Wednesday, July 24, 2013
Tamanaha: How the 'Million Dollar Law Degree' Study Understates Risk (Part I)
Brian Tamanaha (Washington U.), How the “Million Dollar Law Degree” Study Understates Risk (Part I):
In my last post, I argued that Michael Simkovic and Frank McIntyre’s study, The Economic Value of a Law Degree (new title), substantially overstates the value of a law degree. Their article challenges my argument in Failing Law Schools that getting a law degree today can be financially risky, especially for students who attend expensive low ranked law schools. As Simkovic writes, “we disagree with [Tamanaha’s] conclusions about the riskiness of a law degree because data on law degree holders does not support his conclusions.” Their study proves, they say, that even law grads at the bottom quartile stand to obtain “hundreds of thousands of dollars” in net lifetime earnings above what they would have earned had they not gone to law school.
Here are a few statistics behind my position. Graduates of the class of 2012 of Thomas Jefferson had average debt of $168,800. Nine months after graduation, only 28.8% had landed full time jobs as lawyers lasting at least a year. At California Western law school, the same numbers are $167,867 and 43.8%; at Phoenix law school, $162,627 and 43.6%; at New York Law School, $154,647 and 39.6%; at Southwestern law school, $147,976 and 44.1%; at Whittier law school, $143,536 and 34.1%. And so on. Because interest on law school loans begins to accrue immediately, another $15,000 or so is added to these amounts by graduation day. (These numbers do not include undergrad debt, which averages more that $25,000). The majority of grads who do land lawyer jobs work in small firms, which typically pay $60,000 or less, far below the amount necessary to manage standard monthly loan payments on debt this large. They will even struggle to make monthly loan payments on the extended 25-year plan (which adds a huge amount of interest). They will have little choice but to enter IBR, a government sponsored debt relief program, which has negative consequences of its own.
We can skip all the analysis and cut to the heart of the matter with a simple question: Would Simkovic and McIntyre recommend to a friend (who was not admitted to a better school, and who would end up with debt levels this high) that she should go ahead and enroll in one of these law schools (or others like it)? Would they tell their friend that she would likely come out ahead by “hundreds of thousands of dollars” even if she does not land a job as a lawyer after graduation?
Or would Simkovic and McIntyre express reservations, try to talk her out of it, tell her about the financial risks, warn her that she will be paying back the debt for twenty years or more, tell her that perhaps she should keep working in her current job and maybe retake the LSAT in the hope of getting a better score?
If they give the latter response, then they do not in fact disagree with my position.
[Cross-posted at Balkinization.] Prior TaxProf Blog coverage:
- What Is the Economic Value of a Law Degree -- $1 Million? (July 17, 2013)
- More on The $1 Million Value of a Law Degree (July 18, 2013)
- NY Times, WaPo, Others Debate The $1 Million Value of a Law Degree (July 18, 2013)
- What Is the Economic Value of a Law Degree -- $1 Million or $100,000? (July 19, 2013)
- More on The $1 Million Value of a Law Degree (July 20, 2013)
- Merritt on The $1 Million Value of a Law Degree (July 21, 2013)
- Diamond on The $1 Million Value of a Law Degree (July 22, 2013)
- Tamanaha: How 'The Million Dollar Law Degree' Study Systematically Overstates Value (July 23, 2013)
- Tamanaha: Why the “Million Dollar Law Degree” Study Fails (Final Post) (July 25, 2013)
- Rasmusen: Critics of The Economic Value of a Law Degree Are Making the Paper Better (July 25, 2013)
- Pasquale and Simkovic Respond to Tamanaha (July 25, 2013)
- The American Lawyer: Paper on Law Degree's Economic Value a Non-Sequitur (July 26, 2013)
- Simkovic Responds to Tamanaha (Part 3) (July 26, 2013)
- Tamanaha: Short Term Versus Long Term Perspective (July 27, 2013)
- Harper, Diamond: The $1 Million Value of a Law Degree: Distraction, Astronomy, or Astrology? (July 28, 2013)
- Simkovic Responds to American Lawyer Op-Eds (July 29, 2013)
- Diamond Responds to Tamanaha (July 29, 2013)
- Rasmusen: The Economic Value of a Law Degree and the 'Typical' Law Student (July 29, 2013)
- Simkovic Responds to Tamanaha (Part 4) (July 30, 2013)
Derek Tokarz wrote: "Your study puts the average net cost (sticker minus scholarship) at $90,000, and that looks reasonable even against the 25th percentile’s $350,000 premium."
- See more at: http://www.concurringopinions.com/archives/2013/07/brian-tamanaha-says-we-should-look-at-the-below-average-outcomes-and-we-did.html#comments
Posted by: Stephen Diamond | Jul 24, 2013 10:53:30 PM
I offered no such agreement as Stephen Claimed, but rather pointed out quite the opposite, that $90,000 is far from the actual cost for most students.
To Unemployed_Northeastern's comment, I think it can be debated what to do with the loans taken out to cover living expenses, but I've heard no argument why /interest/ on those loans are not a cost of attending law school. Many students will end up paying about $50,000 in interest (about $25k after deducting for inflation).
I also want to echo that it is absurd to consider law professors among low earners. The average tenured professor is at roughly the 75th percentile of lawyer incomes.
Posted by: Derek Tokaz | Jul 24, 2013 5:08:54 PM
Steve, I wish you wouldn't lie about what Derek has said, publicly or privately.
Posted by: Kyle McEntee | Jul 24, 2013 5:00:53 PM
Davidoff makes a good point about looking at the data.
With regards to 'But he also claims that implicitly all of these graduates "will have little choice but to enter IBR, a government sponsored debt relief program, which has negative consequences of its own." It's time to stop these unfounded statements and look at the data.', WHERE ARE THOSE DATA TO BE FOUND? Surely, somebody, somewhere, knows where to go to look for statistics about how many graduates are enrolling in IBR. Where are those data? What do they say? Why isn't this information out there yet?
Posted by: where to find it | Jul 24, 2013 2:15:59 PM
"The debt numbers used here do not deduct cost of living, which a non-JD holder also incurs in the first three years out of school"
Steve, like things are not always alike. For instance, non-JD holding college grads with living expenses pay for those expenses with a thing called "a job." Or they live with family. They are not allowed to pay for them with student loans, although in fairness cases of student loan fraud where folk are using funds for living expenses and not attending college are increasingly common.
Most law students pay for their living expenses with student loans. Because they aren't allowed to work during 1L, because paid summer associate positions are few and far between, and because many are K-JD students with no previous income history or savings. So I think it is entirely appropriate to include those additional nondischargeable student loans for living expenses in the premium calculations. And as you said on a previous thread, most of us aren't born with a silver spoon in our mouths.
"There are many lawyers who have gone to very highly ranked schools who have ended up on the lower end of the distribution (for example, law professors)."
The notion that law professors are low earners among law school grads is patently absurd. Do you get paid less than public defenders? Prosecutors? The vast majority of government lawyers? The 2/3 of practicing attorney who are solos or in firms with fewer than 10 lawyers? How about we judge your salary on an hourly basis against those in the private sector? Listen, anytime you want to switch places, let me know. I'll take your six-figure salary and you can apply to $35,000/year jobs in oh-so-inexpensive Boston.
Posted by: Unemployed_Northeastern | Jul 24, 2013 11:53:13 AM
It is important to compare apples to apples.
The debt numbers used here do not deduct cost of living, which a non-JD holder also incurs in the first three years out of school, and are not discounted to present value. Thus, they are not comparable to the earnings premium data provided by the Simkovic and McIntyre paper. This has been explained in several places on the web and is made clear in the paper.
Derek Tokarz of Law School Transparency has publicly stated his agreement with the authors of the paper that deducting 90,000 from the earnings premium is the appropriate metric.
Of course, if one wants to "skip" analysis altogether and throw out random questions then we are in a different kind of discussion.
It is also a bit disingenuous to imply that the paper suggests that anyone should go to law school or that they should go to a particular school. The paper provides a distribution of the lifetime earnings premium and it remains up to an individual student to calculate where they will likely fall in that distribution.
The ranking of a school is no doubt a factor that must be weighed in considering where you end up in that distribution over a lifetime. But it is only one factor among many. There are many lawyers who have gone to lower ranked schools who have ended up on the higher end of the distribution. There are many lawyers who have gone to very highly ranked schools who have ended up on the lower end of the distribution (for example, law professors).
Posted by: Stephen Diamond | Jul 24, 2013 11:24:27 AM
The paper's authors explanation of why they used the data they did doesn't seem particularly relevant. The authors' inability to use data from a broader time frame does not answer the question whether meaningful results can be obtained from a study of the data available.
Posted by: Jobs | Jul 24, 2013 10:51:45 AM
Actually Simkovic & McIntyre have dodged answering key questions. Thus to the suggestion that they distorted the control group to get a lower baseline for BA-Only incomes to compare with JD holders they simply say:
"We control for ability sorting and selection using extensive controls for socio-economic, academic, and demographic characteristics."
But the strongest criticism of their paper is that their "control" referenced above was to align the bottom 25% of JD holders with the bottom 25% of BA-only holders. Not only do they not address that criticism, they continue to present the control as making their study more accurate rather than less accurate. As numerous commentators have now pointed out without a response, it is ludicrous to claim that the bottom quarter of JD holders can be compared with the bottom quarter of college-only graduates. Law schools are selective, they take from the higher end of schools, the higher end of GPAs and the higher end of LSATs. To take professor Simkovic's own law school, the relatively low ranked Seton Hall it claims an overall median undergraduate GPA of 3.50 (B+) and median LSAT score of 158 - which would put most of its students in the upper 25% of their graduating BA class and upper quarter of LSAT test takers - and this after several years of lowering admission criteria.
Now this particular issue, the inaccurate selection of the control has been raised at The Atlantic, on this blog, on other blogs and indeed by even people who have otherwise praised the Simkovic & McIntyre paper. It is a critique where it would be very easy, as they have the data to show what realigning the control so that say the bottom 25% of JD was compared with the next quartile up of JDs, or the 50% level. They have not. I think that failure, plus the repeated evasion of answering this basic, early and widespread query is very revealing.
Other issues not credibly addressed include inflated assumptions for income while in law school, the exclusion of tuition, etc. But for a start, it would help if Simkovic & McIntyre would show what happens to their number if they stop comparing the bottom 25% of JDs with the bottom 25% of college only BAs. After all they are not actually claiming that Seton Hall is fishing in the bottom 25% of the college graduate ability pool.
Posted by: MacK | Jul 24, 2013 10:41:48 AM
@Steven M. Davidoff,
Historical default rates for ALL college students/grads are notoriously poor.
- For one thing, private student loan data is often not included, and let's be honest, law students at private law schools were the largest borrowers of private student loans out there in the pre-GradPLUS days.
- For another thing, up until about 2011 or 2012, federal loan defaults were measured for two years after graduation. Sounds reasonable, until one realizes that federal loans were given three years of forbearance/deferral periods. Now defaults are measured for three years, but of course IBR/PAYE/PSLF can push off default into infinity, for all practical purposes.
- With unlimited federal lending for law students and the existence of IBR/PAYE/PSLF, one should rationally expect the default rate for the post-2008 cohort to be... 0%. This of course creates profound a moral hazard for the law schools ("Don't worry about the cost, because you can go on IBR and have low payments!") and for the law students ("it doesn't matter how much I borrow because I can go on IBR").
In other words, the official default rate basically tracks the inability to properly fill out paperwork. The entire system was designed to let students push off the day of reckoning past their cohort measurement deadline.
And of course, all of this relies on the continued existence of both the three income-based repayment plans and of unlimited GradPLUS loans. Various organizations and individuals - Representative Petri (R) of Wisconsin, the Gates Foundation & the Lumina Foundation (the two biggest higher ed foundations/think tanks/policy groups), Senators Simpson and Bowles - are working on plans to repeal or rework one or the other, which would have profound effects on law school economics.
Posted by: Unemployed_Northeastern | Jul 24, 2013 10:20:39 AM
Tamanaha - You've got to change the hypothetical to family member. In particular, one that the law prof will be required to see at all major holidays for the next 20+ years, and therefore have to bear witness the the outcome of the education, and account for the advice he/she gave in front of the whole family. Only then will you get an honest answer.
Of course, you main point remains the same--that we know who the losers and the winners will be during law school pretty much right when they get their final LSAT score. Even the authors of the "million dollar" article surely know this. It is very much like the MLB draft - the average salary over the next 30 years for all draftees might be $400,000 per year; however 90% (or so) players drafted after round 5 will make effectively nothing, while a few will make $20 million/ year. And, by and large, we know where the chips will fall on draft day.
Posted by: JM | Jul 24, 2013 7:34:55 AM
I was going to comment on the last post and what I saw was a worrying substitution of rhetoric and attack for reasoned academic comment. Professors Seto and Rasmussen beat me to the punch.
However, as I've written in the Times, my hope is that whether it is right or wrong, the S/M paper spurs more in-depth rigorous empirical study of this issue.
With that, I'd just comment on this post. I certainly agree that law school is not for everyone and taking on debt of any kind should be a choice taken in regards to the risks and rewards. Professor Tamanaha is surely right about these debt figures. But he also claims that implicitly all of these graduates "will have little choice but to enter IBR, a government sponsored debt relief program, which has negative consequences of its own." It's time to stop these unfounded statements and look at the data. Does Professor Tamahana have data on what the salaries of these graduates are five/ten years out? Does he know how many now are in IBR even now? You can indeed look at the figures for default for some of these schools as S/M and they are low generally in most cases and certainly significantly lower than undergraduate rates. One of the biggest problems in this debate is a reliance on rhetoric and loose characterizations instead of data. It's easy to pick on these lower ranked schools, but we really do need more data on outcomes before we completely wipe any school off.
There is no upside to wading into this debate (as my in-box proves every time I enter this debate), but I decided to write this to encourage Professor Tamanaha, a fine scholar, to continue his reasearch and do this. In other words, if he does not like the S/M study, he should continue to do what academics do -- write a study that further looks at these issues either by himself or in partnership with a labor economist, etc., but relying on the data and sound empirical methods beyond time shot descriptives and implicit/explicit biases. Our profession could certainly use it and I encourage him to do more.
Posted by: Steven M. Davidoff | Jul 24, 2013 7:34:25 AM
I find my unending unemployment unbearable, but must admit Michael is being quite magnanimous in the above post.
I wonder if the synthetic work-life earnings model (i.e. past performance is indicative of future returns) is even considered appropriate by social scientists for industries/demographics undergoing great periods of lasting change? Structural change, even...
Posted by: Unemployed_Northeastern | Jul 24, 2013 7:15:57 AM
I find Tamanaha tiresome at times, but he is always intellectually honest. The million dollar idea ignores risk (as he says) and is not terribly useful. It's like saying half of you is freezing, half is boiling, on average you're OK.
Posted by: michael livingston | Jul 24, 2013 6:57:07 AM
Simkovic has already responded to Tamanaha's post from yesterday:
I assume there will be more parts and responses to this piece....which seems to essentially say that schools in the 4th tier are a bad deal.
Posted by: Smithy | Jul 24, 2013 6:48:43 AM
As Inigo Montoya would say, "That line you keep citing. I do not think it means what you think it means."
You're reading that as saying "$90,000 is a reasonable cost of attendance to use in this study." The structure of the sentence clearly point to a different reading: "$90,000 would be a reasonable amount to pay for a $350,000 return." That does not mean that I believe $90,000 is the correct cost figure to use. See: The rest of the comment where I talk about people paying substantially more.
You have to look no further than your own university to see why using $90,000 doesn't make much sense. The majority of students are paying sticker price, and the median scholarship recipient gets only $10,000. Fewer than 25% of SCU students are paying $90,000 or less.
Posted by: Derek Tokaz | Jul 25, 2013 5:42:03 AM