Thursday, January 05, 2012

The ratio of educational debt to income as a measure of law graduates’ viability

I offer the following publicly available summary of my fuller paper, A Degree of Practical Wisdom: The Ratio of Educational Debt to Income as a Basic Measurement of Law School Graduates’ Economic Viability, which can be downloaded at http://bit.ly/DegreePracticalWisdom and has been discussed in this forum. I will be discussing this paper during my contribution to the deans' forum in the annual program of the Section on Socio-Economics at the 2012 meeting of the Association of American Law Schools in Washington, D.C.


This table defines marginal, adequate, and good levels of educational debt, relative to monthly or annual income, based on loans amortized over 25 years at a fixed rate of 6 percent:

Financial viabilityEBER (educational back-end ratio) = monthly debt service / monthly gross incomeEDAI = total debt / annual income
Good0.040.5
Adequate0.081.0
Marginal0.121.5


The simplest measure of whether a student can afford law school is to project the ratio of future annual income to total law school debt. The most conservative assumption is that law school debt will equal three times tuition. I presume that students enter school with no other debt. I further presume that students can fund the cost of living without further borrowing. On those assumptions, the ratio of annual income to educational debt is simply the reciprocal of ratio of educational debt to annual income, with loan principal defined as annual tuition times three:
Ratio of annual salary to law school debt = annual salary / (annual tuition * 3)
Applying my definitions of good, adequate, and marginal financial viability to this ratio generates three very simple rules of thumb. To offer good financial viability, defined as a ratio of education debt to annual income no greater than 0.5, post-law school salary must exceed annual tuition by 6 to 1. Adequate financial viability is realized when annual salary reaches three years of tuition. A marginal level of financial viability requires a salary that is equal to two years’ tuition:

TuitionSalary needed for good viabilitySalary needed for adequate viabilitySalary needed for marginal viability
$16,000$96,000$48,000$32,000
$32,000$192,000$96,000$64,000
$48,000$288,000$144,000$96,000

1 Comments:

Anonymous Anonymous said...

You discuss tuition here. Is this just tuition or is it the cost of attendance as a whole?

Thanks for the article!

2/27/2012 3:39 PM  

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