Sunday, October 25, 2015
Amidst all the other newsworthy topics, the New York Times editorial board made law school debt the lead editorial for today's Sunday edition. And the story line is not good.
The editorial starts with the bleak statistics for Florida Coastal Law School -- low median LSAT scores and high debt loads, casting doubt on whether its graduates can pass the bar exam and repay their federally financed student loans. The editorial highlights Florida Coastal' for-profit status but goes on to note that the rest of legal education is not much better.
A majority of American law schools, which have nonprofit status, are increasingly engaging in such behavior, and in the process threatening the future of legal education.
Why? The most significant explanation is also the simplest — free money.
The editorial details changes in federal higher education finance that created the Direct PLUS Loan program, which, over-and-above Federal Stafford Loans, underwrites up to the full cost of attendance as determined by each law school. The combination of poor job prospects and high debt have depressed applicant volume. As the Times editorial notes, the systemic impact has been to lower admissions standards to sweep in students who will, as a group, struggle to pass the bar exam following graduation. Virtually all of this is financed by DOE loan money.
I don't think the typical member of the legal academy understands the precarious financial condition of legal education. The precariousness exists on two levels: (1) our financial fate is in the hands of the federal government rather than private markets; and (2) the Times editorial suggests that we have a serious appearance problem, which draws down the political capital needed to control our own destiny. With the political winds so goes our budgets.
I think it is important for the Association of American Law Schools (AALS) to take some decisive action in the very near future. In this blog post, I explain where the money comes from to keep the law school doors open and why, as a consequence, we need to pay closer attention to the public image of legal education. I then offer some unsolicited advice to the AALS leadership.
(1) Who pays our bills?
Over the last decade, the federal government has, as a practical matter, taken over the financing of higher ed, including legal education.
Here is how it works. Any law student who needs to borrow money to attend law school is strongly incentivized to borrow money from the Department of Education (DOE). Although the DOE loans carry high interest rates -- 6.8% for Stafford Loans and 7.9% for Grad Plus -- they include built-in debt relief programs that functionally act as insurance policies for the risk that a graduate's income is insufficient to make timely loan repayments. Law school financial aid offices are set up around this financial aid model and make it very easy for students to sign the loan documents, pay their tuition, and get disbursements for living expenses.
In the short to medium term, this is good for the federal government because the loans are viewed as income-producing assets in the budgets that get presented to and approved by Congress. But in the longer term this could backfire if a large portion of students fail to repay their full loans plus interest. Federal government accounting rules don't require projections beyond ten years. But already the government is beginning to see the size of the coming write-downs for the large number of graduates who are utilizing the Public Service Loan Forgiven program, which has a ten-year loan forgiveness horizon. And it is causing the feds to revise their budgets in ways that are politically painful. With the loan forgiveness programs for private sector law grads operating on a 20- to 25-year repayment window, the magnitude of this problem will only grow.
The enormous risk here for law schools is that Congress or the DOE will change this system of higher education finance. For example, the Times editorial calls for capping the amount of federal loans that can be used to finance a law degree. Currently, the limit on Stafford Loans for graduate education is $20,500, but Grad Plus loans have no limit at all. If the DOE were to cap Grad Plus at $29,500 per year, leading to a total three-year federal outlay of $150,000 per law student, this would have an enormous adverse impact on the typical law school budget.
Law School Transparency reports that the average law school debt load for a 2014 law graduate is $118,570, but we know very little about the full distribution. Because of the pervasiveness of the reverse Robin Hood policy, which uses tuition dollars of low credentialed students to finance scholarships for their high credentialed peers, there is likely a significant percentage of students at most law schools who graduate with more than $150,000 in law school debt. Further, according to US News, there are twelve law schools -- including three in the T14 -- where the average law school debt load is more the $150,000. Although there are no statistics on the percentage of law students graduating with greater than $200,000 in law school debt, law students tell me this amount is common.
I have translated this meager public information into the chart below. The area in green is the volume of money that could disappear from law school budgets if the federal government imposed a hard limit on federally financed law school lending.
Why would this money be at grave risk? Two reasons:
First, private lenders will be reluctant to cover the entire shortfall. For decades, private lenders played an important roll in law school finance. But these lenders got pushed out of the market by the changes in federal higher ed finances described above. Unfortunately, in the intervening years, the ratio of earning-power-to-debt has gotten too far out of whack. To come back into this market, private lenders would need to be confident that loans would be repaid. That likelihood is going to vary by law school and by law student, raising the cost of lending. This means that, to varying degrees, virtually all law schools would have to sweat over money. Unlike Grad Plus, private lenders may balk at financing full sticker tuition for lower credentialed students trying to attend the highest ranked school that admitted them.
Second, private lenders will not offer the same loan forgiveness options, such as IBR and Public Service Loan Forgiveness, currently offered by the federal government. With the curtailed scope of these functional insurance programs, some portion of prospective law students will likely be unwilling to sign loan documents in excess of the federal lending cap. Even very elite schools will feel the pain here.
(2) An appearance problem in the world of politics
I would bet a lot of money that law faculty have been emailing the Times editorial to one another, criticizing its lack of nuance. But here is our problem. We are not in a court where a judge will listen to our elegant presentation of facts and law. Nor are we in the world of private markets where we can expect people to reliably follow their own economic self-interest. We are in the realm of politics where sides get drawn based on appearance and political expediency. To make matters worse, the legal academy just got lambasted by the paper of record on the left.
It is hard to argue that a cap on federal funding of legal education would be bad policy for students, the legal profession, taxpayers, or broader society. Such a change would:
- Reduce the number of law grads going into a saturated labor market;
- Reduce the number of low credentialed students admitted to law school who will one day struggle to pass the bar;
- Reduce the risk of nonpayment of students loans currently borne by US taxpayers;
- Put in place serious cost-containment on legal education.
For law schools, however, such a change would produce layoffs and pay reductions. And that may be the fate of the luckier schools. It is widely known that most law schools are running deficits. Central universities are looking for ways to wait out the storm. But the cliff-like quality of a federal cap on law school lending would call the question of how much support is too much.
What's the solution?
Legal education has a cost problem, but so does the entire higher ed establishment. Here is my unsolicited advice.
The leadership of the AALS needs to take a very strong public position that the trend lines plaguing higher ed need to be reversed. This is not risky because it is so painfully obvious. The AALS should then, in conjunction with the ABA, send a very public delegation to the Dept of Education. The delegation should be given a very simple charge: Help the DOE
- Outline the systemic problems that plague higher education
- Articulate the importance of sound policy to the national interest
- Formulate a fair and sustainable solution.
I have faith that my legal colleagues would do a masterful job solving the problems of higher education. And in the process, we'll discover that we have become the architects of a new system of higher ed finance that will be fair and equitable system for all stakeholders, including those employed in legal education. That's right: act decisively to ensure a fair and equitable deal. The only drawback is that it won't be the status quo that we'd instinctively like to preserve.