TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Sunday, July 21, 2013

WSJ: Should Law Schools Bet on Law Students?

WSJ Law Blog, Placing Bets on Law School Graduates:

Benjamin M. Leff, a tax law professor at American University, says he doesn’t see why the legal educational world is so wedded to the traditional model of student debt.

He and another colleague at the school are researching the idea of structuring a loan program as a swap transaction. Here’s how it could work. Under one model, a student would take out a loan and then enter into a contract with the school. The school agrees to cover the loan, and the student agrees to hand over to the school a percentage of future earnings over a fixed period.

The school comes out ahead when the swap is with a student who makes partner at a blue-chip law firm by the age of 30. That student would end up paying the school more than what the school pays the lender.

If a student takes longer than expected to climb the income ladder, the student’s debt load diminishes and the school loses money. So the school has an incentive to help a graduate land a lucrative job and gather more information about their students’ earnings.

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Ultimately, these need to be securitized, given AAA ratings by Moody's, then credit default swaps could be sold to people who do not own the underlying asset. Nothing could possibly go wrong with this plan!

Posted by: Justin | Jul 21, 2013 4:35:38 PM

Why would the schools ever want to take the risk when they can continue feeding at the trough of federally subsidized student loans? How else will they ever support all those hard working administrators and faculty?

Until the government drastically alters the way it subsidizes the loan industry, nothing significant will change in higher education. If the applications to law school continue to drop, there may be change, but the driving factor in all of this is the federally guaranteed system we currently have.

The best proposal I have heard comes from the one and only Instapundit. Allow student loans to be discharged in bankruptcy after a reasonable period (perhaps 7-10 years), and put schools on the hook for a significant percentage of any discharge.

Posted by: Todd | Jul 21, 2013 6:47:09 PM

If the law schools bet on themselves, what would happen to Access Group - the non-profit law/graduate school-specific student lender? It is a "membership corporation," (something I never heard about it Corporations) with each of the ABA-accredited school holding a piece of it. This non-profit student lender owned by the law schools issued no less than $11 billion in SLABS (Student Loan Asset-Backed Securities) between 2000 and 2008, and currently sits on $300 million in cash.

Posted by: Unemployed_Northeastern | Jul 21, 2013 8:57:13 PM