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Saturday, March 3, 2012

The Real Reason Why Law School Tuition Keeps Rising

Collegemoney1American Lawyer, At Last, a Rational Explanation for Why Law School Tuition Keeps Rising, by Matt Leichter:

On February 11, the Washington Post published an article about the ... prospective shortage of primary care physicians. It rightly pointed out that medical students graduate with large amounts of student loan debt, and as a consequence, they tend to specialize early in their careers because they can earn a higher income for the same cost of education.

The article made two important errors: First, it failed to mention that since July 2009 university graduates with federal student loans can put those loans into the Income-Based Repayment (IBR) plan, which today caps monthly payments at 10 percent of the borrower’s discretionary income for 20 years, after which the loan is canceled and the debtor must pay income tax on the forgiven sum. While IBR is a decent idea for encouraging doctors to opt for primary care positions as opposed to higher-paying specialties, it's a savior for law school graduates who are not so fortunate to enter a field where there are more jobs than there are graduates to fill them.

The second, more significant, error the Post article makes is that it accepts high student loan debts for professional degrees as a given, as though tuition increases over the inflation rate are a fact of life, caused by magic. The Bureau of Labor Statistics' (BLS) Consumer Price Index (CPI) and Census Bureau data (Historical Income Tables, Table F-6) illustrate the reality of higher education costs quite dramatically.

... Those pondering the high cost of law school, rather than med school, ought to be even more perplexed. The jobs aren't there—and, unlike in medicine or dentistry, won’t be there either—so why is tuition still increasing? I can think of three hypotheses.

Blame the applicants. There are always more people applying to law school than there are seats for them, so law schools increase their tuition due to high demand and short supply. This answer is true for ABA–accredited law schools but unsatisfactory. Without student loans, people wouldn't be able to buy the degrees, so the answer must discuss that.

Blame U.S. News. U.S. News & World Report's annual law school rankings reward law schools for profligate spending and therefore for charging more. It's true that weighting law schools by "spending per student" will cause them to increase spending and tuition, but law students have to borrow the money to pay the tuition. This hypothesis suffers from the same flaw as "Blaming the applicants" does.

Blame the federal government. By interfering in student debt markets, the federal government is unwittingly causing a tuition bubble. It fails to realize that universities can capture the subsidy student loans provide, allowing them to increase tuition indefinitely. This hypothesis is persuasive.

"Blame the federal government" is better known in academic circles as "The Bennett Hypothesis," named for then-Education secretary William J. Bennett after he wrote a New York Times op-ed piece in 1987 warning that universities were absorbing increases in financial aid to students and then demanding Congress raise the lending caps to repeat the process. The problem with the Bennett Hypothesis, though, is that the evidence for it was inconclusive, which is surprising given the CPI charts above. ...

A closer look at the Digest's data shows that in fact, tuition is increasing faster at law schools than at other professional schools, particularly dental schools and the medical schools referred to earlier. Behold:

Law schools' enrollments are vastly higher, accelerating more quickly, and result in poorer job prospects than their peer professional schools do. Whether this is because other professions deliberately deny accreditation to schools to engineer job shortages for their practitioners or because law schools require far lower start-up costs (i.e., no laboratories or cadavers), I can't say. What I can say is that universities' purposes for opening and maintaining law schools are clearly at odds with their students' career objectives, to say nothing of the public's intent behind the Title IV loan program. ...

Oh, and if you think I'm hard on law schools, run, don't walk, from MBA programs. ...

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Comments

Is this data drawn from rack rate (i.e., the school's posted tuition) or net tuition (i.e., rack rate less school-conferred scholarships)?

Posted by: Anonymous | Mar 3, 2012 12:31:44 PM

That's a very eye-opening study. So is the pdf file that's linked from the main article:

http://centerforcollegeaffordability.org/uploads/Introducing_Bennett_Hypothesis_2-1.pdf

The whole situation looks remarkably bubble-like, with law schools being the most overinflated.

Posted by: AMTbuff | Mar 3, 2012 1:21:31 PM

This article is outrageously misleading. It documents the growth in tuition form the late 1980s until 2008 (i.e., trough to peak). This was a period during which lawyer salaries and profits per partner dramatically increased.

Then the article focuses on events that have happened since 2009 (i.e. the downturn in the legal market).

A fair article would compare apples to apples. How much has net-tuition (after all grant aid) grown since 2009?

Posted by: Anon | Mar 3, 2012 3:44:59 PM

Med School slots are constrained by intern and residency slots in teaching hospitals for graduates. More slots would mean more Medicare and other spending.

Of course, already credentialed doctors want to limit competition, but that's not the only constraint.

BTW, this is one of the weak points of Obamacare. If the law was coherent, intern and residency slots would be ramped up starting years before it started covering 37 millon more people. However, that costs money.

Posted by: Doug Wenzel | Mar 4, 2012 6:56:50 PM

current law actually provides an exception for forgiven student loan debt as not taxable income even though other forgiven debt usually is taxable income

26 USC (f)


despite this, news media keep saying its taxable and will create a huge headache when it happens. very annoying.

Posted by: bob | Mar 4, 2012 7:11:40 PM

Informative article. However, the "Real Reason" was not asserted clearly. Is it Bennett's hypothesis? Infinite loans and forgiveness? Bad guidance counseling for BS/BA students? Watching too much Perry Mason on very late night TV?

Posted by: conrad | Mar 4, 2012 8:28:48 PM

The post-75 flatlines for medical degrees sure looks like a cartel in operation.

Posted by: Law Prof | Mar 4, 2012 8:52:44 PM

The 'cartel' for medical degrees is not.

First, the federal government helps to pay for residency programs for graduated doctors. These are capped at what the federal government reasonably expects to need in the supply of trained doctors. Yes, we could train more, but that would mean (according to the Feds) more health care spending, which they don't want.

This trickles down to the medical schools: if there are not to be more residency positions, then why train more medical students?

Whereas there is no upward limit to the number of lawyers. Neither the ABA nor the state law disciplinary boards nor the federal government recognize the need for such a limit (I guess there is no such thing as 'too many lawyers'), so the only real cap on the number of law school graduates is the limits the law schools please on themselves. Apparently, that limit has yet to be reached.

So there is no 'cartel' limiting medical school enrollment; rather, a conscious decision of the federal government. That's called 'public policy'.

Posted by: Steve White | Mar 4, 2012 9:21:48 PM

Amongst my law school classmates, the majority will tell you that it is because of Bush and the Republicans their loans are so high. They'll tell you Bush's tax cuts for the rich led to less subsidies which led to higher tuition and loans. And you think I am kidding.

Posted by: Vinny B. | Mar 4, 2012 10:56:50 PM

The current unemployment rate for lawyers is 1.5%. Preparation required: 7 years. For physicians and surgeons, it is 0.9%, prapration required is 10+ years. For all occupations, unemployment is 8.2%. Why do you think people go to law school? For all the whining and belly-aching we hear, 1.5% looks pretty good.

Posted by: Publius Novus | Mar 5, 2012 8:39:00 AM

Bob,

It is not clear from (f) that IBR debt forgiveness is not taxable (forgiveness under the public service version appears to be excluded). Here is (f):

(f) Student loans
(1) In general
In the case of an individual, gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of any student loan if such discharge was pursuant to a provision of such loan under which all or part of the indebtedness of the individual would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers.

Ordinary IBR does not appear to meet this language.

Please elaborate on your view--I'm not a tax lawyer and would like to make sure I understand this correctly.

thanks

Posted by: Brian Tamanaha | Mar 5, 2012 8:53:56 AM

Lawyers still make more than just about everyone other than doctors, and their unemployment rates are still much lower than most other professions.

You can see the data here:
http://www.askapeer.com/pages/labor-market-data

There's been a lot of griping and complaining by young lawyers--it's what they're trained to do, and it's in their interest to thin out the competition by spreading tales of misery.

But the truth is, lawyers remain exceptionally well compensated and exceptionally secure compared to the rest of us.

Unless you can get into medical school or dental school, if you want to make good money, go to law school.

Posted by: Anon | Mar 5, 2012 4:15:20 PM