Is Graduate School a Good Investment?

May 10, 2012

Are you or someone you know thinking about going back to school? If so, you’re not alone. With the job market still weak, more and more people are wondering if it makes sense to go to grad school as a way to make themselves more employable.

However, this is not a decision to be made lightly. After all, grad school can put you six figures in debt and doesn’t always have the same income payoff as getting a college degree, especially if you want to get a degree in something like literature or philosophy. Those subjects may be great for the soul but not necessarily for the wallet.

How about more practical degrees like an MD, an MBA, or a JD? While I can’t speak with firsthand knowledge about the first two, I do know something about law school because I graduated from one so I’ll discuss this topic in that context. Here are some things to consider:

Why do you want to go?

Not knowing what you want to do with your life is not a good answer. I find that a lot of people who go to law school are social science or humanities majors that don’t know what to do with their degree so they think of grad school in general (and often law school in particular) as a way to extend their undergrad years and postpone the real world as long as possible. This is because a law degree is often thought of as a versatile degree that opens many doors.

The problem is that the huge debt burden that usually come with the degree tend to close a lot of those doors. Many graduates are forced to work long hours in a job they despise just to make the payments on the loans they took out in order to get that job. Doesn’t make a lot of sense when you look at it that way, huh

The point is that grad school is an expensive way to “find yourself.” Be sure you have a very clear idea of what you want to do with your degree and that you’d really enjoy doing it. The best way to do that is to first work in that field or at least shadow someone who does. If you want to go to law school, get a job as a paralegal for a year or two or at least talk to one or more actual attorneys (most of whom say that they would pick a different career if they could do it all over again.)

What will it cost?

This brings us to the question of cost. Law students generally graduate six figures in debt. That can be like having another mortgage payment, except that you can never walk away from it even through bankruptcy.

That’s not the only cost to consider though. In my case, I got really lucky and was able to get a full academic scholarship that not only covered my tuition and books but also provided me a stipend to help cover room and board. In other words, my situation was about as good as it gets from a financial standpoint. However, as a former economics major, I’m ashamed to admit that I left out another huge cost: the opportunity cost or what you could have earned by not going to grad school. Since I was making decent money as a VP at an investment brokerage firm, I gave up quite a bit in terms of lost income and savings over that 3.5 year period. If I had factored that in, I might have thought twice before accepting that scholarship.

To see if it’s worth it, look at all of your costs (tuition, room and board, books, etc) and estimate what your loan payments would be with this calculator. But don’t forget what you’re giving up in lost income and savings by leaving your current job.

What kind of return can you reasonably expect on your investment?

The blow of high student loans can be softened by a cushy and lucrative career. The problem is that while there’s a perception that law degrees are a ticket to six figure incomes, that’s not always the case. First, go back to the first question. If you want to work in the public sector or for a non-profit, don’t expect  a big salary. If you’re lucky, you’ll get some help paying back your loan, but you’ll probably still earn less than a lot of the friends you graduated college with that didn’t go to law school.

Second, be realistic. If you look at the average starting salaries of graduates from law school, keep in mind that those numbers tend to be skewed upward by a few really high salaries at the top. (Several law schools have ironically been sued by their graduates on this issue.) However, those big six-figure jobs are generally reserved only for those who attended a top school and/or graduated at the top of their class. You had to put in some long hours to get there and you’ll be expected to put in some very long hours to stay there. In other words, they’re pretty much only for a few workaholics who are willing to spend a ridiculous amount of time thinking about things that no one else wants to think about, like the implications of some obscure part of the tax code on a business transaction between two companies you could care less about. (The more fun stuff is generally handled by those working for much less in the public and nonprofit sectors.) If this sounds like you, go for it. Otherwise, you’re likely to earn significantly less than that average starting salary. After all, you don’t have to be a math major to know that we can’t all be above average.

Finally, don’t forget taxes. Because we have a progressive tax system, a person that earns zero dollars for 3 years followed by $100k over the next 3 years will likely earn less after taxes over those 6 years than someone who earns $50k over that entire 6-yr period even though they earned the same $300k total before taxes. This tax burden is in addition to the debt burden mentioned earlier. In fact, Professor Lawrence Kotlikoff, the chair of Boston University’s economics department has argued that plumbers are actually financially better off than doctors over their lifetime when you factor in the opportunity cost of lost wages while in school, the student loan payments, and the higher tax rates. Given what I’ve said about the legal profession, I suspect that it’s at least as true for many lawyers too.

So does this all mean that grad school is a bad investment? Not necessarily. Like any investment, you just want to make sure you understand all the pros and cons before committing a substantial portion of your future income to it. You also don’t want to forget about all the non-financial benefits of going to grad school. (If money was the only thing that mattered, we’d all just get the highest paid job we could, work as long as possible, and save and invest almost every penny.) For some people, getting that piece of paper on the wall is about more than money or even a career but about becoming the person they want to be. How can you really put a price on that?