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Discuss various money matters here. Loans (federal and private), scholarships, lottery winnings, or other school finance related information and queries.
ToTransferOrNot
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Re: NEVER GOING TO BE ABLE TO REPAY 210K IN LOANS? HELP

Postby ToTransferOrNot » Sat Jun 09, 2012 1:27 pm

Tiago Splitter wrote:
RedBirds2011 wrote:
ToTransferOrNot wrote:I don't think individuals should be acting as risk-neutral investors, because education debt essentially represents an extreme lack of diversification. It's very similar to someone whose entire net worth is tied into a single asset--his sole proprietorship--except that, of course, a student is worse off, because a sole proprietorship's downside is limited to zero net worth after bankruptcy, rather than -200k.

Less diversification means that it is *rational* to be more risk-averse. This is a pretty basic aspect of financial planning. Rayiner, correct me if I'm wrong, but your model seems to be for a risk-neutral investor. Isn't that imprudent?



When are law students going to stop treating law school like a stock portfolio? More diversification? How would that work with education? Like buying multiple degrees to hedge employment risks? Lol come on people.


In effect he's saying that you shouldn't treat it like a stock portfolio.


Exactly. The point I was making was that Rayiner's calculation seems to be presuming a risk-neutral thought process, and that's probably not appropriate for someone who is looking at taking out student debt. Instead, the calculation should be focused on an appropriate level of risk-averseness, meaning that the expected payoff, compared to a risk-neutral thought process, should be higher to make it a good "investment."

Put differently: If I'm risk-neutral, a lottery ticket with 50% chance of paying $100 and 50% chance of paying $0 is worth $50 to me. If I'm risk-averse, I may only be willing to pay $30 or $40 for that ticket, even though the expected value of the ticket is $50. I'm saying that people taking out student loans should not be willing to pay $50 for that 50/50:$0/$100 "ticket" (the ticket being the loans). Considering the absolutely life-crushing results of the debt if you don't land on the pay side of the ticket, and the complete lack of diversification, I would say that you should be down in the "20s" before you think of buying that ticket.

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rayiner
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Re: NEVER GOING TO BE ABLE TO REPAY 210K IN LOANS? HELP

Postby rayiner » Sat Jun 09, 2012 1:32 pm

ToTransferOrNot wrote:I don't think individuals should be acting as risk-neutral investors, because education debt essentially represents an extreme lack of diversification. It's very similar to someone whose entire net worth is tied into a single asset--his sole proprietorship--except that, of course, a student is worse off, because a sole proprietorship's downside is limited to zero net worth after bankruptcy, rather than -200k.

Less diversification means that it is *rational* to be more risk-averse. This is a pretty basic aspect of financial planning. Rayiner, correct me if I'm wrong, but your model seems to be for a risk-neutral investor. Isn't that imprudent?


Risk-aversion is just a way to describe a psychological component of an economic decision. It's no more or less rational to be risk-averse than it is to like the color blue versus the color red.

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rayiner
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Re: NEVER GOING TO BE ABLE TO REPAY 210K IN LOANS? HELP

Postby rayiner » Sat Jun 09, 2012 1:49 pm

JCougar wrote:Maybe as a whole it's a break-even risk, but for each individual, it's hit or miss. If you're below median at the lower half of the T14 and don't have anything else special on your resume, you can really screw yourself.

And in this situation, I'd say the downside risk is a lot worse than the upside is good. For an individual, being completely financially screwed for the rest of your life is a terrible thing, whereas making a biglaw salary isn't going to guarantee you happiness.

And, as others have noted, that's assuming you can stay at biglaw. Attrition rates for biglaw are something like 75% after 5 years. I'm not sure how much of that is after the first year or two, but all the people who get biglaw certainly aren't there for 4 years. Biglaw is a pyramid scheme concocted chiefly to make money for the partners. The associates are disposable.


Of course the outcomes are different for each individual. That's life. The point is to rationally analyze what you can expect.

Also, I am not assuming that you can stay in big law for four years. I'm saying that you break even after four years if you stay in big law. I think that's achievable for most people. While associates may be disposable, in this situation the pyramid scheme works in your favor. Under normal circumstances, partners really have no incentive to push out third and fourth years, who are the most profitable tranche of leverage they have. As long as you're putting in the hours and not demanding equity, partners want to keep you around as long as possible--that's why you see things like Kirkland's NSP tier.

People seem to think that partners like hiring 100+ new associates each year just to push them out a couple of years later. That's non-sensical. Recruiting a new associate is extremely expensive. Probably $75-100k when you factor in screening interviews, callbacks, SA salary, SA overhead, opportunity cost for lawyers doing recruiting and managing SA's instead of billing. Plus, clients would much rather have third/fourth years working on cases than first/second years, to the point some are refusing to pay for first years. You think the $210k/year a midlevel costs versus the $160k/year a first year makes outweighs how much more productive the former is in terms of billed (not just billable) hours? No way.

You're also assuming that you have to make back all of your investment while in big law. You'll have 30 years of career after big law. You can't pretend that the relative upside during that period is zero, that's completely inane.

ToTransferOrNot
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Re: NEVER GOING TO BE ABLE TO REPAY 210K IN LOANS? HELP

Postby ToTransferOrNot » Sat Jun 09, 2012 1:49 pm

rayiner wrote:
ToTransferOrNot wrote:I don't think individuals should be acting as risk-neutral investors, because education debt essentially represents an extreme lack of diversification. It's very similar to someone whose entire net worth is tied into a single asset--his sole proprietorship--except that, of course, a student is worse off, because a sole proprietorship's downside is limited to zero net worth after bankruptcy, rather than -200k.

Less diversification means that it is *rational* to be more risk-averse. This is a pretty basic aspect of financial planning. Rayiner, correct me if I'm wrong, but your model seems to be for a risk-neutral investor. Isn't that imprudent?


Risk-aversion is just a way to describe a psychological component of an economic decision. It's no more or less rational to be risk-averse than it is to like the color blue versus the color red.


That is absolutely incorrect. When someone is not diversified, a drop in an asset has a greater negative effect on overall worth. Protecting against that drop in overall worth by insisting on a higher-percentage chance of payout (even if it comes with a lower expected payout overall) is a necessary component of a rational decision.

Go back to a lottery ticket example. Imagine a person has only $50 to his name, and must immediately obtain $70 in order to avoid execution. He has two choices: choice A is a ticket with an 80% chance of paying $70, and a 20% chance of paying $0, so expected payout is $56. Choice B is a ticket with a 50% chance of paying $1000, and a 50% chance of paying $0, for an expected payout of $500. Any rational actor is going to pick choice A in that example.

Obviously, that example is a risk setup that is completely unrealistic, but it demonstrates that it is frequently logical to be risk-averse in the face of lack of diversification and dire consequences if you come out on the "not pay" side of the coin. $200k+ in non-dischargeable debt--with a negative payout of at least 20 years of a shit life--is the "execution" in the example above. Biglaw is the $1,000 (or $10mm, whatever number you want to assign to increased lifetime earnings from a successful legal career) payoff. I'm not saying that it's never an economically rational decision, but to dismiss the importance of risk-averseness in an undiversified "portfolio" is incorrect.

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rayiner
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Re: NEVER GOING TO BE ABLE TO REPAY 210K IN LOANS? HELP

Postby rayiner » Sat Jun 09, 2012 1:51 pm

ToTransferOrNot wrote:
rayiner wrote:
ToTransferOrNot wrote:I don't think individuals should be acting as risk-neutral investors, because education debt essentially represents an extreme lack of diversification. It's very similar to someone whose entire net worth is tied into a single asset--his sole proprietorship--except that, of course, a student is worse off, because a sole proprietorship's downside is limited to zero net worth after bankruptcy, rather than -200k.

Less diversification means that it is *rational* to be more risk-averse. This is a pretty basic aspect of financial planning. Rayiner, correct me if I'm wrong, but your model seems to be for a risk-neutral investor. Isn't that imprudent?


Risk-aversion is just a way to describe a psychological component of an economic decision. It's no more or less rational to be risk-averse than it is to like the color blue versus the color red.


That is absolutely incorrect. When someone is not diversified, a drop in an asset has a greater negative effect on overall worth. Protecting against that drop in overall worth by insisting on a higher-percentage chance of payout (even if it comes with a lower expected payout overall) is a necessary component of a rational decision.

Go back to a lottery ticket example. Imagine a person has only $50 to his name, and must immediately obtain $70 in order to avoid execution. He has two choices: choice A is a ticket with an 80% chance of paying $70, and a 20% chance of paying $0, so expected payout is $56. Choice B is a ticket with a 50% chance of paying $1000, and a 50% chance of paying $0, for an expected payout of $500. Any rational actor is going to pick choice A in that example.

Obviously, that example is a risk setup that is completely unrealistic, but it demonstrates that it is frequently logical to be risk-averse in the face of lack of diversification and dire consequences if you come out on the "not pay" side of the coin. $200k+ in non-dischargeable debt--with a negative payout of at least 20 years of a shit life--is the "execution" in the example above. Biglaw is the $1,000 (or $10mm, whatever number you want to assign to increased lifetime earnings from a successful legal career) payoff. I'm not saying that it's never an economically rational decision, but to dismiss the importance of risk-averseness in an undiversified "portfolio" is incorrect.


You're confusing risk aversion (differences in response given equal risk) to actual reductions in risk from diversification.

Also you're example is asinine. You're neglecting the cost attached to the "execution" outcome. You have to estimate how much living is worth to the person and add the risk-adjusted cost to the two choices. In the law school hypo, there is no cost beyond the tuition + opportunity cost.

ToTransferOrNot
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Re: NEVER GOING TO BE ABLE TO REPAY 210K IN LOANS? HELP

Postby ToTransferOrNot » Sat Jun 09, 2012 1:56 pm

No, I'm not. I'm saying that when diversification is impossible (as it is with student loans), and the negative consequences of a bad result are severe (as they are when you're talking about a high amount of nondischargable debt), it is economically irrational to be anything but risk-averse.

As I mentioned, I'm not saying it makes sense to be extremely risk-averse--perhaps $45 for the 50/50:$0/100 ticket makes sense, or $40--some other people in the thread seem to be of the opinion that the ticket would only make sense at $10, which is the kind of "paralyzing risk-averseness" you referenced.

I'll see whether I can find any papers to support my position when I get into work on Monday.

ETA: How can you possibly say that there is no cost in the law school example between opportunity cost and tuition? "Abject poverty" is itself a cost--it's not the same cost as "death", obviously, but it represents a price tag beyond the cost that was paid for tuition and the other lost income.

ETA2: Of course the example was ridiculous. I didn't claim it wasn't. If you want to make the numbers make more sense, make Choice B have an expected payout of $100bln--far beyond the expected total life earnings of most people--rather than $1,000. I didn't think that was really necessary, but eh.

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rayiner
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Re: NEVER GOING TO BE ABLE TO REPAY 210K IN LOANS? HELP

Postby rayiner » Sat Jun 09, 2012 2:13 pm

ToTransferOrNot wrote:No, I'm not. I'm saying that when diversification is impossible (as it is with student loans), and the negative consequences of a bad result are severe (as they are when you're talking about a high amount of nondischargable debt), it is economically irrational to be anything but risk-averse.


Diversification reduces actual risk. That has nothing to do with risk aversion which is the psychological response to various levels of risk. You're basically saying it's economically irrational to be anything but risk-averse in situations with substantial risk. I'd love to see a paper supporting that point. :roll:

ETA: How can you possibly say that there is no cost in the law school example between opportunity cost and tuition? "Abject poverty" is itself a cost--it's not the same cost as "death", obviously, but it represents a price tag beyond the cost that was paid for tuition and the other lost income.


Because: 1) that's the actual cost; 2) "abject poverty" is not on the table for most people. The vast majority of law students are upper middle class who could move in with parents, etc, to deal with the downside risk. $270k of non-dischargeable debt is not a death sentence or anything close to it for most people. And IBR obviates most of that concern entirely.

NJPitcher
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Re: NEVER GOING TO BE ABLE TO REPAY 210K IN LOANS? HELP

Postby NJPitcher » Sat Jun 09, 2012 3:20 pm

rayiner wrote:
ToTransferOrNot wrote:
rayiner wrote:
ToTransferOrNot wrote:I don't think individuals should be acting as risk-neutral investors, because education debt essentially represents an extreme lack of diversification. It's very similar to someone whose entire net worth is tied into a single asset--his sole proprietorship--except that, of course, a student is worse off, because a sole proprietorship's downside is limited to zero net worth after bankruptcy, rather than -200k.

Less diversification means that it is *rational* to be more risk-averse. This is a pretty basic aspect of financial planning. Rayiner, correct me if I'm wrong, but your model seems to be for a risk-neutral investor. Isn't that imprudent?


Risk-aversion is just a way to describe a psychological component of an economic decision. It's no more or less rational to be risk-averse than it is to like the color blue versus the color red.


That is absolutely incorrect. When someone is not diversified, a drop in an asset has a greater negative effect on overall worth. Protecting against that drop in overall worth by insisting on a higher-percentage chance of payout (even if it comes with a lower expected payout overall) is a necessary component of a rational decision.

Go back to a lottery ticket example. Imagine a person has only $50 to his name, and must immediately obtain $70 in order to avoid execution. He has two choices: choice A is a ticket with an 80% chance of paying $70, and a 20% chance of paying $0, so expected payout is $56. Choice B is a ticket with a 50% chance of paying $1000, and a 50% chance of paying $0, for an expected payout of $500. Any rational actor is going to pick choice A in that example.

Obviously, that example is a risk setup that is completely unrealistic, but it demonstrates that it is frequently logical to be risk-averse in the face of lack of diversification and dire consequences if you come out on the "not pay" side of the coin. $200k+ in non-dischargeable debt--with a negative payout of at least 20 years of a shit life--is the "execution" in the example above. Biglaw is the $1,000 (or $10mm, whatever number you want to assign to increased lifetime earnings from a successful legal career) payoff. I'm not saying that it's never an economically rational decision, but to dismiss the importance of risk-averseness in an undiversified "portfolio" is incorrect.


You're confusing risk aversion (differences in response given equal risk) to actual reductions in risk from diversification.

Also you're example is asinine. You're neglecting the cost attached to the "execution" outcome. You have to estimate how much living is worth to the person and add the risk-adjusted cost to the two choices. In the law school hypo, there is no cost beyond the tuition + opportunity cost.


Rayiner ftw.

Being poor is the actual cost, and you totally ignored the value one would place on their own life. Don't read that as "a" life, it's "their life." When you change the calculation to "$100bln--far beyond the expected total life earnings of most people" you still miss the point. There's no amount of money most people would be willing to take 50/50 odds on their own lives for. Just because they couldn't earn that much doesn't mean they don't think their life has an intrinsic value that exceeds money...

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manofjustice
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Re: NEVER GOING TO BE ABLE TO REPAY 210K IN LOANS? HELP

Postby manofjustice » Sat Jun 09, 2012 3:39 pm

ToTransferOrNot wrote:Put differently: If I'm risk-neutral, a lottery ticket with 50% chance of paying $100 and 50% chance of paying $0 is worth $50 to me. If I'm risk-averse, I may only be willing to pay $30 or $40 for that ticket, even though the expected value of the ticket is $50. I'm saying that people taking out student loans should not be willing to pay $50 for that 50/50:$0/$100 "ticket" (the ticket being the loans). Considering the absolutely life-crushing results of the debt if you don't land on the pay side of the ticket, and the complete lack of diversification, I would say that you should be down in the "20s" before you think of buying that ticket.


This is very credited.

But to it I'd like to add this simple thought: law school isn't really an investment in anything, except maybe yourself. It's a collection of classes and some grades. It's not a bond that pays a dividend. It's not a stock that can be sold at a profit. It doesn't make any money as a traditional investment does, but it can "get you ready" for a career. But the guarantee of actually making any money by having gone to law school, Yale or Golden Gate, is exactly 0: if you don't subsequently work hard and make sound decisions, you won't earn a dime.

Therefore, law school should cost about what it costs to put on classes and grade your tests. It should cost about how much it costs to "get you ready." That's it. Does anyone really think that costs--or should cost--almost $50,000 per student per year?

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Re: NEVER GOING TO BE ABLE TO REPAY 210K IN LOANS? HELP

Postby ToTransferOrNot » Sat Jun 09, 2012 3:45 pm

FFS, I'm not saying that it's irrational to be anything other than risk-averse in risky situations. Strawman.

Not all risky situations are created equal. An investment can be incredibly risky without that investment having the potential to completely torpedo your portfolio. If your portfolio can withstand the loss, then it makes sense to be risk-neutral with respect to that particular investment. If you can effectively rebound from the destruction of your entire portfolio, you can afford to be risk-neutral with respect to the whole thing--otherwise, you can't. Why do you think it's absolutely standard investment dogma to shift those closer to retirement into less risky assets? As you get older, and you lose the ability to recoup losses (and the negative implications of loss increase), it becomes economically irrational not to become risk-averse, even if you've been risk-neutral or risk-hungry for your entire life up to that point.

I think you're overestimating how many law students have fallback options, but I've already factored that into the point about dire consequences if you land in the "no payoff" category. For someone with the backup options you've mentioned, those consequences are less severe, and they get closer to a situation where risk-neutrality makes sense. For someone who has no such fallback, it's a different story.

I'm not sure why you're being snide, by the way.

NJPitcher
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Re: NEVER GOING TO BE ABLE TO REPAY 210K IN LOANS? HELP

Postby NJPitcher » Sat Jun 09, 2012 4:04 pm

manofjustice wrote:
ToTransferOrNot wrote:Put differently: If I'm risk-neutral, a lottery ticket with 50% chance of paying $100 and 50% chance of paying $0 is worth $50 to me. If I'm risk-averse, I may only be willing to pay $30 or $40 for that ticket, even though the expected value of the ticket is $50. I'm saying that people taking out student loans should not be willing to pay $50 for that 50/50:$0/$100 "ticket" (the ticket being the loans). Considering the absolutely life-crushing results of the debt if you don't land on the pay side of the ticket, and the complete lack of diversification, I would say that you should be down in the "20s" before you think of buying that ticket.


This is very credited.

But to it I'd like to add this simple thought: law school isn't really an investment in anything, except maybe yourself. It's a collection of classes and some grades. It's not a bond that pays a dividend. It's not a stock that can be sold at a profit. It doesn't make any money as a traditional investment does, but it can "get you ready" for a career. But the guarantee of actually making any money by having gone to law school, Yale or Golden Gate, is exactly 0: if you don't subsequently work hard and make sound decisions, you won't earn a dime.

Therefore, law school should cost about what it costs to put on classes and grade your tests. It should cost about how much it costs to "get you ready." That's it. Does anyone really think that costs--or should cost--almost $50,000 per student per year?


Wait, it's merely an investment in myself?! You mean they're not taking my money and giving it to profit driven companies for me, so that 3 years down the road i start getting paid off of it? Shocker, here I was under the impression that when referring to law school as an investment we actually meant that the school would eventually start writing us checks.

In all seriousness though, it's an economic investment in human capital where you are your own investor. Of course it's an investment in yourself, wtf else did you think we meant?

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rayiner
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Re: NEVER GOING TO BE ABLE TO REPAY 210K IN LOANS? HELP

Postby rayiner » Sat Jun 09, 2012 6:53 pm

ToTransferOrNot wrote:FFS, I'm not saying that it's irrational to be anything other than risk-averse in risky situations. Strawman.


You said that it's irrational to be anything other than risk-averse when you're not diversified. Lack of diversification increases risk. Ergo, you're saying it's irrational to be anything other than risk averse in riskier situations (not even risky situations in the absolute sense, just riskier than situations in which diversity exists).

Not all risky situations are created equal. An investment can be incredibly risky without that investment having the potential to completely torpedo your portfolio. If your portfolio can withstand the loss, then it makes sense to be risk-neutral with respect to that particular investment. If you can effectively rebound from the destruction of your entire portfolio, you can afford to be risk-neutral with respect to the whole thing--otherwise, you can't. Why do you think it's absolutely standard investment dogma to shift those closer to retirement into less risky assets? As you get older, and you lose the ability to recoup losses (and the negative implications of loss increase), it becomes economically irrational not to become risk-averse, even if you've been risk-neutral or risk-hungry for your entire life up to that point.


There are neoclassical economists who would describe any risk-averse behavior as irrational in the sense that it is not what is predicted by expected value theory. The ongoing debate is about whether risk-aversion is really irrational or not. I'm not aware of any treatment that would say it is ever irrational to be risk-neutral. Kahneman grouped risk-averse behavior within his treatment of bounded rationality, but that framework is all about describing behavior under risk rather than labeling things as rational versus irrational.

I'm not sure why you're being snide, by the way.


I didn't mean to come across as snide.

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manofjustice
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Re: NEVER GOING TO BE ABLE TO REPAY 210K IN LOANS? HELP

Postby manofjustice » Sat Jun 09, 2012 10:42 pm

NJPitcher wrote:
manofjustice wrote:
ToTransferOrNot wrote:Put differently: If I'm risk-neutral, a lottery ticket with 50% chance of paying $100 and 50% chance of paying $0 is worth $50 to me. If I'm risk-averse, I may only be willing to pay $30 or $40 for that ticket, even though the expected value of the ticket is $50. I'm saying that people taking out student loans should not be willing to pay $50 for that 50/50:$0/$100 "ticket" (the ticket being the loans). Considering the absolutely life-crushing results of the debt if you don't land on the pay side of the ticket, and the complete lack of diversification, I would say that you should be down in the "20s" before you think of buying that ticket.


This is very credited.

But to it I'd like to add this simple thought: law school isn't really an investment in anything, except maybe yourself. It's a collection of classes and some grades. It's not a bond that pays a dividend. It's not a stock that can be sold at a profit. It doesn't make any money as a traditional investment does, but it can "get you ready" for a career. But the guarantee of actually making any money by having gone to law school, Yale or Golden Gate, is exactly 0: if you don't subsequently work hard and make sound decisions, you won't earn a dime.

Therefore, law school should cost about what it costs to put on classes and grade your tests. It should cost about how much it costs to "get you ready." That's it. Does anyone really think that costs--or should cost--almost $50,000 per student per year?


Wait, it's merely an investment in myself?! You mean they're not taking my money and giving it to profit driven companies for me, so that 3 years down the road i start getting paid off of it? Shocker, here I was under the impression that when referring to law school as an investment we actually meant that the school would eventually start writing us checks.

In all seriousness though, it's an economic investment in human capital where you are your own investor. Of course it's an investment in yourself, wtf else did you think we meant?


Why u mad bro?

People are talking as if law school is a traditional investment, calculating "expected returns," and while that is somewhat appropriate, it may lead you to pay more for law school than you should. Shocker: maybe law school is so expensive because law students don't know how to figure out how much they should really pay for it.

And you've fucked-up the analogy. Law school doesn't have to start writing you checks for it to count as a "traditional investment." There can still be the risk that law school doesn't pay off. But for it to be a traditional investment, in which we calculate how much we are willing to pay according to its "expected return," there cannot be a degree of continual work required to actually harvest the return.

Compare Bond A: it has a 50% chance of paying a 50 dollar dividend, with Bond B: it has a 50% chance of paying a 50 dollar dividend, but if it does, you have to run a marathon to get it. Bond B is law school, but people are calculating how much they are willing to pay for it as if it was Bond A.

Get the distinction?

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Re: NEVER GOING TO BE ABLE TO REPAY 210K IN LOANS? HELP

Postby NJPitcher » Sun Jun 10, 2012 3:14 am

manofjustice wrote:
People are talking as if law school is a traditional investment, calculating "expected returns," and while that is somewhat appropriate, it may lead you to pay more for law school than you should. Shocker: maybe law school is so expensive because law students don't know how to figure out how much they should really pay for it.


If I come out on top after calculating expected returns, tell me again why I need to pay less? I'm already winning. Would it be nice? Sure. But if my expected return is sufficiently positive then I don't think you can claim someone should pay less.

And you've fucked-up the analogy. Law school doesn't have to start writing you checks for it to count as a "traditional investment." There can still be the risk that law school doesn't pay off. But for it to be a traditional investment, in which we calculate how much we are willing to pay according to its "expected return," there cannot be a degree of continual work required to actually harvest the return.


Where does this definition you're using come from? Let's say I train an employee of mine. At first it cost me money to spend time training them, but eventually it pays off because they generate profit for me. Sure, they may quit immediately after training, or my business may go up in flames in which case I've lost time, but I would consider the time spent training the employee as an investment. Now pretend you're both the employer and the employee. You're just investing in yourself. Putting the training you received into action doesn't mean the training itself wasn't an investment simply because there's continual work required to harvest the return... would you tell a farmer who purchases a barn that it's not an investment because they still have to work to make the barn worthwhile (the barn doesn't pay them back if they don't put animals in it etc.)?

Compare Bond A: it has a 50% chance of paying a 50 dollar dividend, with Bond B: it has a 50% chance of paying a 50 dollar dividend, but if it does, you have to run a marathon to get it. Bond B is law school, but people are calculating how much they are willing to pay for it as if it was Bond A.

Get the distinction?


I see the distinction, but I'm not sure I agree that that's what is happening. If the cost analysis that are done include opportunity cost etc., what piece of information are they missing that fills the role of your marathon?

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manofjustice
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Re: NEVER GOING TO BE ABLE TO REPAY 210K IN LOANS? HELP

Postby manofjustice » Sun Jun 10, 2012 10:45 am

NJPitcher wrote:
manofjustice wrote:
People are talking as if law school is a traditional investment, calculating "expected returns," and while that is somewhat appropriate, it may lead you to pay more for law school than you should. Shocker: maybe law school is so expensive because law students don't know how to figure out how much they should really pay for it.


If I come out on top after calculating expected returns, tell me again why I need to pay less? I'm already winning. Would it be nice? Sure. But if my expected return is sufficiently positive then I don't think you can claim someone should pay less.

And you've fucked-up the analogy. Law school doesn't have to start writing you checks for it to count as a "traditional investment." There can still be the risk that law school doesn't pay off. But for it to be a traditional investment, in which we calculate how much we are willing to pay according to its "expected return," there cannot be a degree of continual work required to actually harvest the return.


Where does this definition you're using come from? Let's say I train an employee of mine. At first it cost me money to spend time training them, but eventually it pays off because they generate profit for me. Sure, they may quit immediately after training, or my business may go up in flames in which case I've lost time, but I would consider the time spent training the employee as an investment. Now pretend you're both the employer and the employee. You're just investing in yourself. Putting the training you received into action doesn't mean the training itself wasn't an investment simply because there's continual work required to harvest the return... would you tell a farmer who purchases a barn that it's not an investment because they still have to work to make the barn worthwhile (the barn doesn't pay them back if they don't put animals in it etc.)?

Compare Bond A: it has a 50% chance of paying a 50 dollar dividend, with Bond B: it has a 50% chance of paying a 50 dollar dividend, but if it does, you have to run a marathon to get it. Bond B is law school, but people are calculating how much they are willing to pay for it as if it was Bond A.

Get the distinction?


I see the distinction, but I'm not sure I agree that that's what is happening. If the cost analysis that are done include opportunity cost etc., what piece of information are they missing that fills the role of your marathon?


I am making a rather subtle analysis requiring more distinctions than you are making. Just to make sure we understand what I think we are disagreeing about: I think law school should cost less because it could cost less.

To the first in bold:

Either you should or you shouldn't pay. You shouldn't pay because the return you have left over after paying for law school may be smaller than if you had gone into a lower-paying profession without having to pay so much. You should pay because your return is still positive, even compared to other options.

But whether you should or you shouldn't pay isn't the question. The question is whether law schools should or should not charge you as much as they do. This is a subtle but, in my opinion, a rather incontrovertible distinction. It is entirely possible that law schools have us by the balls. But that doesn't mean they should squeeze. It is entirely possible that if law students had some balls, law schools would lower their prices. In short, just because you would pay it doesn't mean you should.

To the second in bold: I made it up. edit: actually jenesaislaw made it up here: http://www.top-law-schools.com/forums/viewtopic.php?f=1&t=185813&start=75

To the third in bold: Training an employee is an example of a personal investment, just like law school, and just unlike a traditional investment like a bond or a stock, and I am so glad you brought it up. Here you did get the anology right but missed the implication: how much does a company pay to train an employee? Just as much as it has to. You, as the investor and the one invested in, should pay a law school as much as you have to to be trained. The rational presumption is that we are paying far more, because law schools, which managed to train many capable lawyers in the late 1980s, since have increased tuition at more than triple the rate of inflation over the last 25 years. Source: http://online.wsj.com/article/SB119040786780835602.html

To the fourth in bold:

To be honest, I am not sure I understand your response. The marathon is the work you do: i.e. actually working for a big law firm. If law school were a traditional investment, you wouldn't have to do that work to make your return.

Here is the upshot: we need to dispense with talking about law school as an investment, and start talking about it as a service. As a service, it is overpriced.

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JCougar
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Re: NEVER GOING TO BE ABLE TO REPAY 210K IN LOANS? HELP

Postby JCougar » Mon Jun 11, 2012 11:46 pm

Jon Corzine sunk MF Global by making a "Goldman Sachs" type bet with a far smaller brokerage. While Goldman Sachs is big enough to absorb bets of the same size going bad, MF Global could not sustainably take on so much risk without the threat of total collapse.

Diversification doesn't reduce overall risk for a large group, such as "all law students in general." But when talking about an individual student, it makes the downside risk crippling.

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Re: NEVER GOING TO BE ABLE TO REPAY 210K IN LOANS? HELP

Postby rickgrimes69 » Tue Jun 12, 2012 8:17 am

Fundamental misunderstandings of basic economics ITT

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dingbat
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Re: NEVER GOING TO BE ABLE TO REPAY 210K IN LOANS? HELP

Postby dingbat » Tue Jun 12, 2012 8:29 am

I posted this analysis in an argument of the economics of law school in an unrelated thread, but thought it would be of interest in this thread.
(yes, the methodology has some flaws, which are mainly due to my not wanting to spend a stupid amount of time on the analysis)
dingbat wrote:Based on NLJ250, 56.93% of UPENN class of 2011 is working at an NLJ250 firm. This is higher than the amount reported by the school. As such, let's take the school report for class of 2011 as being fairly accurate.

out of a class of 274:
12 did not report, which we shall assume are unemployed
19 in firms of less than 100, no salary reported, we shall assume they earn $0
14 in firms of 101-250 reported earning a median of $133,571
21 in firms of 251-500 reported earning a median of $151,400
125 in firms of 501+ reported earning a median of $154,837
18 in business reported a median of $83,300
41 clerkship, reported earning a median of $55,020
11 in gov/military reported a median of $55,421
10 in PI reported a median of $44,843
3 in academia, no salary reported; to be conservative, we'll call it $0

This gives a weighted average income of $106,632, in the first year.
Many clerks end up going into biglaw, and biglaw has lockstep salary increases, so in future years the weighted average income will probably increase. But, for argument's sake, let's not factor in any increase whatsoever
It appears to me that median income in the US is about $41k, but, for rounding purposes, let's call it $46,632

That means that the weighted average income of a Penn Law graduate is earning $60k/year more than a non Penn Law graduate.

Now, let's assume that tuition is $50k per year, and that this is borrowed at 7.9%
Let's assume that the extra $60k is taxed at 45% (combined federal and state)
Let's also assume that the entire extra salary (after tax) is used to pay down the loan
After 10 years (3 law school, 7 earning just the additional $60k), the student will have earned an additional $259,123, for an IRR of 23.44%

But, you say, we should include total COA (even though said person would incur living costs regardless). OK, let's call COA $70k. Well, after 10 years, the increased earnings would be $227,289

But, now we're only talking 10 years, not lifelong.

Let's say that this same person earns the JD at age 30 and works until age 60, for a total of 30 years (most will work longer). I will ignore any potential raises, income during 1L and 2L summer, and any other fancy stuff
Lifetime increased earnings would be $887,290

If we were to raise the cost of tuition to $200k per year, lifetime earnings would be $590k higher

Or we can look at it in terms of IRR.
Let's assume no loans. Cash flow in law school is -$70k
Cash flow thereafter is $33k ($60k increase minus 45% tax rate)
after 5 years working, 8 total, the IRR is positive.
After 10 years total (7 years working) the IRR is 9.31%
After working 30 years, the IRR is 18.30%
that's a damn good investment.

The breakeven after 10 years (IRR=0) would require tuition of $77k; IRR after 30 years working would still be 12.27%

the breakeven point, where IRR after 30 years of work is 0% would be if Penn were to cost $330k per year.

ok, that's unrealistic. Treasuries currently yield 2.53%; let's add a risk factor of 1.47%, so that we would need to earn a return of 4.00% for the investment to be reasonable.
COA would then be $182,805

Not a big enough risk factor? OK, let's say we need to earn an 8.00% return
That would justify an annual cost of $144,435

note that I earlier said
dingbat wrote:Top schools could probably raise tuition and would still have to turn applicants away.
while I said this based on demand, you can see above that this can be justified by the results.

If you want to look at it from a purely economic perspective, this shows that UPenn is a good investment in general. Whether it is a good investment for you is a question of risk tolerance.

As to whether or not going to school should be looked upon as an economic investment, that is a different debate altogether (and not one that's easily resolved)


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Re: NEVER GOING TO BE ABLE TO REPAY 210K IN LOANS? HELP

Postby redbullvodka » Tue Jun 12, 2012 12:56 pm

rickgrimes69 wrote:Fundamental misunderstandings of basic economics ITT

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Re: NEVER GOING TO BE ABLE TO REPAY 210K IN LOANS? HELP

Postby NJPitcher » Tue Jun 12, 2012 6:21 pm



Why are you linking to a thread where you show off a basic misunderstanding of economics? I'm just going to go ahead and leave this here: --ImageRemoved--

I know this is crossing threads, but you actually display that you have no idea how to calculate the fair market price:
manofjustice wrote:"the market can bear" analysis cuts both ways. It suggests polar opposite equilibrium costs. If students insisted, they could drive the costs to the bare minimum, just as law schools insist driving the costs to the greatest maximum. But a proper price can only be one. So, setting the price by what "the market can bear" won't work.


The problem here is that they can't, at least not without the collusion you so despise. Let's say you need 50k. You're "greedy" so you tell me that you need 200k now (when you'd happily take 50k), but on average people who give you money get 500k back over the next ten years due to karma or unicorns or leprechauns or it doesn't matter. Doing my research and discovering that, in fact, the average lender gets 500k, I want to lend you that money. Now if you tell me you will only take 10 grants, I want to be one of those ten grants, since it's a positive outcome for me. Sure if I got with the other 9 people who are giving you money we could convince you that you only need $5k from each of us, and not $200k, but that's collusion. Regardless, we're all happy with the amount you're asking for because we still come out on top in the end.

Now screw the analogy and use the idea of law school. There are limited spots at good law schools. On average, these spots pay you back way more than you borrowed, and more than you'd have made not pursuing a higher education. There is a positive return. That means people will be willing to pay for it. Read that again - if there's a positive return, especially with a limited supply then the market will pay for it, because if I decide I don't want it, somebody else will. The greater the return, the greater the demand. The more limited the spots, the more limited the supply. Please read anything econ related anywhere.

You're right. It'd be wonderful to pay less. But the return is still positive, and we live in a capitalist country. Law schools are not a public good, and most are private institutions. Please stop your crusade, at least insofar as you make economic claims regarding T10 schools. I wouldn't pay sticker to go to William Mitchell, but that's not the discussion and the economics in this thread don't use those returns for analysis.

Again, nobody is arguing they don't want to pay less, just that the economics don't dictate we need to.

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dingbat
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Re: NEVER GOING TO BE ABLE TO REPAY 210K IN LOANS? HELP

Postby dingbat » Tue Jun 12, 2012 8:18 pm

NJPitcher wrote:The problem here is that they can't, at least not without the collusion you so despise. Let's say you need 50k. You're "greedy" so you tell me that you need 200k now (when you'd happily take 50k), but on average people who give you money get 500k back over the next ten years due to karma or unicorns or leprechauns or it doesn't matter. Doing my research and discovering that, in fact, the average lender gets 500k, I want to lend you that money. Now if you tell me you will only take 10 grants, I want to be one of those ten grants, since it's a positive outcome for me. Sure if I got with the other 9 people who are giving you money we could convince you that you only need $5k from each of us, and not $200k, but that's collusion. Regardless, we're all happy with the amount you're asking for because we still come out on top in the end.

While I agree wholeheartedly with what you said, I can barely follow your example.

Let's simplify and use a chocolate bar as an example.
Let's say on any given day 1 million people are willing to buy a candy bar for $1 (assume 1 per customer)
If it was priced at $1.50, maybe only 200,000 people would be willing to buy it
But, on the other hand, if it was priced at $0.50, 5 million people would be willing to buy it.

Now, let's say that any given manufacturer can only produce 100,000 bars.
If the price is $1.00, 10 manufacturers are willing to produce candy bars
If the price is $1.50, it's more profitable, so 50 manufacturers would be willing to produce it
On the other hand, if the price were $0.50, maybe only 2 manufacturers are willing to produce candy bars.

So, if the price of candy bars were $0.50, there would be 200,000 candy bars for a demand of 5,000,000. Because there's a shortage, some people will offer to pay more than $0.50, so the price will go up.
The price shoots up to $1.50, because as we saw above, 200,000 people are willing to pay $1.50.
Now that the price has gone up, more manufacturers start producing candy bars. We now have 50 manufacturers, producing 5,000,000 bars. But, only 200,000 people are buying them, so in order to sell the over-supply, the producers cut the price. Well, some producers can't afford to stay in business, so the number of producers drops.
Market equilibrium is where these forces meet - eventually the price will be $1.00, which is where 10 manufacturers are willing to produce 100,000 bars each and where 1,000,000 consumers are willing to buy a candy bar

In real life it's never that clean, but the concept is that simple.
a market in equilibrium has a price where the amount being produced is equal to the amount being consumed

EdgarWinter
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Re: NEVER GOING TO BE ABLE TO REPAY 210K IN LOANS? HELP

Postby EdgarWinter » Wed Jun 13, 2012 12:31 am

ITT Rayiner forgets about discount rates and everybody except (sorta) ToTransferOrNot forgets about declining marginal utility of money.

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dingbat
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Re: NEVER GOING TO BE ABLE TO REPAY 210K IN LOANS? HELP

Postby dingbat » Wed Jun 13, 2012 12:35 am

EdgarWinter wrote:ITT Rayiner forgets about discount rates and everybody except (sorta) ToTransferOrNot forgets about declining marginal utility of money.

what does declining marginal utility of money have to do with anything that's been discussed in this thread so far?

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Re: NEVER GOING TO BE ABLE TO REPAY 210K IN LOANS? HELP

Postby EdgarWinter » Wed Jun 13, 2012 12:54 am

Because declining marginal utility of money is why going to law school at sticker is (like somebody said earlier) borderline insane for most people.

Declining marginal utility of money is basically the idea that each additional dollar/unit of cash that you acquire is worth somewhat less to you than the one before it. If you make only $5k/year then a $5k raise is extra-great because it lets you not starve to death or whatever. On the the other hand, if you're already making $200,000 you probably don't give much of a shit.

People arguing for how great an investment law school is should factor this in--rational decision-making criteria is utility, not money per se. What people should be measuring is not the money-outcomes of law school but rather their own utility outcomes from law school (which are derived from the money ones). Thing is that it's not a perfect translation when you're dealing with such large disparities of cash (biglaw and subsequent high-power career ($160k*) vs strike-out (let's say $50k if you're lucky)).

You can't just go (160+50)/2==expected payout of law school is $105k/yr and act like that is a useful measure, because you want to base decisions not on money averages but on utility ones. And your utility average is going to be way below the utility that a simple $105k would leave you with. This is why ToTransferOrNot's execution example makes sense--potentially having a life of barely any cash after loan payments overbalances the potential upsides to not striking out even if simple monetary calculations seem to point out otherwise. (That said all this crap about "diversification" is beside the point imo).

*yes I know that's only first year salary but let's face it your career avg will probably not be much higher than that given that you'll probably exit biglaw sooner rather than later).




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