What do the GM bankruptcy and law student debt have in common?  They both teach a simple lesson to the unwary about making money and spending.  Spend more than you make and chances are, you're headed for trouble.

Yesterday, General Motors Corporation emerged from an unusually speedy bankruptcy (40 days).  The good news is that what was once the world's largest automaker, appears to have dodged a huge bullet; it will continue to operate, albeit in a reduced capacity.  And although many unfortunate people have lost their jobs, a great deal of money, or both; the alternative could have been catastrophic.

How did GM get there?  It's actually pretty simple.  GM believed and operated as if (I'm speaking of the collective consciousness of its management and ownership throughout the years) that it's success would continue forever.  In the 1950s and 1960s, approximately half of all cars driven in America were manufactured by GM.  GM convinced car buyers that they needed new cars every year.  Buyers complied and during this era, GM made huge profits and built more cars. 

At the same time, GM's constituents (employees, workers, managers, shareholders and the like), began to demand a greater piece of the profit pie.  Rather than risk a breakdown of the gravy train, GM (as did most American companies during this time) granted extensive wage increases and benefits to its workers, and was able to pass the increased costs along to the car buyer. 

The first chinks in GM's earnings armor began to occur as a result of the 1970's oil embargos.  For the first time, Americans became sensitized to gas shortages and fuel economy.  Enter the Japanese manufactures, who filled that need, and offered cars that seemed to last forever.  In a short decade, Honda, Toyota and Nissan earned, justifiably, substantial market positions.

In order to meet this threat (as well as pay for things like retiree health care benefits), GM did what many do when incoming dollars do not match outgoing-  they borrowed money and lots of it (in the corporate worlds, "bonds" are a fancy way of saying "borrowed money").  Ultimately, GM imploded under its own weight of this borrowing, which is also called "leverage". 

Law students can and have used leverage for years.  "Leverage" is essentially a bet that borrowing money will result in a payback down the road, based upon future earnings potential.  Leverage works, but only those using it earn more money down the road (plus the cost to borrow it), than they borrow.

Law school tuition (as well as undergraduate tuition) has steadily and substantially increased every year since the first Baby Boomers began to go to college.  Law.com reports that between 1987 and 2005, the average public law school tuition increased 448% ( see http://www.law.com/jsp/article.jsp?id=1182330351869).  As startling as that may seem, in reality first-year lawyer salaries increased at an even greater rate.  So, students who used leverage during this time period generally found it to be a successful strategy. 

During my first-year orientation at Vanderbilt University Law School, the law school dean ruefully announced to the group of fresh-faced 1Ls that "I'm pleased to announce that this is the first year that I am entirely free of student debt."  Although the class groaned loudly, the truth was that most of the groaners had also incurred substantial debt to go to college and law school.

The Wall Street Journal Blog recently reported the story of a 47-year old lawyer who passed the New York bar exam, but was refused admission by the New York bar authorities (see http://blogs.wsj.com/law/2009/07/02/sizing-up-a-student-loan-horror-story/).  Allegedly, the student had accrued approximately $400,000 in student debt over the course of 32 student loans, and had failed to make a single repayment over his 26 year loan history.

You may be aware that, in  order to obtain a law license, you are required to present evidence to the bar of your "present character and fitness to practice law".  "Character and fitness", generally speaking, means moral character (as evidenced by the lack of criminal history of the applicant) and financial fitness (as evidenced by demonstrated responsibility to one's financial obligations).  Many lawyers frequently handle client money, which could result in temptation for the fiscally unfit lawyer.

Law school is an investment in one's future earning capability, just as any business makes capital investments, in order to optimize its future investments.  And as a second-career lawyer, I continue to believe that the decision to go to law school was a wise investment in my own case.  However, as a potential law student, you may have a variety of investment options-  private school, state school, in-state, out-of state, and others.  The question you must ask yourself is "what is the return on my investment going to be?"

The legal profession is currently in a state of "contraction", in that there are fewer jobs for law graduates, and certainly fewer high-paying big firm jobs.  However, as the economy begins to improve, eventually jobs will come back.

I have discussed in earlier blogs the economics involved in choosing a law school.  If you plan to practice public interest law, an Ivy League education accompanied by huge debt will likely make less sense than a law degree from "Local U".  Although many schools offer debt forgiveness for public interest work, you need to evaluate your future earnings potential and measure it against the cost carefully.

GM was a relatively young company, when it made the fatal strategic error of spending more and taking on debt to finance it.  It took about 40 years for that strategic error to catch up with GM.  I hope and pray that you will make your own law school strategic decision carefully.  Take the time to read some of my other posts in this section regarding choosing a law school.  Think of yourself as a buyer and consumer of educational services. 

And as a buyer, remember "caveat emptor". (Don't you just love it when lawyers use Latin?)

There are over 200 law schools presently operating in the United States.  Most of those are accredited by the American Bar Association.  Some law schools are approved only by the state bar examining authorities, which means that graduates from those schools can practice only in that state.

There are a variety of criteria that can affect your choice of schools.  School reputation, curriculum, location, tuition rates and faculty-student ratios all can play a part in your decision.  Probably the biggest is the simple fact of whether you have the requisite grades and LSAT score to get admitted to a particular school.

 Law School Reputation  

The popular weekly magazine, U.S. News and World Report publishes annually a ranking of every accredited law school in the country.  The rankings are based on a variety of objective criteria such as class size, library size and other variables.  The so-called “Top Twenty Schools” in this ranking are the most sought-after law schools by students and law firm recruiters.

Naturally, many law schools disdain these rankings.  The deans of a number of law schools got together a few years back and published an open letter regarding therankings.  The letter essentially said that the student’s choice of law school should be about much more than rankings.  I certainly agree with the premise.  

However, generally speaking, students from the highest-ranked schools will have an easier time finding employment following graduation.  That said, there are numerous jobs out there, which can be found in a variety of ways.  Many of these employers are happy to employ lawyers from mid or even lower-ranked law schools.  

Students who either do not have the requisite LSAT/GPA numbers, or who do not want to incur substantial debt may choose a lesser-ranked school and have extremely rewarding careers.  In addition, as discussed below, these students frequently are able to commence their careers free of burdensome student debt and are therefore relieved of the pressure of having to take a job they won’t really enjoy.

 You Don’t Necessarily Get What You Pay For  

There are many good regional schools in the United States.  Most of these are state schools, with reasonably tuition for in-state residents.  Other schools are nationally recognized.  These are the so-called “prestige” schools.  

You can get a good idea of which law schools are viewed as the most desirable schools from these rankings.  Many law school representatives disdain these rankings on the basis that they are not comprehensive and do not consider all of the factors that make a law school.  Regardless, these rankings are generally accepted in the legal community and law firms.  Most prospective law students consider these rankings as gospel.

The statement I am about to make will be considered by many to be heresy.  Having known and worked with numerous lawyers who have graduated from a variety of law schools, I have become convinced that the quality of legal education among schools is actually pretty similar, regardless of which law school you choose.

Let’s face it.  There are only so many variations program.  Even Socrates himself could only vary the Socratic teaching method in just a few ways.  Class outlines and subject matter are so universal that a veritable cottage industry has emerged selling commercial outlines.  Your legal education is less about the school itself and more about what you make of it.  Some of the most successful lawyers come from the worst schools, and vice-versa.

And as far as bottom lines go, the bottom line to your legal education is your bar card.  Without it, you cannot practice law.  So, the ultimate goal of law school is to pass the bar.  This is so, despite the conventional wisdom that the purpose of law school is to teach you how to “think like a lawyer”.

I overheard my first year Contracts professor talking to a group of students after class one day.  He frequently held court after class and students ostensibly to would ask questions about a finer point of law.  In reality, they were hoping to earn a few brownie points with the professor.  

One student asked the professor whether a particular area of law would be tested on the bar exam.  The professor responded, “We don’t worry about your passing the bar.  You take BARBRI for that.  We teach you to think.”  As an aside, BARBRI is the commercial bar exam preparation course that the majority of bar examinees take, in order to prepare for the exam.

With all respect due that professor, my response to that comment is that law professors don’t worry about the bar exam, because they don’t have to take the test.   By the time students are faced with the bar exam, they are but a distant memory to the law school professor.  In other words, there is no real accountability to help law students pass their bar exams.  

This attitude is prevalent among the top law schools:  “we teach you to think.”  In my opinion, this is an overstatement.  I would argue that law schools, especially the top schools, are overplaying their role in the development of students.  Instead, the typical “Type A,” overachieving, 165-170 LSAT, 4.10 GPA entering law student has already demonstrated the ability to “think” long before they entered lawschool.  

I would further argue that law schools are taking credit for the intelligence of a group of incredibly bright people, who were that way long before they ever thought about law school.

Certainly, while in law school, you will hone your deductive and analytical reasoning skills.  You will learn how to sift through facts, apply those facts to legal principles and develop analyses to predict how a rationally thinking judge will rule on an issue.  But your law school will not teach you this process.  You must understand it, both from a macro and micro perspective, and master it.  And by the way, you still have to pass the bar exam.

The lower-ranked schools, on the other hand, focus substantial energy on equipping their students to pass the bar exam.  Bar passage rates are a source of huge pride for these schools.  Many of these schools have much higher passage rates than the nationally ranked prestige schools.  They provide strict curricula, with bar exam subjects being the primary focus.  These schools offer few esoteric legal subjects, but instead require students to take the tough courses, such as secured transactions, commercial paper and the like.  And their students pass the bar.

Finally, the declaration that BARBRI alone will enable you to pass the bar exam is a reckless assertion.  To rely solely on BARBRI as your bar preparation guarantees that you will have ten of the most stressful weeks of your life following law school graduation.  As is discussed throughout this book, regardless of where you are in your legal studies, you need to know the law.  This is true for bar exam purposes and it is true for law school exam purposes.

Learning legal reasoning is important.  However, as is discussed in my book, "Law School Labyrinth", knowing the law is critical to your developing legal reasoning skills.

A “name” law school may be a great career ticket; however, if the school is unwilling to teach you the law, perhaps your tuition dollars are better served at a lower-ranked school with a rigorous curriculum.

As purely an investment decision, picking the right law school is one of the most important investment decisions you will make.  Certainly, buying a home is a big investment.  However, if dissatisfied, you can always sell your home.  Law school tuition, on the other hand, is (for the most part) non-refundable.  And once you have graduated from law school, to a certain extent, your future career path is predetermined.

Despite everything you may hear from your school, the rankings are important.  A law degree from a so-called “name” school is a virtual guarantee of a good job following graduation.  However, the rankings are also a good predictor of law school tuition.  Therefore, it is important that you select a school that meets your career needs, but no more so than necessary.

For example, many good law firms recruit primarily local candidates.  If you grew up in a city, have lived there all of your life, and plan to stay there forever, it may make good sense to graduate from your local law school. Even if the school does not make the top 100 by any list’s standards, it may be a wise economic choice nonetheless.  

Tuition for in-state residents at their local law school is often substantially less than private schools.  If you do well, graduate near the top of your class, or are on Law Review, you will be able to land a good job with a good firm.

Think about your career plans.  For example, if you are absolutely certain that you will spend your entire career in public interest work, it may make sense to attend a lower-ranked (and less expensive) law school.  You should also be aware that some law schools will forgive a portion or all of your debt if you choose to practice in an area of public interest.  Further, if your long-term plans contemplate a non-legal career, you may not need the credential of so-called “name” school.  A mere J.D. will more than suffice for your needs.

On the other hand, if you are bound for the large, prestigious law firm life, you may need a “name” school degree.  Many of the large, behemoth “national” firms recruit exclusively from the select pool of the top candidates from only the top schools.  Further, a “B” student from Duke Law School will generally be more sought after than a “B” student from Local Law School.  However, with tuition of private schools typically three or four times that of state schools, most students graduating from private schools will be forced to work for a large law firm, which pays a large salary.

I encourage you to carefully think through this important expenditure.  As with any major purchase decision, you should carefully decide how much law school tuition you can afford and are willing to spend, in light of your career interests.   You should assess the value you will receive for those tuition dollars.