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)
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
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.