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Editor: Paul L. Caron, Dean
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Sunday, November 12, 2017

Increases In Federal Student Loan Limits Do Not Induce Private Law Schools To Raise Tuition

Robert Kelchen (Seton Hall), An Empirical Examination of the Bennett Hypothesis in Law School Prices:

Whether colleges increase tuition in response to increased federal student loan limits (the Bennett Hypothesis) has been a topic of debate in the higher education community for decades, yet most studies have been based on small increases to Pell Grant or undergraduate student loan limits. In this paper, I leverage a large increase in Grad PLUS loan limits that took place in 2006 to examine whether law schools responded by raising tuition or other living expenses and whether student debt levels also increased. Using data from 2001 to 2015 across public and private law schools and both interrupted time series and difference-in-differences analytical techniques, I found rather modest relationships across both public and private law schools. I conclude with some possible explanations for the lack of strong empirical support for the Bennett Hypothesis.


My analyses suggest that the large increase in federal borrowing limits did not induce law schools to substantially increase tuition and fees (funds they do receive) or living allowances (funds they do not receive). However, the difference-in-differences models do suggest that any responses that do exist may be concentrated among public law schools instead of private nonprofit programs. This runs counter to prior literature at the undergraduate level (Lau, 2014; Lucca et al., 2015), but could be explained by the lack of tuition and fee controls in professional education that often exist for bachelor’s degree programs at public colleges and universities.

I offer three potential factors that could explain the relatively modest relationship between law school prices and the availability and attractiveness of federal student loans for students. First, law schools as a whole did not appear to actively attempt to engage in additional rent-seeking behavior by increasing their prices in an effort to gain additional tuition revenue. Some programs have responded to particular incentives under Public Service Loan Forgiveness to shift the incidence from students to taxpayers (such as the Georgetown Law example discussed earlier), but there appear to be few institutions that sharply increased tuition rates above and beyond what they were doing prior to 2006.

The second potential explanation is that since law schools are an example of a higher education marketplace in which prospective students have reasonably good information about individual programs, a program that increases tuition more than its competitors may have seen a decline in enrollment—and potentially overall tuition revenue. If all law schools raised tuition by a similar amount, this concern could be lessened. Yet game theory suggests that programs have a strong incentive to deviate from the consensus in order to increase enrollment levels of price-sensitive students, and this could be particularly true in the post-Great Recession environment in which the number of prospective law students fell precipitously.

Finally, it is possible that the number of law students who faced credit constraints prior to the adoption of the Grad PLUS program could have been relatively low due to the presence of a robust private loan market during the 2000s. There is evidence that the adoption of Grad PLUS, combined with improved income-driven repayment terms, induced students to switch from private to federal loans during this period (Bhole, 2017). It is likely that Grad PLUS loans extended access to capital to at least some students, but a sizable percentage of students could already access loans up to the full cost of attendance.

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1) Well, the rate of annual increase in private law school tuition may not have increased from the pre-GradPLUS era, those increases still radically outpaced and outpace the increases elsewhere in the academy. When GradPLUS was introduced in 2006, Harvard Law sported sticker tuition just shy of $40,000. It now stands above $60,000. A 50% increase in ten years - a decade marked by recession and stagnant-at-best wages for law school graduates - is not a minor thing.

2) Of course Bennett Hypothesis is bunk. Just take a look at undergrad tuition. The last time the federal lending limit was increased for undergrads, it was 2008 and Bush 43 was in office. Tuition has continued to increase apace every year. The Ensuring Continued Access to Student Loans Act increased the lifetime undergrad federal student loan ceiling to $31,000 for dependent students and $57,500 for independent students, with a gradually increasing annual limit. For dependent students, I believe the freshmen year lending limit is $5,500, which increases to $7,500 or so by the third year in school. Or barely more than 1/10 the annual cost of attendance of our most expensive private colleges and universities. And yet there remain those who are willing to demonize the existence of federal student loans as the sole culprit as to why college costs anything at all in the US. By coincidence, I'm sure, if you tease their bios long enough, you'll almost invariably find ties to either private student lenders or the securitization industry. Go figure.

3) "Finally, it is possible that the number of law students who faced credit constraints prior to the adoption of the Grad PLUS program could have been relatively low due to the presence of a robust private loan market during the 2000s."

Yup, and even back in the halcyon days of early 2005, the predicted default rates on said private law school loans were among the highest in all of higher education. 12% for Access, if memory serves, and Sallie Mae's law school loans defaulted at around twice the rate of their business school loans. But of course since those loans were all securitized (and shortly thereafter made retroactively nondischargeable)), the lenders did not appear to care one whit. And lest we forget, plenty of decidedly bottom-half (at best) private law schools were charging $30k or more in tuition alone before GradPLUS was introduced and the annual lending ceiling on graduate Stafford loans was just $20,500.

4) Perhaps anecdotal, but I can think of at least one bottom-rung law school around here that cost roughly 60% of what other area private law schools cost in the time immediately before GradPLUS and now stickers at parity with those other schools. Perhaps a coincidence, perhaps other factors were involved (like the dean's ~$850,000 salary), but nevertheless, it did happen.

Posted by: Unemployed Northeastern | Nov 12, 2017 9:33:09 AM

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