It’s probably impossible to realistically think about spending tens to hundreds of thousands of dollars until you’ve actually done it. It’s only looking back, after paying your mortgage for twenty years, that you can really see the value of ten more years of payments.
But for people going to law school, that’s generally what we’re talking about: ten to twenty years of payments, of an amount that at least rivals a mortgage, except that you don’t own a house at the end, and you can’t ever walk away.
So, if it’s impossible, how should we do it? How can we more realistically decide how much debt to take out?
First, let’s lay out some options for comparison: we’ll look at someone with a full-tuition scholarship who still has to pay for cost of living, someone paying full sticker, and someone in between — say, a recipient of a Harvard Law need-based aid package. If you’ve got a full-tuition offer plus a substantial stipend… well, sorry, but you’re lucky enough not to need this post.
- Student F has a full tuition offer from Washington University in St. Louis. They’ll still have to pay some fees, and for cost of living— all in all, about $25,000. Over three years, their total cost of attendance (COA) will be $75,000. With interest capitalization, they’ll owe about $84,000 at graduation.
- Student H has a need-based aid package from Harvard. They have some money saved in their retirement account, and a couple thousand dollars in savings, so they’ll take out about $55,000 in loans each year, for a total COA of $165,000. With interest capitalization, they’ll owe about $192,000 at graduation.
- Student S is paying sticker at University of Chicago—about $290,000 over three years. In total, they’ll owe around $335,00 at graduation.
(These numbers and those that follow are a little fudged/rounded. I’m using the AccessLex Student Loan Calculator to estimate these figures).
The standard 10-year repayment for each of our students looks like this:
- Student F: $1000 per month
- Student H: $2200 per month
- Student S: $3850 per month
Income-based repayment / pay-as-you-earn is a sort of leveler, for those who qualify. You’ll pay 10% of your discretionary income (your adjusted gross income minus about $20,000) but for 20 years instead of 10. Since this plan doesn’t depend on how much debt you’ve taken out, we’re not going to consider it in depth here. Keep in mind, though, that it doubles the length of time you’re making payments—so with low loan balances, it can end up costing more. Earning $60k after taxes, for example, Student F would end up paying almost $20,000 more in exchange for lower monthly payments. And that’s assuming they keep earning $60k after taxes—but over the course of twenty years, the amount you have to pay will (hopefully) go up over time, as you go further in your career and earn raises.
Since we’re trying to compare options, we’re more interested in the difference between them than the raw amount. So, using Student F as a baseline, how much more will the better opportunities at Harvard or Chicago cost?
- Student H: $1200 more per month for ten years / $144,000 extra.
- Student S: $2850 more per month for ten years / $342,000 extra.
Remember, interest keeps accumulating while you’re trying to pay down your loans—so Student H and Student S didn’t just start out with more debt, they also had to pay more on it over time!
This is also why it’s so important to consider overall cost of attendance, and not just comparing “half tuition at X” with “full tuition at Y”. Tuition at Chicago is $64,000—but the actual difference between paying rent in St. Louis vs. paying rent in Chicago and tuition isn’t just three years’ worth of Chicago tuition. It’s more than five years’ worth when you take costs and interest into account.
Turning it Around
So, given all the above, let’s look at our options from a few different angles, to try to defeat some of our cognitive biases, and get a realistic feel for these numbers.
Just how long is ten years, anyway?
If you’re a KJD, longer than you can realistically remember. Sure, you may have some memories from when you were twelve, but really grasping that time frame is tough. Consider a few other timeframes, instead: how long has it been since you started college? How about high school? You’re going to be paying loans off for even longer.
Or, think about the future in other ways. Think about all the milestones of raising a child: their first words, walking, the first day of school, their first day of ballet or tee-ball or whatever. Keep going. You’re going to be paying loans until thirteen years from now—long enough for a newborn to grow to thirteen years old.
How much time is the loan costing me?
Money is fungible. Time isn’t. Time is the single most limited, precious resource we have. (P.S.: if you’re a KJD, maybe don’t be. Go screw around for a couple years. Try something new and audacious—especially if you’ve got a good LSAT score as a backstop. You only get your twenties once, and spending it slaving away in law school and then slaving away as a lawyer, likely being at least somewhat unhappy most of the time, isn’t a good way to spend it. It might not be a good way to spend your thirties, either, but I’m not going to regret now being the time I go, at least.)
Let’s relate this loan burden to a 40-hour workweek. We’ll assume you’re lucky enough to be in BigLaw, so let’s say you’re taking home $130,000 per year after taxes and deductions, or a little over $11,000 a month.
(A few things to keep in mind: I’m not taking raises into account, so things could get better over time. On the other hand, things could get worse: BigLaw has high turnover for a reason, and you shouldn’t necessarily assume you’ll spend ten years, or even five, before taking a lower-paying job. And if you don’t make it into BigLaw in the first place, then $1000/$2200/$3850 per month loan payments are all the more serious).
If you’re Student F, $1000 of that is going toward loans. Out of your forty hours in a week, three hours and forty minutes go to loan payments. Not so shabby, but it’s still almost half of the kind of workday you may be used to right now.
Student H is paying an extra $1200 a month. That’s another 11% of the week, totaling up to eight hours. That’s right: Student H is giving up a full day of work each week to loan payments.
Student S needs to pay an extra $1450 each month beyond that—all in all, over thirteen hours each week. Student S comes to work on Monday, works all day and goes home, then comes back on Tuesday at 9am and it’s not until over five hours later—3:15 in the afternoon if they took lunch—that they start making money they get to keep. That’s true week. after week. after week. For ten years.
Remember, we’re talking about making payments throughout all of that time. Long enough from now to have a teenage child. Yeah, you’ll have an income, but for ten years a chunk of each day isn’t money in the bank: it’s money you have to work for that you don’t get to see. Some portion of your hours each week—exhausting, draining, substance-abuse-and-depression-promoting hours—will immediately go towards your loan payments.
Just how much is that extra $1200 per month, anyway? What about $2850?
Unless you’ve bought a house, you probably haven’t ever had a bill this big.
Your rent is likely the closest thing, if you’ve had to pay rent. Let’s say your rent is $800 a month. Imagine having an entire second apartment/house/etc. that’s even nicer than the one you have, by half. You have to pay for it, every month, but you don’t get to use it. You never get to go there. You’re paying for someone else’s nicer apartment. (And remember, $1200 is just the difference for Student H. The actual payment for Student S is $3850 per month. Student S is paying for three other people to rent nicer apartments than yours for ten years.)
Or, look at it in annual terms. Student H is paying an extra $14,400 per year. Student S is paying an extra $32,400 per year. What could you do with $32,000? You could buy this airplane. You could buy it every year for ten years!
After four years, Student F could save that extra $32,000 and buy a waterfront cabin in Maine. In comparison, Student S would still have an extra $192,000 to pay off.
Paying vs. Getting Paid
Comparing your loan payments to things you could have instead can be powerful. Let’s do one better. Flip the idea of paying more for Harvard around: How much would I have to pay you to go to WashU instead?
Let’s say as soon as you graduate from WashU, on the first of every month, I send you a check for five hundred dollars. Every single month, you’ve got that $500 coming in the door. Imagine cashing it, knowing it’s coming again the next month, and the month after. I’ll keep up the payments for ten years.
If you say no, I’ll double it. I’ll pay you a thousand a month. Every month. For ten years. You don’t even have to do anything!
But even that doesn’t capture it: if you choose WashU over Harvard in this scenario, you’re getting to keep an extra $1200 per month in your pocket.
Investing the Difference
The airplane, the cabin, and even the monthly checks leave out a real consideration: what if you were investing that money that you could have spent on a more expensive school? If you take that $1200 each month and put it into investments, what happens to it over the course of ten years?
We’ll assume a 7% growth rate. (Overall, the S&P 500 has done better, but we’re also now setting the record for the longest economic upswing in the history of the United States, so I’m going to be a bit conservative.) We’re going to put $1200 in each month, starting from zero, and we’ll compound annually. After ten years, we’ll have put in $144,000 of principal, but the account will be worth over $200,000. Not only will we have saved ourselves enough to buy ten airplanes, we’ll get almost two more airplanes’ worth from investing.
What about with an extra $2850? Under the same assumptions, we now have nearly $500,000. The choice to take the full ride at WashU instead of paying sticker at Chicago netted Student F half a million bucks.
Pick Your Character
We’re not actually talking about three different characters, of course. Which path do you want to take, given the options you’ve got? Do you want to be Student S, with a Chicago degree and a federal clerkship? Is it worth an extra $2850 a month for ten years, to you? Or would you rather have the $500k?
Obviously, the potential rewards of going to WashU are lower than for Chicago or Harvard. But weighing the value of those rewards has to be balanced against the actual costs. It’s easy to imagine being in a judge’s chambers, or a New York skyscraper. Hopefully this has made it easier to imagine what you’re giving up for those opportunities.
Don’t forget, also, that you’re paying all this for marginal opportunity. Going to WashU doesn’t mean you’re out of contention for BigLaw. HLS has a BigLaw/Federal Clerkship rate of about 76%, compared to WashU’s 49%. Being Student H rather than Student F improves your odds by 55%. Is that worth it?
Up to you.