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Editor: Paul L. Caron, Dean
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Monday, February 5, 2018

Would A Federal Student Loan Overhaul Bring Down Law School Tuition?

ABA Journal, Would an Overhaul of Federal Student-loan Programs Help Bring Down Law School Tuition?:

Could reforming the federal student-loan program be a way to halt the skyrocketing cost of attending law school? At the 2018 ABA Midyear Meeting in Vancouver, British Columbia, the American Bar Foundation gathered a panel together to discuss the issue in The Perennial (and Stubborn) Challenge of Cost, Affordability and Access in Legal Education: Has it Finally Hit the Fan?

“If I have to put the blame for the title of this panel on any one place, I would put it on these student loan programs and the fact that they are basically unregulated, really, in terms of the amount,” said Barry Currier, the ABA’s managing director of accreditation and legal education.

“The students can borrow as much money through those programs as they want,” Currier said. “So if Harvard Law School or New England Law School said, ‘Tuition at our school next year is $200,000, and living expenses are $50,000,’ the federal government wouldn’t say, ‘You’ve got to be kidding me!’ They would say, ‘Where can we send that check for $250,000?’” ...

Currier and Stephen Daniels, a senior research professor at the American Bar Foundation, both drew attention to a current bill that would impact the federal student-loan program and potentially cause havoc for law schools and law students. HR 4508, the Promoting Real Opportunity, Success and Prosperity through Education Reform Act was introduced in the House of Representatives in December.

“That bill, as currently written, eliminates the loan forgiveness programs that are now in effect, and it puts a cap on student borrowing for graduate and professional education of $28,500 a year,” Currier said. “And I venture to say that if a cap of $28,500 per year were put on law school borrowing through the federal student-loan programs, one of two things would happen: A lot of students would then not go to law school because they couldn’t afford it. Or the interest rate they would have to borrow on the private loan that they would have to take out to supplement that would be at a rate of interest that would make it really difficult to justify the decision to go to law school.”

Even if passed by the House, it’s unclear how the Senate would respond to the PROSPER Act, Currier said. “So whether there will be a cap, and if there is a cap, what the cap will be, is at this point unknown. But for law schools at this point in time, this is a very serious issue.”

http://taxprof.typepad.com/taxprof_blog/2018/02/would-an-overhaul-of-federal-student-loan-programs-help-bring-down-law-school-tuition.html

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Comments

We know what happens when federally-insured lending is capped: students borrow the excess from private lenders at higher interest rates and go to school anyhow. The premise that students will be price-sensitive to interest rates when they are clearly not price-sensitive to tuition rates is incoherent.

I am not arguing for higher tuition. I have strongly urged that tuition increase be capped at 3% -- the rate at which lawyer earnings have historically risen. My point here is simply that Mr. Currier's approach to capping tuition is unlikely to work.

Posted by: Theodore Seto | Feb 5, 2018 8:30:22 AM

No. We already know that this won’t bring tuition down. We know this because just before GradPLUS was invented and the annual graduate federal student lending ceiling was $20,500, many fourth-tier private law schools featured tuition anywhere between $28,000 and $36,000 per year,* BEFORE living expenses. And that tuition had been increasingly steadily, year after year, at a rate essentially identical to the rate during the GradPLUS era. And no law school was complaining that their students couldn’t scrounge up financing. That’s because those private student loans were securitized in the same vein that NINJA mortgages were. And then they became nondischargeable in bankruptcy to boot. These conditions remain. There are new actors on the scene now, like SoFi (Yes, Virginia, SoFi securitizes all of those refinanced, erstwhile federal student loans), to say nothing of the currently-dormant private student lender controlled by the law schools themselves, AccessLex, nee Access Group, nee Law Access. Their private law loans featured predicted default rates in the double digits back in the mid 2000’s, incidentally.

So there will not be much downward pressure on law school tuition, though the switch to private loans will result in much pressure on law grads’ paychecks, since private loans are, by their very nature, not eligible for government income-based repayment plans, so instead of merely owing 10% of takehome over 150% of the poverty level, future grads will face payments more akin to a Midwestern mortgage payment.

*Matt Leichter’s “Law School Tuition Bubble” provides historical tuition data for every accredited school going back into the 1990s.

Posted by: Unemployed Northeastern | Feb 5, 2018 9:00:21 AM

Rising law school tuition is not a problem. Law degree holders earn approximately $53,300 more per year than bachelor’s degree holders. The mean value of a law degree over a lifetime is $990,000. Thus, the value of a law degree exceeds the costs of tuition by hundreds of thousands of dollars. Law graduates are having no trouble repaying their student loans thanks to the earnings premiums conveyed by a law degree. Law graduates have the lowest default rates compared to graduates of bachelor’s and other advanced degree programs. Law degree holders are also more likely to participate in the workforce and less likely to be unemployed.

Tuition is rising because law schools have to compete with large law firms for talent. The local solo practitioner cannot teach securities law. So law schools have to pay a premium to top lawyers as an incentive to leave high paying firm jobs for teaching. Schools also need to pay a premium to hire top legal talent with experience in Article III clerkships. These lawyers have insight into what judges look for when deciding motions and other matters. Given the wage premiums, low default rates, and low unemployment rates of law school graduates, law students are clearly benefiting from the education.

If Congress reduces investment in legal education, they will substantially harm the nation. The Federal government will collect less taxes because fewer individuals will benefit from the wage premium conferred by a law degree. Tax collections will also decrease as unemployment rates increase and labor participation rates decrease. Moreover, society will have fewer leaders. The versatility of a law degree allows graduates to do more than practice law. Law graduates serve in Congress and state houses, they are leaders in the business community and CEOs, and they advocate for social justice.

Posted by: tuition | Feb 5, 2018 9:02:02 AM

Prof Seto, I think your statement that prospective students are not price-sensitive to tuition increases would probably surprise any law school dean of the last 7 years. My understanding is that students are ruthless negotiators of tuition discounts these days.

Posted by: JM | Feb 6, 2018 8:30:34 AM

I have always found it fascinating how much a certain individual fetishizes wage premium as the be-all, end-all of whether or not to attend a program, even as this person, as a mere academic, likely earns magnitudes less than anyone else who joined the elite management consultancy the year he did. With the amount of time that has passed, I imagine that many of them have become equity partners at VC, PE, and HF firms pulling in millions per year - the kinds of people who bark orders at lawyers on Friday night that keep them in the office all weekend.

And of course the unemployment rate for law school grads is DOUBLE what it is for four-year grads.

Posted by: Unemployed Northeastern | Feb 6, 2018 9:00:29 AM

"Law graduates are having no trouble repaying their student loans thanks to the earnings premiums conveyed by a law degree. Law graduates have the lowest default rates compared to graduates of bachelor’s and other advanced degree programs."

Yeah, that's because of IBR plans. We know from Nomura Securities ratings that private law school loans back in the "New York to $160k!" glory days had virtually the among the highest default rates of any educational loans.

Speaking of those law school premiums, I can't help but notice that the NALP $65,000 median starting salary for the Class of 2016 doesn't even match, in real dollars, the $29,700 nominal median starting salary for the Class of 1986, which works out to $65,843 today. Thirty years of tuition growth, slightly smaller median salary.

Incidentally I know more than a few forced-solos who took multiple securities courses and aced them; problem was they didn't go to Yale or whatever so law firms with securities groups didn't give a damn. But I forgot we are supposed to assume that all law school grads from all law schools all end up making the same salary because law is secretly an egalitarian utopia...

Law school unemployment: 10%. National unemployment: 4%

And your last sentence is pure Ivy League aloofness and confirmation bias.

Posted by: Unemployed Northeastern | Feb 6, 2018 10:47:20 AM

Rising law school tuition is definitely a problem. AccessLex has a very useful debt calculator on its website. A student who fully debt-finances a law degree at a high tuition school will pay back $695,306 over the course of loan repayment. Even accepting the Simkovic estimate of the lawyer premium, the cost of law school eats a huge portion of that premium. And what if the lawyer is one of many who earns less than average? (Note that it's a mean value, not median, and so distorted by a small number of high-earning lawyers--the majority will earn less).

Posted by: CBR | Feb 6, 2018 1:36:36 PM

"I have always found it fascinating how much a certain individual fetishizes wage premium as the be-all, end-all of whether or not to attend a program, even as this person, as a mere academic, likely earns magnitudes less than anyone else who joined the elite management consultancy the year he did. With the amount of time that has passed, I imagine that many of them have become equity partners at VC, PE, and HF firms pulling in millions per year - the kinds of people who bark orders at lawyers on Friday night that keep them in the office all weekend."

That's right. And many of those people have law degrees. Sounds like a law degree is pretty versatile--you can become a professor, a consultant, a lawyer, or a financier--whatever strikes your fancy.

Posted by: VC, PE Partners | Feb 7, 2018 7:14:56 PM

Apples to apples unemployment rates are lower for law grads than for similar bachelor's degree holders, employment rates are higher, earnings are higher, student loan default rates are lower, and repayment rates are higher than for similar bachelor's degree holders.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2250585

You can't compare NALP "unemployment" (which is actually "unemployed or not in labor force") to Census unemployment (which is just unemployed and seeking work), and you can't compare unemployment immediately after graduation to unemployment for people who have been in the workforce for 20 years.

Apples to apples.

Posted by: apples to apples | Feb 7, 2018 7:21:01 PM

If Harvard could charge $200K per year in tuition for law school, they'd be doing it already. The degree is probably worth far more than that.

But the problem is, those folks at Yale and Stanford and NYU and Columbia and Chicago would undercut Harvard and take all their students.

That's how competition works.

Student loans don't drive law school tuition prices. Market competition between law schools does.

Posted by: Law school tuition to $200K per year? | Feb 7, 2018 7:24:54 PM

@ CBR

You're confusing future value with present value. The way to read "The Economic Value of a Law Degree* is that as long as the average law degree costs less than $1,000,000--just counting tuition and books, no living expenses--and the weighted average interest rate on student loans is around 6% and inflation/wage growth is around 3%, then the average law degree is a good investment.

The most expensive law degree in the U.S. costs less than $250K, so we're not even close to the point at which a law degree becomes a bad investment.

The government collects more in taxes on the earnings premium than law schools collect in tuition, and the lions share goes to the student.

Posted by: Present value | Feb 7, 2018 7:30:09 PM

To put it another way, the "future value" of a law degree is many millions of dollars--around $50K to $60K in earnings premiums on average (at the mean) over 40 years. The present value at the start of law school is only $1 million.

Interest expense is already fully baked into the $1 million estimate.

Clearly someone did not pay attention in law school.

Posted by: Present value | Feb 7, 2018 7:33:39 PM

@PresentValue: No. Quoting from the Simkovic/McIntyre study: "Median pretax lifetime values are approximately $650,000 (after taxes, $450,000) for men and $850,000 (after taxes, $600,000) for women." Even by that study, the net post-tax value for men is only $450,000. High tuition definitely eats a large portion of this premium. The COA at more expensive schools is now the $80-$90,000 a year range. Debt financing that will eat into a significant part of the median wage premium, and the effects will be especially strong for those who earn less than the median lawyer income.

Posted by: CBR | Feb 8, 2018 9:41:52 AM

“That's right. And many of those people [VC/PE/HF partners] have law degrees.”

That’s adorable, in the way that people argue that the existence of Gates and Zuckerberg means that high school grads can be billionaires. But of course the vast majority of high finance folk are MBAs, not JDs, and nearly all of them went to a mere handful of business schools whose names are so well known as to not need be listed here. This is corroborated by the business and sociology prize-winning book “Pedigree” by Kellogg professor Lauren Rivera, whose earlier work into the hiring proclivities of bulge bracket banks, the MBB, and corporate law firms, “Ivies, Extracurriculars, and Exclusion,” was reviewed by the Chronicle of Higher Education in an article succinctly headlined “Brown and Cornell Are Second-Tier.” It rather blows a hole in your notion that all law school grads have the same career and salary outcomes, as does, you know, the reality of the legal profession, with which you seem to only have a passing knowledge. But sure, that JDs are relegated to the “alternate career track” at all three of the major consultancies is undoubtedly a sign that most of the partners at those firms are lawyers. Yup.

Also you’ve elided my point of how psychologically interesting it is that you keep citing this fellow’s wage premium malarkey when he is almost certainly among the very lowest-earning of anyone who McKinsey his year. His compatriots who became junior partners at McKinsey are earning at least $450k, and those who got lucky in IB/VC/HF etc. might be pulling in millions per year.

“You can't compare NALP "unemployment" (which is actually "unemployed or not in labor force") to Census unemployment (which is just unemployed and seeking work), and you can't compare unemployment immediately after graduation to unemployment for people who have been in the workforce for 20 years.”

And you shouldn’t bounce between NALP, BLS, and ACE data, as well as entry-level salaries with career average salaries, as best suits his argument. Pot, meet kettle. Heck, you just presented a low law school default rate as some sort of proof of a high repayment rate, when it is no such thing, as I have shown you multiple times in the past. Active repayment status and default status don’t even add up to 50% of outstanding federal student loans. Also the Department of Education doesn’t break down default or repayment rates by type of program but whatever.

Anyhoo the ~10% unemployment rate among recent law school grads is both objectively appalling and double the corresponding rate for recent four-year college grads.

“Student loans don't drive law school tuition prices. Market competition between law schools does.”

Ah yes, the free market of unlimited federal student loans to anyone who can get into any law school, no questions asked. Uh huh. Hayek it is not.

Also the supposed wage premium values in your responses to CBR are 1) pretax, 2) multiple reviewers with a higher level of economics education than the study’s author have found serious flaws with the figures (Leichter, Harper, Scheiber, etc), and 3) those figures have not taken into take into account student loan repayment or the very significant wealth-building hit those student loans represent – a recent study found that just $30k of student loan debt equates to $325k in lost 401(k) wealth by retirement, because obviously money tossed at student loans isn’t being socked away. Assuming that scales linearly, and your precious, purported million dollars is more than negated by the average private law school payoff.

“The most expensive law degree in the U.S. costs less than $250K”

The most expensive law schools are well over $270k now, and that’s before we get to future tuition increases, interest on every penny of those grad school loans since they aren’t subsidized anymore, bar loans, or undergrad debt. For instance, Harvard Law – I believe the author you keep citing went there - stickers at $92,200 per its 2017 Form 509 and 52% of the student body pays sticker. Fact. A bit of back-of-the-napkin math would indicate that about $35k in interest will find its way onto the balance by the time these kids are out of school. So that’s $311,600, excluding bar loans and tuition increases. According to finaid.org, that works out to a $3,585/month standard payment, which to be “affordable” (i.e. 10% of gross income) one needs to make $430,308. In other words, it would eat 30% of the gross income of the BLS median lawyer’s wage. Ouch!

Oh, and if one were to punch that out to a 25 year repayment, they would end up paying back just shy of $650,000, or basically the entire million dollar premium once taxes are factored in. Res ipsa.

Finally, it is very telling that you can’t muster a response to the sobering realization that the real dollar NALP median starting salary for the Class of 1986 is higher than it is for the NALP median starting salary Class of 2016.


Posted by: Unemployed Northeastern | Feb 8, 2018 5:44:35 PM

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