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Wednesday, December 28, 2011

Henderson & Zahorsky: How Long Can the Law School Bubble Last?

ABA Journal, How Long Can the Law School Bubble Last?, by William Henderson (Indiana-Bloomington) & Rachel M. Zahorsky (ABA):

In 2010, 85% of law graduates from ABA-accredited schools boasted an average debt load of $98,500, according to data collected from law schools by U.S. News & World Report. At 29 schools, that amount exceeded $120,000. In contrast, only 68% of those grads reported employment in positions that require a JD nine months after commencement. Less than 51% found employment in private law firms.

The influx of so many law school graduates—44,258 in 2010 alone, according to the ABA—into a declining job market creates serious repercussions that will reverberate for decades to come. ...

Heavy loans now threaten to consume the future earnings and livelihood of the nation’s young lawyers. Yet, even as the legal market contracts, more than 87,900 potential candidates vied for 60,000 seats at 200 ABA-approved law schools in 2011, according to the Law School Admission Council.

More than 78,900 have applied for 2012 spots, according to preliminary LSAC counts in November.

Youthful overoptimism, bleak job prospects for college grads and the entry of several more universities and for-profit businesses into the legal education business are some of the root causes for the supply-and-demand imbalance in entry-level lawyers.

Very few critics, however, have examined the part played by the federal government through its student loan policies in creating a law school bubble that may be on the verge of bursting—one strikingly similar to the mortgage crisis that cratered the economy in 2008.

Direct federal loans have become the lifeblood of graduate education, and they shelter law schools financially from the structural changes affecting the profession. The bills are now coming due for many young lawyers, and their inability to pay will likely bring the scrutiny of lawmakers already moaning about government spending.

As student groups continue to lobby the federal government for increased transparency, the lawmakers are bound to ask a very simple question: Why should the U.S. government, through the Department of Education direct-lending program, continue to make billions of dollars of loans to law students when structural changes in the legal market suggest that a large portion will lack the earning power to repay those loans?

The answer to this question has potentially grave implications for legal education. Law schools—many for the first time ever—will become vulnerable to significant cuts in the amount of money available to students as Congress tries to hold the line on additional deficit spending. ...

By failing to make rigorous, realistic actuarial assumptions in deciding who to lend money to and how much to lend, the federal government avoids politically uncomfortable trade-offs. Everyone can go to college. And if you can get accepted into law school, the government will finance that, too.

But as the economist Herbert Stein once said, “If something cannot go on forever, it won’t.” The federal government’s gamble that higher education will continue to result in higher personal incomes eerily echoes Wall Street’s risky assumption that historical patterns in real estate values would carry forward forever and enable many sliced-and-diced mortgage-backed securities to attain AAA ratings. ...

Given the likelihood of some form of curb in federal student lending, there are gut-wrenching times ahead for law schools—even those that continue to enjoy a surplus of applicants. Until we get to that point, how ever, the lawyer production machine will continue to churn out more lawyers.

For those trying to get through this fiscal year, a government write-down of student debt may seem far away and speculative. Within a few years, however, the government will gain more experience on the IBR program, permitting a more accurate calculation of what its loan assets are really worth.

All the while, the stakes are growing larger. The volume of direct loans to students is estimated to increase from $489 billion in 2009 to $1.8 trillion in 2020, according to the Office of Management and Budget. Between 2 and 4 percent—$36 billion to $72 billion—will be for law school graduates. ...

The U.S. legal profession is in the midst of a broad structural transformation. Meeting the challenge to compete in a global economy requires a higher-education policy that honestly addresses issues of access, cost containment and national interest.

Legal education may soon provide an object lesson of what happens when we do nothing: Bad things happen when lawyers and law professors stick their heads in the sand. The republic may be in need of some world-class lawyerly judgment. And maybe soon.

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Craziness I tell you! It's competitive on top of competitive!

Posted by: financial services | Dec 28, 2011 8:41:19 AM

I don't know, how did indentured servitude end? That's pretty much what being a lawyer is like these days for anyone not born with a silver spoon in their mouth.

Posted by: Matt | Dec 28, 2011 9:25:56 AM

The sad part is you have identified just a small segment of the student loan bubble that is about implode.

Posted by: Robin Steele | Dec 28, 2011 10:59:53 AM

I have heard that IBR is still largely unknown, even among law students. Are there any hard numbers on IBR enrollment, particularly among law grads.?

Posted by: JD | Dec 28, 2011 8:43:51 PM

Quote from above: "By failing to make rigorous, realistic actuarial assumptions in deciding who to lend money to and how much to lend, the federal government avoids politically uncomfortable trade-offs. Everyone can go to college. And if you can get accepted into law school, the government will finance that, too."

Point: Student loan decision-making differs from home loan decision-making, and the bubbles are not comparable. Student loans allow young people to rise out of their native-born circumstances. Federally backed student loans are vital to prevent the elitist, rigid, class-based society of Britain, for example. In America, regular kids from low-middle class backgrounds can still rise to the highest levels of professional fulfillment thanks to student loans.

I paid off my student loans, which were over $80,000. Without those loans, I would not be where I am today.

Posted by: Another Anon | Dec 29, 2011 5:37:23 AM

"Federally backed student loans are vital to prevent the elitist, rigid, class-based society of Britain."

And yet, four years at Oxford or Cambridge do not equal the expense of one year at, say, Suffolk Law School. Who really has the elitist, class-based society? In a land of 4000 colleges, employers (particularly law firms) prefer that their employees only come from the half dozen institutions, and dismiss everyone else as incapable of doing the work.

Without my student loans, I might have had a shot at supporting a family or a mortgage someday. As it stands currently, with my seven years of college and bar license in good standing, I am no more employable than I was in the 10th grade - less so, in fact, because my law degree "overqualifies" me for every other job on Earth. Wage slavery is my future, if I ever find myself lucky enough to become employed in any profession.

Posted by: Long-Term Unemployed Attorney | Dec 29, 2011 11:04:15 AM

I am just so appalled by the law school administrators and professors who participated in this behavior. They all should have known better, given their training and responsibility to the profession and our society. End of story. I could see what was wrong in my second year of law school, but somehow the people collecting six figure salaries from the school thought graduating classes with 40% employment and leaving them to repay taxpayers with a barista job at Starbucks was all hunky dory?

Posted by: Liz | Dec 29, 2011 1:50:04 PM