Sunday, October 25, 2015

Is there a right way to respond to the "Law School Debt Crisis" Editorial?

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:

  1. Reduce the number of law grads going into a saturated labor market;
  2. Reduce the number of low credentialed students admitted to law school who will one day struggle to pass the bar;
  3. Reduce the risk of nonpayment of students loans currently borne by US taxpayers;
  4. 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

  1. Outline the systemic problems that plague higher education 
  2. Articulate the importance of sound policy to the national interest
  3. 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.

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Yes, there is a correct way to respond. It is to apologize. Then to reform. Then to clean house of the regulatory capture. Then to take responsibility as the gatekeeper to an important profession seriously.

Posted by: Jojo | Oct 25, 2015 8:06:15 PM

Thanks for the characteristically-thoughtful analysis, Bill. I should offer one slight quibble, one I see frequently in analyses like these. The average debt is about $118,000, as LST reports, but among those who incurred debt, which LST reports includes 82% of graduates; 18% of graduates, then, incurred no debt. So the "average" debt is something lower than that. Frankly, median debt would be a more beneficial measure, but we, sadly, appear not to have access to such granular data.

Posted by: Derek Muller | Oct 25, 2015 8:28:08 PM

Interesting, Derek, because the same analysis could be applied to incomes. At many schools, a significant percentage of students were unemployed, after having graduated from a professional program. If the schools were honest, they'd count them as having zero income.

Posted by: Barry | Oct 26, 2015 9:14:10 AM

Also, Derek, as has been extensively pointed out, this average debt is the average amount borrowed, with interest accruing from the moment these loans are originated. So upon graduation the actual average amount that graduates need to repay is significantly higher than the advertised average indebtedness.

Posted by: yes, but | Oct 26, 2015 12:54:07 PM

"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. "

I am not convinced by this line of reasoning. Law school tuition started growing by leaps and bounds over undergrad tuition back in the 1980's. Law school tuition & living expenses, even at unranked law schools, was far higher than $20,500/year in 2005, the year before GradPLUS loans were introduced. The law schools jointly own/control the non-profit private student lender AccessGroup as a membership corporation. From everything I have seen, the SLABS market has been growing again over the last few years. The sheer existence of SLABS and a market for them, coupled with the nondischargeability of private student loans, largely absolves lenders of needing to conduct due diligence. As Simkovic has helpfully pointed out in a few newspaper articles, the Lumina Foundation, which was set up by Sallie Mae, has been funding papers and studies castigating GradPLUS and IBR plans for years - SLM's direct competition. I just don't see any compelling argument why the private student lending market wouldn't race to cover 90% to 99% of students the day after GradPLUS loans are curtailed or repealed. Lend them the money, bundle the loans, sell them to pension funds and investment banks, get a fat contract to service and collect the balances.

Posted by: Unemployed Northeastern | Oct 26, 2015 2:10:06 PM

Bill, you write that the solution is to do a "masterful job" at adopting "sound policy" towards a "fair and equitable solution." Maybe I'm missing something, but what is the fair and equitable solution, and to whom is fairness and equity owed?

Posted by: Orin Kerr | Oct 26, 2015 5:46:24 PM

The first step should be shutting down at least 100 of the 200 law schools.

Posted by: Walter Sobchak | Oct 26, 2015 6:07:52 PM

"I have faith that my legal colleagues would do a masterful job solving the problems of higher education."

Superb satire! Well played sir!

Posted by: Don Pettengill | Oct 26, 2015 7:37:57 PM

Don, no satire. Lawyers have play an essential role creating legal and regulatory systems that have created immense peace and prosperity. We are at our best when solving the problems of others. We can be both objective and creative. Let's start there -- with the broader problems affecting higher ed.

Posted by: Bill Henderson | Oct 26, 2015 8:32:02 PM

Orin, students and taxpayers are not well served by the current system of higher education. Further, the legal profession is not well served by lawyer overproduction. And nothing about the current system seems to be working for lower and middle income Americans who can't afford lawyers.

If law professors and lawyers went into a room to formulate a system that better served students, taxpayers, and broader society, they would do a lot better than our current system. So why not volunteer for the job? Lawyers have architected more complex systems than this. Let's focus on fixing the broader system of higher ed rather than our narrow corner. This brings out the best in lawyers.

Posted by: Bill Henderson | Oct 26, 2015 8:49:49 PM

Bill: I, for one, would love to be involved in something like that. You know where to find me!

Posted by: Kyle McEntee | Oct 26, 2015 9:25:02 PM

Good analysis Bill. A few quibbles:

(1) Although I agree lawyers could and should play a role in crafting a better system, legal academics are far too self-interested in maintaining the status quo to be of much help in this projected effort. There will of course be individual exceptions, such as you and Orin, but asking the AALS as an institution to get involved is not a good idea for this reason. Also, as Orin implies, everyone is in favor of a fair and equitable reform until you get down to the specifics of what that actually entails.

(2) UE's points about private lenders and SLABS are sobering, although obviously this is an empirical proposition that hasn't been tested. The key to threading this needle is to make private educational loans dischargeable in bankruptcy. True they weren't dischargeable prior to 2005, but as you point out the debt to income ratio for law graduates has been getting out of wack for many years now, and only recently has there been any general realization of this fact, Non-dischargeability plus transparency ought to produce less reckless lending by the private markets.

(3) Derek: Muller: $118,000 in loans now equals about $140,000 at initial repayment, six months after graduation, because of interest accrual and origination fees. Also, the LST debt stats don't include the debt loads at more than a dozen schools that didn't disclose this info to USN last cycle. These are almost all schools with much higher than average debt, so the true numbers for law school debt among those who borrow are certainly higher. Also these numbers don't include other educational debt, and the average undergrad debt incurred now by the two thirds of undergrads with debt is around $30K.

A minor point: Staffords and GRAD PLUS now have their interest rates determined annually at distribution. The current rates are the 10 year treasury plus 3.6% and 4.6% respectively. These aren't variable interest rate loans though: once the rate is set it remains the same for the life of the loan.

Posted by: Paul Campos | Oct 27, 2015 4:16:51 AM

Bill --

I think you understate the appearance problem in the world of politics. At the state level, I believe lawmakers are beginning to question why the state should subsidize islands of left-wing orthodoxy, and most law schools certainly qualify. If the NYT indicates that law schools are losing friends on the left, state institutions in particular should be concerned that they don't have many friends on the right.

Posted by: Jonathan H. Adler | Oct 27, 2015 5:17:38 AM

To Jon Alder,

You are absolutely right -- it is possible I understate the appearance problem. What continues to amaze me is that lawyers and law professors approach this issue as if I can be resolved by marshaling arguments and facts. We have become dependent upon the federal government for essentially all our operating funds. That has consequences.

Law professors getting indignant at the New York Times will not help. We should have gotten indignant at ourselves ten years ago.

Posted by: Bill Henderson | Oct 27, 2015 9:57:09 AM

"We should have gotten indignant at ourselves ten years ago."

I'd advise readers to look up the following citation: 1987 Duke Law Journal 240-275 (1987).

Posted by: Unemployed Northeastern | Oct 27, 2015 10:44:49 AM

Bill, I agree with everything you are saying, but I am not as optimistic as you. The ABA already has a committee on law school financing, and its final report made only minor suggestions on how to deal with the problem.

Posted by: Scott Fruehwald | Oct 27, 2015 11:39:22 AM

Bill, I appreciate your enthusiasm and optimism. With that said, I’m not sure I see the cause of it. Lawyers can solve problems, but they are also talented at creating incredible messes out of things. And as Paul suggests, organizations of law professors are unlikely to be skilled at solving this problem because the law professor have an obvious self-interest. Finally, the track record of the ABA and the AALS in this particular area doesn’t inspire great confidence, at least in me.

Posted by: Orin Kerr | Oct 27, 2015 12:51:02 PM

Orin, What is the alternative to forming a delegation to address the higher ed problem — do nothing? Wait for the next negative editorial as an unsustainable system rolls forward?

Political problems, if they are ever solved at all, are solved by people, not abstractions or stereotypes. I know a dozen law professors and dozens (and dozens) of lawyers who I would be relieved if I learned they were working on the higher ed problem. I bet you do too. Further, I bet we could agree on a list that crosses the ideological spectrum. These folks have objectivity, intelligence, emotional calm, and integrity.

Over the course of 200+ years, lawyers have solved a lot of problems in our republic. This is another big problem. Let’s get the right people working on it. This is not optimism at all. It’s pragmatism. We have had decades of propensity and stability in the legal academy. As the saying goes, “smooth seas make poor sailors.” Well, now by virtue of crisis, we’ll get better leaders of our institutions. I guess that is part of our silver lining.

Let’s not overthink this. (1) acknowledge the problem, (2) note that it threatens the long-term stability of our economy and society, (3) volunteer our best people to help architect a solution.

Posted by: Bill Henderson | Oct 27, 2015 1:27:18 PM

How would such a delegation be organized? Would it be under one of the law school or legal organizations, or would it be independent?

Posted by: Scott Fruehwald | Oct 27, 2015 1:49:36 PM

So, as an attempt at synthesis – several of the comments above seem to implicitly propose, or suggest an amenability to, the formation of a committee of reform-minded law professors and other interested parties (the Union of Concerned Jurists?), to craft a slate of potential reforms as a supplement to any AALS efforts.
If so, among the pros, such a committee probably would generate more meaningful reform proposals than would the AALS, and the group could provide a coherent point of contact and consultation if and when legislators turn their attention to this subject. As for cons, maybe I am wrong about this, but my sense is that at the present time a majority of a majority of law faculties would not be interested in what such a committee would have to say, its power would be limited to its ability to persuade through reason, and I don’t know whether the group would produce any recommendations that aren’t already out there. But perhaps I am too skeptical of the idea.

Posted by: Kyle | Oct 27, 2015 3:38:59 PM

Bill, I tend to think that forming a committee of law professors is usually one of the less productive approaches to solving an actual problem. There may be people who have good ideas who happen to be law professors or lawyers, but there's a big gap between that and saying that the answer is to form a committee to come up with the answer.

Posted by: Orin Kerr | Oct 27, 2015 10:09:05 PM

Hmmm, it could be called the Coalition of Concerned Colleagues. No, wait, that happened in 2013 - - and the ABA Section on Legal Education and Etc. more or less entirely ignored it, despite signatories like Profs Henderson, Kerr, Tamanaha, Caron, and even Richard Posner.

Posted by: Unemployed Northeastern | Oct 28, 2015 8:10:15 AM

Bill, If schools take collective action on this issue, it will only be to challenge the bar exam requirement. In fact, we have already seen a strong push from some deans to drop the bar exam requirement. If schools succeed in this regard, it will be an absolute nightmare for the public and the legal profession. Or course, it would be amazing for law schools since they could collect tuition from every direction and then sweep their students’ failure under the rug. The Holy Grail for law schools is abolishing the LSAT and the Bar Exam so that there is no way to objectively measure their students’ performance and/or aptitude, thus leaving it all the realm of marketing. U of Phoenix could basically claim that its students were as good as UCLA grads and there would be no way to challenge them. The shrewdest schools would admit huge numbers of underrepresented minorities and use the diversity aspect as a shield, effectively arguing that any criticism of its students is attributable to racism.

While I don’t believe that any attempt by the ABA to solve this issue will lead to a positive result, there are plenty of measures individual schools can take to improve their own long-term prospects and regain some semblance of respectability. The first necessary step is cost-cutting. Keep the facilities minimal, cut out courses that aren’t cost efficient, and, most importantly, trim the faculty. The vast majority of law schools should not be hiring another full time professor for the next 10 years. It is frankly ridiculous that they continue to do so. Faculty should be bought out, and if necessary fired under exigency circumstances. The faculty that remain should teach, at the absolute minimum, 3 classes per semester, and many should teach 4 per semester. Research requirements should be reduced dramatically. Once costs are contained, schools can attract, through heavy scholarships, a first year JD class of candidates that are all likely to pass the bar and have the option to work as attorneys somewhere. Only then will a school find permanent stability.

Let me be clear about one thing: there is no other option a school has for long-term success. There is no silly curriculum change that can attract students. The only factors that count are cost of attendance and job opportunities. The market has become too savvy, and the relevant information too accessible. Each school has to make meaningful changes to its cost structure, like it or not.

Posted by: JM | Oct 28, 2015 9:12:20 AM

Unemployed Northeastern -- Fair enough. But the Coalition perceived itself as having an essentially hortatory function. What's being proposed here is a group that would undertake the grunt work of proposing specific reforms and presenting them to legislators and regulators. Perhaps such an effort would be ignored or otherwise impotent, but the fact that a critical mass of law professors didn't rally around an earlier effort shouldn't preclude renewed attempts to usefully engage with these issues -- especially if such efforts offer some indication that law professors are willing to act responsibility and propose coherent, workable solutions to the problems that affect their institutions. Perhaps we could argue about who should be on a new committee and to whom their efforts should be directed, but those strike me as second-order issues.

Posted by: Kyle | Oct 28, 2015 6:57:57 PM

The best and most effective short-term solution would be deny Federal Stafford Loans and Direct PLUS Loans to all for-profit law schools, immediately and indefinitely. But you know THAT won't happen.

Posted by: Joe Leahy | Oct 28, 2015 9:26:07 PM

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