The economics of small law and the cost of legal education

The reason that law school no longer makes sense for most people who enroll in it is that it costs too much relative to the kinds of jobs people can now get with a law degree.  This blog has emphasized the extent to which many current students (perhaps half) are never going to have careers as lawyers at all, in the sense that they will never get real legal jobs.  These are people who either will never work as attorneys at all, or will work only in temporary positions of various kinds until they give up on the idea of having a legal career.

But what about the other half?  The crucial difficulty for them will not be getting jobs as lawyers, but rather getting jobs that pay enough to justify what has become an average total cost of attendance of around $165,000 at the typical law school, at least for that half of the class that gets no break on the sticker price (Because of the reverse Robin Hood structure of "merit" scholarships this half of the class is also more likely to end up in the half that never get real legal jobs, but let's ignore that for the moment).

Nearly half of the Class of 2010 (the most recent for which national statistics are available) that went into private practice either got jobs with firms of two to ten lawyers or went solo.  Something like this percentage is typical even at relatively high-ranked schools.  For example Loyola Los Angeles (ranked in the 74th percentile of all ABA schools in the USNWR rankings) saw 114 of the 212 grads in its class of 2010 who went into private practice go to firms of ten or fewer lawyers, or go solo.

There are two big problems with these jobs: a certain number either aren't real law jobs at all, or are only doubtfully so, and almost none of these jobs pay anything like enough to allow typical current law graduates to service the educational debt -- which averages around $125,000 -- they incurred in the course of getting a BA and a JD.  (None of what follows should be taken to imply that there's anything wrong with a career in small law, which after all is what most lawyers in private practice end up doing in the long run, and which provides the only realistic access to legal services for the majority of Americans who have any access to them at all).

As to the first problem, some of these "jobs" are not with a preexisting business. This is obviously true of the solo practices (6% of 2010 grads who went into private law did so by attempting to start such practices), but it's also true in cases where two or three graduates with no other prospects decide to start a law firm, which is an increasingly common strategy among law graduates who find themselves with no other legal employment options post-graduation.  The practical challenges they face are daunting.  A friend of mine who graduated from law school more than 20 years ago, and has had a very successful career in small law, provides the following list of expenses that someone who wants to set up a solo practice or a small practice of any kind will likely have to incur to make a realistic go of it:

Rent (monthly, which includes NNN, i.e., property tax, utilities, and maintenance and repair)

Basic furniture

Parking (quarterly)

Copy machine / printer / scanner (buy or lease)

Computer / IT guy / software license renewal

Billing software

Westlaw subscription (monthly)

Martindale Hubbell Directory

Line of Credit (annual renewal fee, plus interest on balance, I pay 5.5% annually) (also you eventually need to pay it back)

Checks for Trust Account / Operating Account

Accountant (annually)

Phone line

Internet line

Fax line

Cell phone

Malpractice insurance

Website build / maintain

Yellow pages

CLE credits (need 45 every 3 years and they aren’t free)

Archive service (gotta keep client files somewhere)

Postage

Supplies (paper / envelopes / files / business cards)

Every year you need to get current publications (minimum):

Court Rules (State & Federal)

Pocket Parts for statutes

Jury Instructions

Legal Directory

If you have an employee (they get paid before you do)

Salary and applicable taxes

Health Insurance

Payroll service

SEP contribution (same % as you take)

Bonus?

Professional dues / bar fees:  Some are mandatory, like paying the Colorado Supreme Court to remain licensed annually, then there is the Colorado Bar Association, the local Boulder County Bar and you probably want to be in the Denver Bar association if you want to capture some of that market.   Then there is the American Bar Association, Colorado Trial Lawyers Association, American Trial Lawyers Association, Boulder County Legal Aid, Colorado Legal Aid, there are honorary organizations to which you pay dues like FACTL, ABOTA, ALI-ABA, International Society of Barristers, Inns of Court

I would say any serious lawyer is going to be in a minimum of 3 dues collecting organizations

Optionals:

Cleaning person

Bottled water

Shredding service

Other things to consider:

Dress clothes

Non-clunker car

Unpaid Accounts receivable

Contingency cases you lose both your time and costs advanced

Of course somebody starting out can try to cut operating costs to the bare minimum, but as law professors know all too well in a different context, giving the appearance that you're competent to do what you're doing can be even more important than actually being competent to do it.  In other words, as hard as it is to make a living in a hyper-saturated market full of experienced attorneys pursuing the kinds of clients who are not serviced by larger firms, it's even harder if your "conference room" is a Starbucks.  (None of this touches on the comparatively minor detail that law school graduates aren't really taught how to practice law, let alone how to run a small business).

The second problem is that even graduates who get jobs as real associates with real, ongoing small law firms, that have real clients and real income streams are going to get paid salaries that are in no way adequate to deal with the debt they've incurred.

How much do graduates going into small law get paid?  The available statistics on this question are very inadequate: only 31.8% of 2010 graduates in this category reported salaries. This contrasts strikingly with the more than 90% reporting rate among graduates who got jobs with firms of more than 50 lawyers.  As always, willingness to report salaries correlates very strongly with the increasing size of salaries, so we can be sure that the reported salaries of graduates who went into small law are quite a bit higher than the actual salaries found in this cohort (which again represents nearly half of all graduates who go into private law). Nevertheless the reported numbers are daunting enough: a median salary of $50,000, and a 75th percentile of $62,500 among those who reported (there are no income figures for what people who went into solo practice managed to net).

People with $125,000 of high-interest educational debt and a salary of $50,000 will, if they don't have very significant alternative sources of income, have to go into IBR, (assuming they're eligible, and that the program isn't eliminated) where they will have a monthly payment equal to about a quarter of what they would owe on a 30-year repayment schedule for their loans. This means, of course, that something like ten thousand dollars in interest will accrue onto their balance for every year in which they remain in this situation.

And note that such people are doing significantly better than the average graduate: after all, they have real legal jobs with real salaries.  They count, in the current context, as law school success stories.