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Paul L. Caron
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Wednesday, November 23, 2022

Bill Henderson: The Dollars And Math Behind Yale Law School's Withdrawal From U.S. News — 'Are Limits on Federal Student Loans The Best Way To End The Rankings Madness?'

Bill Henderson (Indiana), The Dollars and Math Behind Yale Law’s Withdrawn From USN Rankings:

Yale USNYale Law School’s $1.2 billion share of the Yale University endowment provides approximately $63 million in operating funds, which translates into $106,000 per student. ... To be clear, these are the funds available before Yale Law collects its first dollar of tuition. Nonetheless, as the top-ranked law school in the US News rankings for more than 30 years, Yale has a superabundance of highly credentialed students who would be willing to pay or borrow the current cost of attendance. For the 2021-22 admission cycle, Yale admitted only 5.6% of applicants; of those admitted, 81% enrolled, making Yale the most selective and elite law school in the nation.

Among elite law schools, Yale clearly has the strongest balance sheet. Its closest competitors are Stanford Law ($76,000 in endowment funding per student) and Harvard ($56,000), which typically rank #2 or #3 in any given year. Among the rest of the T-14, endowment funding generates approximately $20,000 per student, with a high of $33,000 and a low of $4,000, albeit these figures, similar to Yale, may go up due to improved endowment performances, as pandemic-related fiscal and monetary policies tended to make the rich richer.

The big news, of course, is that Yale recently announced its withdrawal from the US News rankings, at least as an active participant. This decision, and its likely second-order effects for other law schools, are nearly impossible to accurately grasp without also understanding (1) the technical intricacies of how the US News rankings work, as this creates the underlying incentive structure; and (2) the significant risk that Yale was running by continuing to play the US News game, making it a poor data point for generalizing to other law schools. ...

1. The intricacies of how the US News rankings work ...
Whereas Yale, Harvard, Stanford, Chicago, Columbia, and other T-14 schools cluster together on large and important inputs like LSAT (a range of 1.43 to 1.60 in std deviation units), Academic Reputation (1.98 to 2.57), and Employed at 10 Months (0.83 to 1.57), the same is not true for Instruction, Library, and Supporting Services, which ranges from 1.5 to 4.3 in standard deviation units. When multiplied by the 9.0% USN weight, this gives Yale a (nearly) insurmountable edge for the overall #1 spot, as the next closest school is nearly a full standard deviation away.

Yet, it’s important to pull back and understand the role that the rankings play in the market for entry-level legal talent. Many years ago, Russell Korobkin, now interim Dean of UCLA Law, posited that the US News rankings are primarily a coordinating mechanism for highly credentialed students to signal their ability to elite employers, akin to selecting the Eiffel Tower as an obvious and efficient meeting place for two strangers to connect in Paris. See Russell Korobkin, “Harnessing the Positive Power of Rankings: A Response to Posner and Sunstein,” 81 Ind L J 35, 42-43 (2006).  Korobkin’s theory is strongly corroborated by what we see year after year in the entry-level hiring market. See, e.g., Post 114 (Evan Parker noting that “53% of first-year associates in the NLJ 100 come from the T-14,” which he observes is much too restrictive to make significant progress on diversity).

This coordinating function between highly credentialed students and BigLaw creates a massive lock-in effect for elite law schools. Specifically, a near guarantee of a large firm job upon graduation gives T-14 school enormous pricing power, which is only partially exhausted by charging higher effective tuition (i.e., tuition dollars net of overall financial aid) while also maximizing LSAT and UGPA inputs.  We see this greater pricing power in the high average debt loads for T-14 graduates, which range from $132,000 to $184,000 versus an average of $107,000 for the rest of the law school hierarchy.

Yet, here’s the conundrum: a law school trying to increase or preserve its overall rank has a very powerful incentive to take in more tuition dollars and spend it on academic programming (i.e., Instruction, Library, and Support Services). This is because the current year’s rank is always “reflexing” forward to influence marketplace perceptions and thus impacting the following year’s Placement, Student Selectivity, and Placement metrics. See Wendy Nelson Espeland & Michael Sauder, “Rankings and Reactivity: How Public Measures Recreate Social Worlds,” 113 Am J Sociology 1 (July 2007). ...

In sum, unilateral disarmament is a dangerous strategy for any law school concerned about maintaining calm and good relations with stakeholders, as students, alumni, and central university administrations all care about a school’s rank. This is why we’re locked into a terrible system that increases racial, socio-economic, and generational inequity. ...

2. Yale Law’s unique decision set
In the 2023 US News rankings, the average per-student cost for Instruction, Library, and Support Services at a ranked ABA-Accredited law school was $45,400.  Yale’s expenditures, in contrast, were more than $150,000 per student.  As noted at the beginning of this post, Yale’s endowment provides approximately $106,000 in operating funds.

In short, unlike other law schools, Yale Law is in a position where it can operate comfortably with significantly less tuition, including essentially zero for a significant percentage of its student body.  The only hitch is that going all-in on this approach would likely cost Yale Law its #1 rank in US News. Faced with this decision set, Yale concluded that the best path forward was to pull out of the US News rankings altogether.

This path has several advantages. Foremost, it’s unlikely to hurt the Yale Law brand, as three decades on top of US News give the school a multi-year pass to do whatever it wants with essentially zero negative impact on student and employer perceptions. Second, once unshackled from the need to enroll students with better credentials than Harvard and Stanford, Yale has enormous latitude to engage in holistic admissions for a much broader range of candidates. ...

In the mid-2000s, when I assembled my first US News ranking model, Yale’s direct expenses translated to a 5.9 standardized score, which was nearly two units higher than its next closest peer. Today, that financial advantage has become much more compressed, probably due to more aggressive law school fundraising (law school deans know that YLS’s advantage is money) and schools expanding the scope of what counts as an instructional expense. Thus, by staying in the USN game, Dean Gerken had to accept legitimate growing criticism for perpetuating a terrible system while also running the risk of being the infamous dean on the day Yale tumbled to #2. Yale went out on top with money in the bank. It’s not quite so easy for the rest of us.

How does this end?
I don’t know except to say that Yale has more non-tuition revenue than its two biggest competitors, Harvard and Stanford, and somewhere between a lot more and vastly more resources than everyone else. And that confers independence.

It’s plausible that the T-14 could form a new league, or bracket, of elite law schools. Yet, these schools are very far from being equally rich. What Yale can do through its endowment resources, other elite schools can only afford by charging tuition. Further, both students and employers are going to want, and search for, an “Eiffel Tower” to coordinate their movements and order their preferences—vanity and status-seeking are endemic to the human condition. A school that last ranked at #8 or #12 is not going to be satisfied with a status that is frozen in time. Only a school that last ranked #1 is going to be fully content with the new order. Thus, any T-14 bracket would be inherently unstable. But much more problematic is the fact that any explicit coordination to wall off the market and create sharing rules is going to raise federal antitrust issues, something that antitrust scholars are already mulling over. See Daniel A. Crane, “Antitrust Concerns on Firing U.S. News & World Report,” Yale Journal on Regulation, Nov 16, 2022.

Regardless of how many law schools drop out, we should expect US News to carry on as before, imputing values to the schools, as they have done for years with employment rates and other closely guarded metrics. Yet, what happens three or four years from now for prospective students considering law school—are they going to care about who used to be ranked highly in US News and, if they get that far, the principled reasons for why these schools dropped out? Conversely, if Yale is offering an elite, differentiated, and discounted model that flows from its superior financial resources, that just might cut through the noise, enabling them to chart a different path—for themselves, not the rest of us.

I don’t like writing this next sentence, but I believe it is true: law faculty probably underestimate the financial stability and predictability that flows from a labor market organized around the US News rankings. Because we don’t have to personally balance our law school’s budget, we focus disproportionately on the costs of the US News rankings without acknowledging how our school benefits. It is wishful thinking that a flawed US News methodology is the root cause of our problems. Yale and a handful of peers may be able to opt out, but the challenges remain for the rest of us.

Government intervention (laws, regulations) is the conventional solution to a collective action problem. Perhaps limits on the disbursement of federal student loans are the best way to end the rankings madness. This type of belt-tightening may be inevitable and, in the long run, the best outcome, as the benefits would fall onto the next generation. With the other wicked problems they’re inheriting, they deserve a break.

U.S. News coverage:

Boycott

U.S. News Response to Boycott

https://taxprof.typepad.com/taxprof_blog/2022/11/bill-henderson-the-dollars-and-math-behind-yales-withdrawal-from-the-us-news-law-school-rankings.html

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