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It’s been said that going to law school is like investing in the stock market. Some have even called it gambling. One can make a similar argument about any career choice. But law school is a riskier bet than most career choices because of its high cost, uncertain employment outcomes, and that the wrong choices can set you back financially for a very long time.
Since we are discussing investments and gambling, let’s examine what happened to GameStop last week. To give a very simplified explanation, a group of people on Reddit’s wallstreetbets figured out that certain hedge funds and wealthy investors bet that GameStop’s stock value would fall in the future. So they essentially borrowed GameStop stock, immediately sold it and were waiting for the stock price to fall so they could buy it back at the lower price. They would then return the stock and profit from the difference. This is known as “shorting.” The problem with this strategy is that if the stock price goes up, they can lose money. The risk of loss is unlimited because the stock price can go up indefinitely.
The wallstreetbets group coordinated a massive purchase of GameStop stock, thus driving up the price. Many of the investors have never seen anything like this before so some of them bought back the stock at the inflated price, thus taking a loss on their bet but before their losses got bigger. The problem is that by doing this, these investors have inadvertently joined the wallstreetbets buyers group, thus increasing demand even more and driving the stock price even higher.
This unprecedented event got the attention of mainstream media and even the government. And in a rare moment of bipartisan, racial, and socioeconomic unity, everyone got a good laugh seeing hedge fund managers complaining about not being able to purchase another ivory backscratcher. So when the average Joe saw this opportunity, they pulled their stimulus money out of their savings account generating 0.0000000001% interest and purchased GameStop stock at $300 and even $400 thinking it would “go to the moon.”
But what goes up must eventually come down. The hype subsided and GameStop stock which was recently valued at a high of $430 has now fallen to $90. This was likely because Robinhood, the stock trading app used by most of the buyers, prohibited and later restricted the purchase of GameStop stock. They claim that this move was necessary because due to the volatility in the stock market, their deposit and capital requirements have increased in order to cover any resulting losses. However, others have speculated that this move was done to avoid investigations and more regulations by the government. Some think that Robinhood did this to protect their rich hedge fund friends.
As a result, many who purchased GameStop stock at the peak price or close to it will face losing a lot of money unless something happens that makes the stock price increase again. It is likely that some of these people did not have a lot of money so they used borrowed funds which will have to be paid back. If they went all YOLO and borrowed a mountain of money, they could be in debt for a very long time.
Perhaps those who are on the fence about law school can learn some lessons from what happened last with the rise and fall (and maybe rise again) of GameStop stock.
First, timing is crucial. The people who made the most money from GameStop stock were the ones who got in early and did their research, although they didn’t see something like this coming. Those who later joined the bandwagon are now underwater and are hoping that there will be another rally. The speculation is all over the place. Some think that the stock value will rise again while others are saying game over now that the hedge funds know what’s up.
So if you are going to law school now, keep in mind that you won’t know what the job market will be like three years from now when you graduate. Your job options might be limited after your first-year grades. Make sure that you plan for every post-graduate scenario. You may have to change your plans depending on your grades and job opportunities.
Second, buy low. Most of the people who made money from GameStop stock bought in when the price was low. Even when the stock value tanked, they will still make some money. Before going to law school, don’t be afraid to negotiate tuition. I don’t understand why some people refuse to do this. Law schools do not owe you better grades just because you paid full tuition. Usually, it’s the other way around. Those who got academic scholarships are likely to get better grades and those who are paying full tuition will be subsidizing their privileged futures while they are on IBR for life. And don’t expect President Joe Biden to forgive your loans anytime soon. He knows you won’t vote Republican no matter what he does.
Don’t follow the bandwagon. If you are paying full tuition because you see lawyers driving Porsches, it doesn’t mean you will (or should). Some of these people are living paycheck to paycheck praying for the next high-paying client the same way those who purchased GameStop stock at the peak are hoping for the next rally.
Third, don’t overleverage yourself. Those who borrowed money to purchase GameStop stock will have to cash it out to pay it back. If they lost money, they will need a loan that can take years to pay back if the balance is high enough. Minimize student loans. Pay the accrued interest every year or it will capitalize and you will pay interest on that too. If you went all out and fully financed your tuition and the luxury apartment three blocks away, you could be repaying the loan for many years, even if you earn substantial income.
Law school can be seen as an investment — even gambling. The people at wallstreetbets found a way to exploit the system to benefit the little guy at the expense of hedge funds. I would love to see a similar exploit for law school tuition pricing. Maybe a law school’s incoming class can band together and demand a tuition reduction for everyone or threaten to go to another school or not attend at all. Even if 30% of the class were to participate, it can create substantial bargaining power. But until that exploit is found, you will need to hedge your bet by negotiating tuition and planning for all possible post-graduate outcomes.
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at sachimalbe@excite.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.