreadsheets/d/ ... sp=sharing - I'm just going to remove the tinyupload version) to add the capability to account for PAYE. In the PAYE version, you don't pay tuition or increased COA (so there's no t=0 cash outflow), but your income is reduced by loan payments equal to 10% of your "discretionary income" for that year (defined as your income minus 150% of the federal poverty level for your state).

Good idea, because this makes a big difference. Using Loyola (LA) as an example again, Loyola still looks like a bad investment if we assume you could make \$60k per year growing at 3% annually by not attending law school. But if you would make only \$50k per year growing at 3%, then it looks like a good investment. (In the lump-sum scenario, the \$50k assumption looked like a close call.)

If anyone wants to check my work, that would probably be a good idea. I based my modeling of PAYE on this website - https://studentloanhero.com/pay-as-you- ... quirements - and have no knowledge about how PAYE works beyond that.

### Re: A Calculator to Help You Determine Whether Law School Is a Good Investment

Posted: Thu Aug 17, 2017 5:09 pm
iamgeorgebush wrote:
Johann wrote:
iamgeorgebush wrote:
Johann wrote:For what it's worth, you could prolly also just make an option for .9* (any school NPV) and take away he loan cost upfront to get your result according to PAYE

What do you mean? Like remove the cash outflow portion of NPV (tuition/increased COL), so it's just the PV of the increased income, and then multiply that PV by 0.9? I'm not super familiar with PAYE, so how does that work?

its an income based loan repayment method where you pay 10% of your income for 20/25 years before getting your loans forgiven.

so, the cost of the law school then just becomes a function of your salary .1*annual salary. it would also help get a better picture because with the cost of law school as an up front cost rather than back end cost, you are significantly over weighting the true cost of the degree in an NPV. its not a cash outlay, its paid back years and years later.

Good idea, because this makes a big difference. Using Loyola (LA) as an example again, Loyola still looks like a bad investment if we assume you could make \$60k per year growing at 3% annually by not attending law school. But if you would make only \$50k per year growing at 3%, then it looks like a good investment. (In the lump-sum scenario, the \$50k assumption looked like a close call.)

If anyone wants to check my work, that would probably be a good idea. I based my modeling of PAYE on this website - https://studentloanhero.com/pay-as-you- ... quirements - and have no knowledge about how PAYE works beyond that.

I guess this falls in the same category as not including the loan payments at all, but PAYE comes with a tax bomb if it's not done as part of PSLF. Not including that will make PAYE look like a wonderful option (outside of the psychological toll of having six-figure debt for 25 years), but it's not at all an accurate depiction of the pure monetary value of that plan.

### Re: A Calculator to Help You Determine Whether Law School Is a Good Investment

Posted: Thu Aug 17, 2017 5:10 pm
this is some very solid work.

this should basically be stickied/reposted in every choosing a law school/whether or not to begin a legal career. hopefully others remember to quote this in for people to make their own decisions in the future.

### Re: A Calculator to Help You Determine Whether Law School Is a Good Investment

Posted: Thu Aug 17, 2017 5:12 pm
cavalier1138 wrote:
iamgeorgebush wrote:
Johann wrote:
iamgeorgebush wrote:
Johann wrote:For what it's worth, you could prolly also just make an option for .9* (any school NPV) and take away he loan cost upfront to get your result according to PAYE

What do you mean? Like remove the cash outflow portion of NPV (tuition/increased COL), so it's just the PV of the increased income, and then multiply that PV by 0.9? I'm not super familiar with PAYE, so how does that work?

its an income based loan repayment method where you pay 10% of your income for 20/25 years before getting your loans forgiven.

so, the cost of the law school then just becomes a function of your salary .1*annual salary. it would also help get a better picture because with the cost of law school as an up front cost rather than back end cost, you are significantly over weighting the true cost of the degree in an NPV. its not a cash outlay, its paid back years and years later.

Good idea, because this makes a big difference. Using Loyola (LA) as an example again, Loyola still looks like a bad investment if we assume you could make \$60k per year growing at 3% annually by not attending law school. But if you would make only \$50k per year growing at 3%, then it looks like a good investment. (In the lump-sum scenario, the \$50k assumption looked like a close call.)

If anyone wants to check my work, that would probably be a good idea. I based my modeling of PAYE on this website - https://studentloanhero.com/pay-as-you- ... quirements - and have no knowledge about how PAYE works beyond that.

I guess this falls in the same category as not including the loan payments at all, but PAYE comes with a tax bomb if it's not done as part of PSLF. Not including that will make PAYE look like a wonderful option (outside of the psychological toll of having six-figure debt for 25 years), but it's not at all an accurate depiction of the pure monetary value of that plan.

Okay, I should be able to include that in the model. I'm not very knowledgeable about tax stuff (never took fed income tax), so tell me where to find the info.

### Re: A Calculator to Help You Determine Whether Law School Is a Good Investment

Posted: Thu Aug 17, 2017 5:17 pm
cavalier1138 wrote:I guess this falls in the same category as not including the loan payments at all, but PAYE comes with a tax bomb if it's not done as part of PSLF. Not including that will make PAYE look like a wonderful option (outside of the psychological toll of having six-figure debt for 25 years), but it's not at all an accurate depiction of the pure monetary value of that plan.

even assuming 600k of debt at time of forgiveness, that results in 271k of a tax bomb (assuming the net worth of the lawyer exceeds 271k), which has a present value of 70k. however, this bill can also be deferred through IRS repayment plans.

additionally, you dont actually pay a full 10% of your income on PAYE (because you get a poverty limit threshold exemption, family size exemption, can defer income etc.). i usually end up paying about 5% of my income every year on PAYE. all in all, its basically a wash, but if OP wants they can add the caveat that to be ultra conservative, you add 70k of present value to the law school cost for someone attending law school on full sticker loans.

### Re: A Calculator to Help You Determine Whether Law School Is a Good Investment

Posted: Thu Aug 17, 2017 5:24 pm
I have no idea how math works, but assuming it's even somewhat accurate, it looks like a great resource for 0Ls.

And I'm happy to get the belated reassurance that law school was a good investment for me, so thanks!

### Re: A Calculator to Help You Determine Whether Law School Is a Good Investment

Posted: Thu Aug 17, 2017 5:28 pm
iamgeorgebush wrote:Okay, I should be able to include that in the model. I'm not very knowledgeable about tax stuff (never took fed income tax), so tell me where to find the info.

i cant open the model now, but i was already conservative on the actual PAYE payments. see my analysis above but theres basically no way to account for all the tax consequences in the model without making it insanely complicated:

the debt forgiven is treated as taxable income, so debt forgiven*tax rate = the amount of the taxes that become due at the time of forgiveness (20 or 25 years out)
however, if the debtor does not have assets that cover or exceed the income, there is no tax bomb. so 600k of debt forgiveness for someone that only has 100k of net worth assets (retirement accounts, houses, etc everything counts), is only taxed on 100k of income (30k tax bomb).
forgiveness occurs 20/25 years after repayment starts. however, you can make deferments that basically you get 3 months off and then extend your repayment 3 months, so you can actually kick the can even further past 20/25 years up to 23/28 years (you get 36 months of deferments cumulatively if you want)

a 600k debt forgiveness would be ~70k in present value cost on 20 year forgiveness (however could also do 25 year forgiveness to extend this out further).
if moving the needle from .9 to .95 covers the 70k, I think the model is conservative enough because most people will not actually pay the full 10% of their income to debt. if you make 50k (depending on your 401k contributions/IRA) you pay about 5%. if you make 100k and have a baby, you pay about 5%. if you make 150k with no baby and are single you pay more like 7.5% etc. its a slidig scale, but worst case scenario is 10%.

### Re: A Calculator to Help You Determine Whether Law School Is a Good Investment

Posted: Thu Aug 17, 2017 5:32 pm
Lavitz wrote:I have no idea how math works, but assuming it's even somewhat accurate, it looks like a great resource for 0Ls.

And I'm happy to get the belated reassurance that law school was a good investment for me, so thanks!

i spend a good chunk of time looking at valuations, and this is as good of a resource you would get for free that is broadly applicable. for it to be super individualized, there are a few tweaks that could be done.

### Re: A Calculator to Help You Determine Whether Law School Is a Good Investment

Posted: Thu Aug 17, 2017 5:35 pm
Okay, I think I understand the tax bomb. Basically, all the debt that's forgiven is treated as taxable income the year the debt is forgiven ("cancellation of debt" (COD) income)? But if you're insolvent at the time of the debt forgiveness (i.e., liabilities > FMV of assets), then your taxable income is reduced by the amount of your insolvency. See https://lawyerist.com/defusing-student- ... t-tax-bomb.

I'll have to make some assumptions about the amount of a person's insolvency at the time of the debt (and the person's tax rate), but I think I could probably work a simplified version of the tax bomb into the model. It won't be perfect, but I'll give it a go.

Edit: Something else that just occurred to me: If you're doing the PAYE route, the income you would have received during the time you're attending law school should be reduced by the COL you would have paid if you weren't attending law school. Since your loans are covering your COL during law school, that isn't money you would have otherwise earned. I'll find a way to account for this. Should make attending law school slightly more attractive.

### Re: A Calculator to Help You Determine Whether Law School Is a Good Investment

Posted: Thu Aug 17, 2017 6:43 pm
Okay, I've updated the spreadsheet to account for the tax bomb. Rather than making wild guesses about people's tax rate at the time of repayment or their assets and liabilities, I've let users define those things for themselves. This will obviously require some additional research from the user, but since these are pretty important assumptions, I think it's best to put them out in the open.

If anyone notices any errors, please let me know. Again, I emphasize that I know very little about tax, and my understanding of the tax bomb is based largely on this article: https://lawyerist.com/defusing-student- ... t-tax-bomb.

### Re: A Calculator to Help You Determine Whether Law School Is a Good Investment

Posted: Thu Aug 17, 2017 6:51 pm
How does the spreadsheet account for risk?

Like, if the mega millions jackpot goes to \$1 billion the NPV of a lottery ticket is probably well over \$1. That doesn't mean you should dump your life savings into lotto tickets. But if I'm understanding your formula here correctly, that seems to be exactly what the sheet would recommend. Got to be some way to account for the stability of a job given the high degree of variance in outcomes from lower ranked law schools.

E. Conversely, how do you account for the relative lack of stability in law given that for a ton of high earners from your data set their highest earning years as a lawyer will be the first 2-5 after law school?

E2. Basically, given the bimodal distribution of entry level legal salaries and the front loaded nature of the compensation I think analyzing NPV of a law degree by looking at average first year salaries probably significantly overstates the desirability of law.

### Re: A Calculator to Help You Determine Whether Law School Is a Good Investment

Posted: Thu Aug 17, 2017 7:22 pm
BlendedUnicorn wrote:How does the spreadsheet account for risk?

Like, if the mega millions jackpot goes to \$1 billion the NPV of a lottery ticket is probably well over \$1. That doesn't mean you should dump your life savings into lotto tickets. But if I'm understanding your formula here correctly, that seems to be exactly what the sheet would recommend. Got to be some way to account for the stability of a job given the high degree of variance in outcomes from lower ranked law schools.

E. Conversely, how do you account for the relative lack of stability in law given that for a ton of high earners from your data set their highest earning years as a lawyer will be the first 2-5 after law school?

E2. Basically, given the bimodal distribution of entry level legal salaries and the front loaded nature of the compensation I think analyzing NPV of a law degree by looking at average first year salaries probably significantly overstates the desirability of law.

You have a good point about risk. People tend to be risk averse, and I did not include any sort of discount for the increased risk associated with law school. How about I add an assumption in the cover sheet to reflect the person's individual risk aversity, and then discount the PV of the person's future income by that factor? I think this would address all your objections. I'll think about how to do this, but in the meantime, please do let me know if you have ideas about how to best implement it.

### Re: A Calculator to Help You Determine Whether Law School Is a Good Investment

Posted: Thu Aug 17, 2017 7:26 pm
iamgeorgebush wrote:
BlendedUnicorn wrote:How does the spreadsheet account for risk?

Like, if the mega millions jackpot goes to \$1 billion the NPV of a lottery ticket is probably well over \$1. That doesn't mean you should dump your life savings into lotto tickets. But if I'm understanding your formula here correctly, that seems to be exactly what the sheet would recommend. Got to be some way to account for the stability of a job given the high degree of variance in outcomes from lower ranked law schools.

E. Conversely, how do you account for the relative lack of stability in law given that for a ton of high earners from your data set their highest earning years as a lawyer will be the first 2-5 after law school?

E2. Basically, given the bimodal distribution of entry level legal salaries and the front loaded nature of the compensation I think analyzing NPV of a law degree by looking at average first year salaries probably significantly overstates the desirability of law.

You have a good point about risk. People tend to be risk averse, and I did not include any sort of discount for the increased risk associated with law school. How about I add an assumption in the cover sheet to reflect the person's individual risk aversity, and then discount the PV of the person's future income by that factor? I think this would address all your objections. I'll think about how to do this, but in the meantime, please do let me know if you have ideas about how to best implement it.

I think that's a good call because there's really no way to objectively say what the right level is but unless you account for it the results are going to be overly rosy. Ideally the formula would find a way to punish schools that have inflated NPVs based on twenty percentish of the class getting big law beyond just a lower NPV.

### Re: A Calculator to Help You Determine Whether Law School Is a Good Investment

Posted: Thu Aug 17, 2017 11:48 pm
BlendedUnicorn wrote:
iamgeorgebush wrote:
BlendedUnicorn wrote:How does the spreadsheet account for risk?

Like, if the mega millions jackpot goes to \$1 billion the NPV of a lottery ticket is probably well over \$1. That doesn't mean you should dump your life savings into lotto tickets. But if I'm understanding your formula here correctly, that seems to be exactly what the sheet would recommend. Got to be some way to account for the stability of a job given the high degree of variance in outcomes from lower ranked law schools.

E. Conversely, how do you account for the relative lack of stability in law given that for a ton of high earners from your data set their highest earning years as a lawyer will be the first 2-5 after law school?

E2. Basically, given the bimodal distribution of entry level legal salaries and the front loaded nature of the compensation I think analyzing NPV of a law degree by looking at average first year salaries probably significantly overstates the desirability of law.

You have a good point about risk. People tend to be risk averse, and I did not include any sort of discount for the increased risk associated with law school. How about I add an assumption in the cover sheet to reflect the person's individual risk aversity, and then discount the PV of the person's future income by that factor? I think this would address all your objections. I'll think about how to do this, but in the meantime, please do let me know if you have ideas about how to best implement it.

I think that's a good call because there's really no way to objectively say what the right level is but unless you account for it the results are going to be overly rosy. Ideally the formula would find a way to punish schools that have inflated NPVs based on twenty percentish of the class getting big law beyond just a lower NPV.

Okay, I've modified the spreadsheet (both the lump-sum and PAYE models) to account for risk aversion. Basically, each model now asks the user two questions, and the answers to those questions determine the discount to be applied to the present value of each stream of excess income.

First, the models ask whether LS employment outcomes are significantly more variable than non-LS employment outcomes. If the answer is no, then the model does not apply a discount for risk aversion. This is because the user has implied that LS is not really a riskier option than whatever they'd be doing otherwise.

Second, the models ask the user's degree of risk aversion: "None" / "Low" / "Moderate" / "High." The model then multiplies each stream of PV payments by a discount factor that varies depending on the user's answer: 1 for "None" (meaning no discount), 0.9 for "Low," 0.8 for "Moderate," and 0.7 for "High." There is an exception for when the PV stream for a given year is negative, in which case the model applies no discount. This is because we shouldn't be discounting negative income based on the user's risk aversion—if anything, we should do the opposite.

How does that sound? I chose the discount factors somewhat arbitrarily, so if anyone has better ideas, please chime in.

Also, I'd like to compile a list of caveats to the spreadsheet that I will put in the OP in a separate section. Everyone should feel free to point out the model's limitations (especially those that are hard to fix) so I can state them clearly for users. Here are some I can think of:

1. Simplistic treatment of risk. In particular, the model does not a very good job distinguishing between law schools with a great deal of variability in employment outcomes (e.g., Hastings, with its low 55.5% employment score but respectable 19.3% BigLaw score)—which should receive a higher risk discount—and schools with less variability in employment outcomes (e.g., Penn State, with a respectable 82.4% employment score but lower 8.8% BigLaw score).

2. Failure to deal with taxes (except the tax bomb for PAYE).

3. Failure to account for potential exit from legal profession (and lower earnings resulting from said exit).

Other caveats worth mentioning?