Paying for Law School 1: How Much Does Law School Really Cost?

How much law school really costs is often not clear to potential law students.  In fact, most potential law students underestimate the cost of law school by tens of thousands of dollars.  However, the cost of law school and paying back the loans is a major financial aspect for most new lawyers.  Prospective law students need to have a clearer understanding of their true cost.  Let's take a look at some actual numbers and find out where people are making their mistakes.
Let's use the University of Pennsylvania Law School for this example - many other law schools are similarly priced.

If we visit their website, the breakdown of costs that is provided to us is as follows:

Tuition	$43,680
University Fee	2,074
Technology Fee	760
Academic Subtotal:	$46,514
Room & Board	$12,654
Books	1,225
Clothing, laundry, personal expenses, medical insurance	5,217
Support Subtotal:	$19,096
Total:	$65,610

OK, so to an average undergrad considering law school it looks like PennLaw costs about $65K/year, so they multiply that by three to get a total cost for law school of about $197K. 

That sure seems nice and logical, but it probably considerably underestimates the cost of law school by at least $50K.  Here are several factors that are usually missed when considering cost and typically add up to tens of thousands of dollars.  As you will see below, these factors impact all law schools, not just PennLaw.

1. The cost of tuition increases yearly, and by a substantial percentage in recent years.  Although not all law schools will sock you with the 16% yearly tuition increase my law school socked me with, here are the actual statistics compiled by the ABA with regard to yearly tuition increases.  You can see that private law schools have been increasing tuition at a rate of about 7%/year and public law schools have been increasing tuition at a rate of about 9%/year.  Further, the rate of tuition increase is expected to increase. 
2. The numbers provided by the law school's website are last year's numbers - your first year's tuition will be increased - by 7% or 9% on average.
3. Law schools often project ridiculously low room and board numbers - unless they are actually offering you the opportunity to stay in their dorms at the indicated price, don't trust them.  For example, my law school was using about 10K/year as projected living expenses, but one bedroom apartments in the area were renting for around $2000/month!  (This was on the east coast.)  I ended up renting a single, small room in the attic of a home nearby - and it still cost about 6K for the year!  Also, although I only bought the "required" books, my total book expenditure exceeded the budget every semeter I was in law school.  Law schools vary widely in how accurate their projections are, but to be on the safe side from a budgeting standpoint it would be reasonable to increase the budget numbers by 25%.
4. Yep, the cost of room and board increases every year as well.  Also, the budget uses last year's numbers.  However, a yearly increase of about 4% may be reasonable here.
   
5. Our hypothetical law student will be taking out loans during his first year, but will not be graduating for 2 more years.  Further, although a small fraction of the law student's loans are likely to be subsidized (thank you subsizded Staffords!), the majority of the loans will not be subsizided.  Today, a student can borrow up to $20,500 through the stafford program, of which $8500 is subdized. Consequently, the loans that the law student takes out in his first year will be accumulating interest for at least two more years before the law student can even think of paying them back.
6. Although the interest rate on federal student loans is a fairly reasonably 6.8%, the student can only borrow up to $20,500/year through the federal program.  Consequently, the remaining loans (in fact the majority of the loans) must be paid for using private loans which carry a considerably higher interest rate - or may carry a variable APR rate.  Although variable rate loans may be reasonably priced right now due to the abnormally low LIBOR and fed rates, the more typical experience (and indeed my experience) is that private student loans are typically about 3% higher than federal loans.  We will assume that private loans carry an interest rate of about 9% - much better than the 11.25% rate I had on my private loans.
   

 So let's take a look at how these factors actually impact the total cost for law school.

1. First, let's calculate the tuition and fees part.  Let's apply the more conservative 7%/year increase for private schools.  Thus, we take last year's total above of $46,514 and project the actual tuition and fees for our experience to be $49,773, $52,257, and $56,965 for a total of $158,995
2. Second, we take the $19,096 budget for room and board and increase it by 25% to $23,870.  Next, we apply our inflationary increases of 4% while remembering that the budget above recites last year's numbers.  Thus, we project the cost to be $24,824, $25,818, and 26,850, for a total of $77,492. Adding up the total tuition and support costs above yields $236,487 - an increase of nearly $40,000 from our original estimate - and we haven't even added the effect of interest!
3. With regard to interest payment, let's assume that the law student is coming straight from undergrad and is paying the full bill themselves using loans.  The total cost for the first year (remember, we have to use our projected numbers calculated above) is $49,773 for tuition and $24,824 for support for a total of $74,597.  Of that, $20,500 will be Staffords - considering the subsidized and unsibsided portions, the average interest rate is anout 4%.  However, the remainder of the need amount (about $54,100) must be paid for using private loans at about 9%.
4. Additionally, as far as timing, remember that the full amount of the loans have been disbursed by January 1st at the start of the second semester to pay tuition, yet repayment typically does not begin until the student gets their first paycheck on about October 1 after the third year.  Consequently, the loans taken out for the first year accumulate interest for about 33 months before payment begins, the loans taken out for the second year accumulate interest for about 21 months, and the loans taken out for the third year accumulate interest for about 9 months.
   
5. Thus, for the loans taken out during the first year, the accumulated interest is about:  4%*20500*33/12 + 9%*54100*33/12 = $15,645 similarly, the loans taken out during the second year have accumulated interest of 4%*20500*21/12 + 9%*57575*21/12 = $10,503.  Finally, the third year's interest is 4%*20500*9/12+9%*63315*9/12 = $4,889.  This yields total accumulated interest of $31,037. 
   

Consequently, we see that our law student is really going to be looking at a loan balance of $267,524 when payback begins ($236,487 in total tuition and support and $31,037 in interest).  This is about $70,000 more than the $197K she was originally estimating - an increase of about 36%.  Consequently, we see that the potential law student's estimate of the cost of law school was significantly low.

Further, we note that at the point that repayment begins, the law student's debt is increasing at about $18,000/year.  That's about $1,500/month.  To put it another way, the first $1,500 that the law student puts toward their loans each month only goes to pay off interest and does not even touch the priniciple.  Yikes.

Finally, I acknowledge that the student may be able to get a job and get some income while attending law school.  However, I note that: 1) most law school jobs pay around minimum wage (say, $8/hour), so even if a law student works 20 hours/week, then they have only earned $8,000 for the year, 2) students are discouraged from having a job during their first year in law school, and 3) only a small percentage of law students get the lucrative summer positions with a large firm - for the rest, working at a minimum wage job during the summer may bring in $2-3K.  I freely admit that any income that the law student receives may help to offset the costs above.  However, I think that we can agree that in most situations the cost offset is not going to be significant on a percentage basis.