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Friday, February 15, 2013

How Grad PLUS Loans Sustain Zombie Law Schools

The American Lawyer:  How Grad PLUS Loans Sustain Zombie Law Schools, by Matt Leichter:

In recent months, the most prominent defense of law school as an investment has come from Case Western Reserve University School of Law dean Lawrence Mitchell, in both an op-ed published in The New York Times and an appearance on Bloomberg Law. Around the same time, Georgetown University Law Center professor Philip Schrag wrote a much more informed defense of the status quo in a review of Brian Tamanaha's Failing Law Schools, which will appear in a forthcoming issue of the Georgetown Journal of Legal Ethics. Although Tamanaha has responded to Schrag's review elsewhere, Schrag leveled a few criticisms at an article I wrote for The Am Law Daily that I will address here.

Before I do so, allow me to summarize Schrag's argument, which goes as follows: If the economic model of U.S. legal education doesn't work for many students because it leaves them with low incomes against unpayable debts, the solution to their problems is the government's Income-Based Repayment plan (IBR) and its 10-year-public-service-job sibling, Income-Contingent Repayment. Most law students can borrow up to $20,500 in unsubsidized Stafford loans at 6.8% interest (less a 1% origination fee) and cover the remaining total cost of attendance plus living expenses via Grad PLUS loans at 7.9% interest (4% fee). If they fail to find a job that pays an income commensurate to their monthly payment obligations, they can go onto IBR, which saves them from the debt peonage that would have otherwise awaited them because the government will cancel their loans after 20 years.  ...

Identifying himself as a conservative, Schrag asks, " 'Why not leave it to the market'? In our Internet-saturated age, if too many law graduates are chasing too few jobs, word will soon get out and fewer students will apply." Given that the Internet-saturated market forces he refers to were mainly scambloggers who call law professors con artists, Schrag must have thick skin. Despite the ongoing nose-dive in applications, however, there's a reasonable chance that more people will always enroll in law school than there will be jobs available when they graduate, so the market is unlikely to work as Schrag believes.

The more conservative response would not be a persistent defense of IBR but would instead be a focused attack on both Grad PLUS loans and how private student loans are treated in bankruptcy. The changes to these two aspects of the student loan system, which occurred in 2006 and 2005, respectively, have insulated many ABA law schools from a credit and enrollment crisis that would otherwise imperil them because private lenders would not be willing to lend money to law students indefinitely while the government has.

To illustrate, here's the annual Stafford loan limit (subsidized plus unsubsidized) and median law school tuition, adjusted for inflation.

In a counterfactual world without Grad PLUS loans and dischargeable private loans, private law school debtors would have started using the bankruptcy system to deal with their unpayable loans beginning in the late 2000s. Lenders would have responded by raising interest rates, demanding cosigners, ending in-school deferments, requiring clearer data on graduates' employment outcomes from the schools, and eventually ceasing lending to law students once they realized the low likelihood of repayment. The result: law schools with poor graduate outcomes would have curtailed their expansion and halted their tuition increases, if not shut down entirely.

Sadly, in the actual world we inhabit, the federal government has chosen to sustain a number zombie law schools that can only be killed by convincing students who pay full tuition via unlimited debt not to attend them. Even if some of these schools shutter, there's no reason to believe that the remaining ones will reduce their tuition significantly because the nucleus of the enrollment pool consists of people willing to pay whatever law schools tell them to. Thus, conservatives who are interested in using market forces to manage law school pricing should start first with the Grad PLUS Loan Program, and then wait for inflation to erode away the Stafford loan limits.

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Comments

Prof. Caron, you write that "there's a reasonable chance that more people will always enroll in law school than there will be jobs available when they graduate, so the market is unlikely to work as Schrag believes." It seems to me that this is a good thing for the legal industry and for the public as a whole. In theory, the law grads who don't get jobs will be the bottom of the law school barrel. Some of these folks won't be able to pass a bar exam and will move off into other employment. Others will pass a bar exam, but not obtain legal employment requiring bar membership. Why would we want a law job for every law grad, including law grads from the bottom quarter of the bottom tier law schools? One could make a very strong argument that the sorting process inherent in a system with an excess of graduates yields a higher quality bar. Isn't this exactly the way the law school admissions process works--more people apply than can be accepted, yielding higher quality student bodies? If it works at the intake, why isn't the same process acceptable at the other end?

Posted by: Publius Novus | Feb 15, 2013 9:30:10 AM

To Publius Novus:

Because by the time students reach the back end, they tend to owe a mortgage or so in nondischargeable student debt, and their creditor is usually Uncle Sam/the American taxpayer.

Posted by: F.T. McGruff | Feb 15, 2013 1:19:19 PM