Value of a JD

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rman1201
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Value of a JD

Postby rman1201 » Wed Jan 26, 2011 10:47 pm

I'm just curious if this has been done before...
I was thinking of trying to set up an excel calculator to determine the present value of a JD. Basically to crunch the numbers to determine if Law School is a decent investment in financial terms.

Here's just a quick basic calculation I set up using BU as the example (where I'll probably end up).
Do the numbers look reasonable used for calculating expected salary? Most of it was just estimation since BU doesn't publish a great deal of employment stats that I could find aside from how many go into what field.

The idea is if NPV of JD > Debt you'd need to take out today, then the JD is a good investment.
(and it does account for the three years of lost salary. Assumes 40 working years for JD, 43 for Non-JD)

If you guys think this is a good idea maybe I'll invest more time and get info for more schools to do a bit more analysis for various law schools, but this could just be stupid.

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robotclubmember
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Re: Value of a JD

Postby robotclubmember » Thu Jan 27, 2011 3:04 am

it would be a good idea if i understood what was going on in that spreadsheet. half of the numbers aren't labeled (or labeled but clear what you mean) and i don't understand what the results are or what it means.

(i'm a cpa by the way)

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D. H2Oman
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Re: Value of a JD

Postby D. H2Oman » Thu Jan 27, 2011 3:07 am

Your numbers aren't all that good. imo


and why is growth rate for salary after JD higher than the growth rate for non-jd? That's wrong.
Last edited by D. H2Oman on Thu Jan 27, 2011 12:18 pm, edited 2 times in total.

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ahduth
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Re: Value of a JD

Postby ahduth » Thu Jan 27, 2011 3:20 am

robotclubmember wrote:it would be a good idea if i understood what was going on in that spreadsheet. half of the numbers aren't labeled (or labeled but clear what you mean) and i don't understand what the results are or what it means.

(i'm a cpa by the way)


There's no reason a CPA would necessarily understand what he's doing here. CFA on the other hand... now that's a different story.

What you're trying to do makes sense. The problem is that a 40k starting salary for a non-JD is just a vast over-generalization. Bump that number up to 50k and all of a sudden your cozy little 274k number starts to look like a pile of shit.

And aren't interest rates at 0%? :o

Edit: I guess that's the point of the model though - if you have an CS degree, and can make like, 60k out of the gate, you're looking at a losing proposition, based on this simplistic model.

I don't agree with the other poster that the growth rates are backwards necessarily, but flat growth rates are... not going to work. There's no reason to not to dump the JD "value" down into the lower section and break it out by practice type.

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rman1201
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Re: Value of a JD

Postby rman1201 » Thu Jan 27, 2011 10:16 am

Yeah this was made in like 5 mins, so it's a vast over-simplification.
The 40k figure was for myself considering I'm a Liberal Arts major from a public.
I just wanted to see if the gist of it was good enough to put more time into

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D. H2Oman
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Re: Value of a JD

Postby D. H2Oman » Thu Jan 27, 2011 10:20 am

rman1201 wrote:Yeah this was made in like 5 mins, so it's a vast over-simplification.
The 40k figure was for myself considering I'm a Liberal Arts major from a public.
I just wanted to see if the gist of it was good enough to put more time into



The biggest problem is 80,000 will not be the average salary for a class of 2011 BU law grad. It's probably 75% of that at best.

bdubs
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Re: Value of a JD

Postby bdubs » Thu Jan 27, 2011 10:22 am

The problem is your weighted average salary is complete BS. Those probabilities are not random, your probability of ending up with a $40k/yr law job or unemployed could be 90% or 50% depending on your background, work ethic, and intelligence.

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starrydreamz3
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Re: Value of a JD

Postby starrydreamz3 » Thu Jan 27, 2011 10:25 am

I did something similiar for this in a labor economics class. I compared the value of a BA in Economics vs Biglaw vs PI. PI was actually a negative return. If I can find the excel sheet I'll post it.

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Re: Value of a JD

Postby bdubs » Thu Jan 27, 2011 10:29 am

starrydreamz3 wrote:I did something similiar for this in a labor economics class. I compared the value of a BA in Economics vs Biglaw vs PI. PI was actually a negative return. If I can find the excel sheet I'll post it.


Financial return and economic utility are not the same. Most people realize that PI is not an NPV positive financial proposition.

Did you use a particular school's LRAP guidelines?

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mpj_3050
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Re: Value of a JD

Postby mpj_3050 » Thu Jan 27, 2011 10:31 am

A Vanderbilt professor (think it was Vandy) wrote an article in the WSJ about the value of a JD. Assumes some things, like no scholly, private school, and probably optimistic salary, etc. Can't seem to find it, title is something like "Parents don't let kids become lawyers" and it is a quick read.

Edit: Crap, now I can't remember if it even was the WSJ but it is in an academic kind of format, not an Op-ed piece.

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observationalist
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Re: Value of a JD

Postby observationalist » Thu Jan 27, 2011 10:34 am

You're on the right track. I would take a look at what Prof Schlunk (tax prof) recently put together in this paper for more ideas:
http://papers.ssrn.com/sol3/papers.cfm? ... id=1497044

bdubs
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Re: Value of a JD

Postby bdubs » Thu Jan 27, 2011 10:34 am

mpj_3050 wrote:A Vanderbilt professor (think it was Vandy) wrote an article in the WSJ about the value of a JD. Assumes some things, like no scholly, private school, and probably optimistic salary, etc. Can't seem to find it, title is something like "Parents don't let kids become lawyers" and it is a quick read.


Dean Van Zandt at Northwestern posted on this with some pretty basic (and optimistic) assumptions, and got people at non T25 schools pissed off.

This is also relevant, and references the DVZ number.:

http://www.americanbar.org/content/dam/ ... eckdam.pdf

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rman1201
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Re: Value of a JD

Postby rman1201 » Thu Jan 27, 2011 10:35 am

D. H2Oman wrote:
rman1201 wrote:Yeah this was made in like 5 mins, so it's a vast over-simplification.
The 40k figure was for myself considering I'm a Liberal Arts major from a public.
I just wanted to see if the gist of it was good enough to put more time into



The biggest problem is 80,000 will not be the average salary for a class of 2011 BU law grad. It's probably 75% of that at best.


On a Mean basis it's probably around there.
Realistically you have a higher chance of ending up in the 40-60k range just because thats where most jobs are, but this model requires a weighted average which is skewed by the higher paying jobs.

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D. H2Oman
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Re: Value of a JD

Postby D. H2Oman » Thu Jan 27, 2011 10:38 am

rman1201 wrote:
D. H2Oman wrote:

The biggest problem is 80,000 will not be the average salary for a class of 2011 BU law grad. It's probably 75% of that at best.


On a Mean basis it's probably around there.
Realistically you have a higher chance of ending up in the 40-60k range just because thats where most jobs are, but this model requires a weighted average which is skewed by the higher paying jobs. gdane



Pretty damn unlikely actually.

Also, do you live in a world where student loans are borrowed at 0%?


Loan Balance: $250,000.00
Adjusted Loan Balance: $250,000.00
Loan Interest Rate: 6.80%
Loan Fees: 0.00%
Loan Term: 10 years
Minimum Payment: $50.00

Monthly Loan Payment: $2,877.01
Number of Payments: 120

Cumulative Payments: $345,240.90
Total Interest Paid: $95,240.90




BU is worth that?
Last edited by D. H2Oman on Thu Jan 27, 2011 12:18 pm, edited 1 time in total.

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mpj_3050
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Re: Value of a JD

Postby mpj_3050 » Thu Jan 27, 2011 10:43 am

D. H2Oman wrote:
rman1201 wrote:
D. H2Oman wrote:

The biggest problem is 80,000 will not be the average salary for a class of 2011 BU law grad. It's probably 75% of that at best.


On a Mean basis it's probably around there.
Realistically you have a higher chance of ending up in the 40-60k range just because thats where most jobs are, but this model requires a weighted average which is skewed by the higher paying jobs.



Pretty damn unlikely actually.

Also, do you live in a world where student loans are borrowed at 0%?


Loan Balance: $250,000.00
Adjusted Loan Balance: $250,000.00
Loan Interest Rate: 6.80%
Loan Fees: 0.00%
Loan Term: 10 years
Minimum Payment: $50.00

Monthly Loan Payment: $2,877.01
Number of Payments: 120

Cumulative Payments: $345,240.90
Total Interest Paid: $95,240.90




BU is worth that?


But it is going to be even more than this. The 250k has a loan rate of 6.8 for stafford loans, but stafford loans have annual limits. The vast bulk of the loan would be financed with grad plus loans at 7.9 percent. Of course this is all for federal loans, don't know what private loans are financed at.

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rman1201
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Re: Value of a JD

Postby rman1201 » Thu Jan 27, 2011 10:44 am

Pretty damn unlikely actually.

It might be extremely unlikely, but you still have to give the higher salaries some weight.

If you were considering an investment that had a 99% chance of a $50k return and a 1% chance of a $10 Million return the realistic odds are obviously EXTREMELY likely you'd end up with 50k, but for financial evaluation you'd still have to give that $10 Million appropriate weight when determining the expected return (The weighted average would be $149,500). This is an extreme example and when given some discretion would be a silly investment. Law school isn't as extreme, but might be as silly of an investment. Regardless, that's where the number comes from and it would be foolish to completely disregard the possibility (whatever that probability may be) of a high salary.

D. H2Oman wrote:

Also, do you live in a world where student loans are borrowed at 0%?


Loan Balance: $250,000.00
Adjusted Loan Balance: $250,000.00
Loan Interest Rate: 6.80%
Loan Fees: 0.00%
Loan Term: 10 years
Minimum Payment: $50.00

Monthly Loan Payment: $2,877.01
Number of Payments: 120

Cumulative Payments: $345,240.90
Total Interest Paid: $95,240.90




BU is worth that?


The NPV is as of day 0, meaning thats the current value of the JD (would be compared to an upfront cash paid for the degree). If you want to compare at 10 years + interest on the loan the JD value would have to be compounded forward 10 periods, which I can't do right now because I'm on a different comp and don't have my spreadsheet, but it would be a bit higher.
And I'm not looking to get into an argument or be overly optimistic, I just want a good estimate. If you can provide better numbers thats fine and I'll factor them in.

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ahduth
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Re: Value of a JD

Postby ahduth » Thu Jan 27, 2011 11:57 am

I personally wouldn't get so caught up in all these numbers before your model is functioning correctly and capturing all the relevant data. I'm a spreadsheet jockey/whore/enthusiast/slave though.

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rman1201
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Re: Value of a JD

Postby rman1201 » Thu Jan 27, 2011 12:04 pm

ahduth wrote:I personally wouldn't get so caught up in all these numbers before your model is functioning correctly and capturing all the relevant data. I'm a spreadsheet jockey/whore/enthusiast/slave though.


Excel is the greatest thing ever made.

Any idea where to get more relevant data? Theres really nothing on BU employment stats that I can find other than private/overall median salary, geo breakdown, and % in each field. I checked their site and ABA data.

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Re: Value of a JD

Postby bdubs » Thu Jan 27, 2011 12:11 pm

rman1201 wrote:
ahduth wrote:I personally wouldn't get so caught up in all these numbers before your model is functioning correctly and capturing all the relevant data. I'm a spreadsheet jockey/whore/enthusiast/slave though.


Excel is the greatest thing ever made.

Any idea where to get more relevant data? Theres really nothing on BU employment stats that I can find other than private/overall median salary, geo breakdown, and % in each field. I checked their site and ABA data.


What you really need to compare the NPVs of each career path and not a fictional weighted average. Biglaw is easy to figure out, you can get associate figures from lots of places. PI is a lot harder, I would probably start with the GS scale from the federal government. No idea where you can find info on small law firms, but it's probably pretty heterogeneous anyway.

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rman1201
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Re: Value of a JD

Postby rman1201 » Thu Jan 27, 2011 12:13 pm

bdubs wrote:
rman1201 wrote:
ahduth wrote:I personally wouldn't get so caught up in all these numbers before your model is functioning correctly and capturing all the relevant data. I'm a spreadsheet jockey/whore/enthusiast/slave though.


Excel is the greatest thing ever made.

Any idea where to get more relevant data? Theres really nothing on BU employment stats that I can find other than private/overall median salary, geo breakdown, and % in each field. I checked their site and ABA data.


What you really need to compare the NPVs of each career path and not a fictional weighted average. Biglaw is easy to figure out, you can get associate figures from lots of places. PI is a lot harder, I would probably start with the GS scale from the federal government. No idea where you can find info on small law firms, but it's probably pretty heterogeneous anyway.


I was thinking something along those lines. I'd still want one weighted figure to look at just as a reference, but maybe break it down into Partner track (very slim, acknowledged), BigLaw -> Gov't path, BigLaw -> Solo, BigLaw -> Midlaw, etc... but some of these things (solo especially) just seemed way too hard to get any kind of reliable figures for.

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lolschool2011
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Re: Value of a JD

Postby lolschool2011 » Thu Jan 27, 2011 12:21 pm

rman1201 wrote:but this could just be stupid.


You're onto something here....

As a decision making tool, this is about as useless as tits on a bull.

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ResolutePear
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Re: Value of a JD

Postby ResolutePear » Thu Jan 27, 2011 12:31 pm

The value of a JD is so variable there is no point in doing cost analysis.

Take person A and person B for example:

Person A graduated with a BS in Comp. Sci. and worked at IBM for the past 10 years. He makes 130k/yr and has the opportunity to go to CCN.

Person B graduated with a BA in Poli. Sci. and worked at Banana Republic for the past year as an Assistant Manager. Person B makes 45k/yr and has the opportunity to go to UF/FSU.

You can compound the example by introducing the other 1000 examples of students who don't do the ol' Poli-Sci -> Law without work route.

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redsox
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Re: Value of a JD

Postby redsox » Thu Jan 27, 2011 12:40 pm

mpj_3050 wrote:A Vanderbilt professor (think it was Vandy) wrote an article in the WSJ about the value of a JD. Assumes some things, like no scholly, private school, and probably optimistic salary, etc. Can't seem to find it, title is something like "Parents don't let kids become lawyers" and it is a quick read.

Edit: Crap, now I can't remember if it even was the WSJ but it is in an academic kind of format, not an Op-ed piece.


http://blogs.wsj.com/law/2009/11/13/mamas-dont-let-your-babies-grow-up-to-be-lawyers/

Title is "Mamas Don’t Let Your Babies Grow Up to Be Lawyers"...you know, like the country song? About cowboys? Waylon Jennings and Willie Nelson? Anyone?...Nope.

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observationalist
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Re: Value of a JD

Postby observationalist » Thu Jan 27, 2011 1:01 pm

observationalist wrote:You're on the right track. I would take a look at what Prof Schlunk (tax prof) recently put together in this paper for more ideas:
http://papers.ssrn.com/sol3/papers.cfm? ... id=1497044


This is the direct link to the paper by the Vandy prof. One of the most-downloaded papers on SSRN last year for legal scholars, probably due a mix of WSJ coverage and crazed Ed Bruce fans: http://www.youtube.com/watch?v=ngbcsxFET68

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rman1201
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Re: Value of a JD

Postby rman1201 » Thu Jan 27, 2011 1:04 pm

Thanks guys! That seems pretty similar to what I was getting at.

I guess for me its a decent investment - I'm making $24k a year and I'll be attending a T25. And I've grown up in a household with a single mom with a double bankruptcy, so it's not like dealing with poor credit (due to the ls debt) will be anything foreign to me. Meh. Law school it is.




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