Law School Debt-to-Income in the United States

One common-sense rule in student lending, expressed through a debt-to-income ratio that compares total outstanding debt to earnings, provides that students should not borrow more than they expect to earn after their first year. Law schools of all types make observing that rule difficult. According to data released by the U.S. Department of Education in 2019, the median earnings exceeds the median amount borrowed at 11 law schools (i.e. 5.5% of law schools exceeded a ratio of 1.00) for 2015 and 2016 graduates in the first full year after graduation. The median school ratio was 1.86, which means that the median amount borrowed exceeded the median earnings by 86%.

A few caveats: First, the earnings median reflects only graduates who borrowed. Second, the amount borrowed is not the same as the amount of debt. Interest accumulates during law school, even though loan payments are not yet due. Accordingly, debt-to-income ratio is a misnomer with this dataset, although it has already become convention. You can read more details on the underlying data and assumptions here. Finally, debt:income is only one metric. Because loan terms extend beyond one year, it is also helpful to look at the percentage of income devoted to debt service. You can read about the debt service ratio, which mortgage lenders consider, here.

The chart below plots median earnings vs. the median amount borrowed for 199 law schools. The schools are color-coded by type. At first impression, it may seem there is a weak-to-moderate positive relationship between median amount borrowed and median earnings (r=0.2316; p<.01). But a closer look shows more complexity.

The reality is that there are two stories: the schools with median earnings above $100,000 and everyone else. These top 15 schools place a substantial percentage of their graduates in large firms jobs that pay the highest salaries. Graduates of other schools have much less access to those firms. If we divide the law schools into two groups, the top 15 and all other schools, there is no correlation between median amount borrowed and median earnings for either group.