Balkinization  

Wednesday, October 19, 2011

A Proposal for Imposing Fiscal Restraint on Law Schools

Brian Tamanaha

Law school tuition has increased at an unrestrained rate in recent years, with a handful of schools now above $50,000 per year, and more poised to follow. As long as students are willing and able to pay what law schools charge, it appears that little can stop this.

Setting aside the question of willingness to pay, in this post I will focus on ability to pay. Ninety percent of law students borrow to finance their legal education. Thus an increase in tuition is directly correlated with an increase in debt. The primary source of loans is the federal government (Stafford and Graduate Plus loans). Previously, the government guaranteed student loans made by private lenders, but now it loans the money directly to students.

When lending the money, the government makes no evaluation of whether the borrower is likely to repay the loan. A private lender would soon go out of business if it operated this way, but in the student loan context this policy is justified as providing "access to the poor." Thus a student who borrows to attend Cooley or Thomas Jefferson gets the same treatment as a student who borrows to attend Harvard Law School, notwithstanding the fact that a far greater proportion of the former will not repay the loan.

It is not obvious that this policy is actually beneficial to the people it purports to help, since many of them end up burdened with massive debt and scant economic opportunities (average law school debt is nearly $100,000). Linking eligibility for loans to likelihood of repayment would close the money spigot to schools that produce questionable results for their students. But it's hard to argue against providing access, especially since law school is increasingly the preserve of the wealthy. (Access could be retained while dealing with the most problematic schools by applying loan eligibility requirements to law schools that the DOE now applies to for-profit vocational schools.)

We must ask whether it makes sense at any level that, for example, the 2010 graduating class of Cooley had a total combined debt of $91.4 million, with the federal government on the hook for nearly all of it. That is only one school (with branches). The total debt of 2010 law graduates was $3.6 billion. And that is just one year. A substantial chunk of this money will not be paid back (I will discuss the implications of Income Based Repayment in a future post.)

One possible way to deal with the situation is to set a cap on how much a given student can borrow from the federal government. That would slow tuition increases. But to get additional revenue law schools can take in more students--as they have already been doing--which would add to the difficulty graduates have of finding jobs, and would increase the aggregate total supplied by the government.

Another possible solution is to set an across-the-board per school cap for federal loans: say $45 million per class for all law schools. That's a generous amount of public money to go into the coffers of law schools. A cap imposes the greatest restraint on large law schools (Georgetown, 678 graduating students, had $71 million total debt for the class of 2010.) Schools above or near the limit will be forced to control enrollment as well as tuition. The smaller schools will not be squeezed by the cap but they cannot charge higher tuition than schools above them in the hierarchy (students wouldn't go), so they will indirectly be restrained, although the best schools might be able to size up without lowering the quality of their class.

Along with the cap, there must be no federal guarantee of private loans to attend law school, and any such private loans must be eligible for discharge in bankruptcy (at least going forward). This would put the risk on lenders, which would not loan money to students who are unlikely to repay (at least not without charging prohibitive interest rates).

The main downside of the cap is that schools will place a premium on letting in rich folks who don't need to borrow, and the rich already have too many advantages in the current system. That aside, a hard cap would seem to be viable way to control tuition and enrollment, while still providing access.

Comments:

Why $45 million per class? Where is this number coming from?

Why anything?

Why should the government involve itself at all, especially if it looks as though this is going to turn into a massive waste of taxpayer money.
 

A,

I just picked a number. It could be set higher or lower (including 0). The questions you raise are serious and should be discussed.
 

Simply eliminating Grad PLUS and federally privileged private student loans would do a great deal to help.

Stafford loans top out at $20,500/year (@ 6.8%). Perkins top out at $8,000/year ( @5%) and is already limited by school to only a subset of students. That means that any school that wanted to charge more than $28,500 / year at the most would have to accept students who could: 1) either pay the difference through their own resources or 2) convince a private lender that they are a worth credit risk.

I imagine such lenders will be more than happy to analyze all the factors that go into repayment risk, including school quality, before parting with unsecured loan money.
 

I would like to see schools have "skin in the game," so to speak.

I think it would appropriate for a school to have to pay 5% of the loss if one of their former students default on their federal student loans. For students of multiple schools (transfers, people who go straight to law school with undergrad debt), it would be appropriate to prorate that by what percentage of the money the student borrowed occurred while that student was enrolled at that school.

This can be tweaked further, but it would provide a huge incentive for schools to do better at helping their students attain jobs, and would provide a force for making sure tuition is being well spent.
 

Brian:

The general principles of your plan are extremely sound and would be applied to all universities. Great work.
 

What will be the mechanism for making law schools pay 5% of the loss if one of their former students defaults on a loan? Does it matter why they defaulted?
 

BH:

You can just have the .gov withhold the money in the first place, and then disperse it after the loans are paid off.

The school should be able to sell this future income stream if it so chooses, though obviously at a discount partly dependent on its quality.

Another mechanism would be for the school to act as a guarantor for the 5%. That would put the onus on the servicer (usually the Dept. of Education these days) to seek redress upon default.
 

Here's a "what if" to consider:

If student loans had not expanded over the years, would tuitions have risen so much at both colleges and law schools? Did expanding student loans contribute to tuition rises? Was this a matter of supply and demand or something else?

Student loans benefit parents for obvious reasons. And of course they benefit the student who otherwise would not have been able to afford college or law school; but at what costs? Perhaps in the early years, the costs could be handled by an eventual job permitting repayment. But as tuitions rose and thus student loans, at some point there would be problems, like now.

Let's also consider the impact upon the public, the taxpayers, particularly with respect to law school, of high student loans. For the student to effectively pay back the loan (with interest, of course), a high paying job is necessary. The law firm employer of the young and fortunate lawyer surely would pass on the costs of such a high salary to clients. But this same assessment could apply to a young lawyer in a small firm or solo practice in setting fees that would cover the living expenses of the lawyer, including repayment of student loans (with interest, of course).

Should there be a federal policy that addresses this? Compare the federal tax policies that have subsidized home ownership: mortgage interest paid permits for a federal income deduction; property taxes paid permits for a federal income tax deduction. [There are, of course, other subsidies, but these are the major ones for the homeowner.] The student loan interest paid does not result in a federal tax deduction. And discharging student loans via bankruptcy can be difficult. Apparently the subsidies for student loans are most beneficial to lenders since the loans may be guaranteed by the federal government. So the student borrower can end up "under water" similar to many mortgages today.

These are random thoughts, I realize. But perhaps the underlying issues should be addressed rather than the band-aid approach suggested. As I have noted with earlier comments on this subject, my concern is with the consumer who needs appropriate and affordable legal services.
 

When my father z"l (law '47) and my grandfather z"l (law '14) went to law school it was a program for undergraduates. They entered right after high school. They were awarded an LLB. (bachelor of laws) when they graduated. They were both very fine lawyers.

If we went back to that system, we would save the students as much as $200,000 each.

When I went to law school (law '75), we had classes with upwards of 100 students in them. Those classes were taught by professors who had not published more than a handfull of articles. It certainly helped keep the costs down.

My recommendation would be going back to the undergraduate degree program. Actually, what we should really do is make law a two year program at community colleges. like useful trades such as plumbing. Then it would be affordable for everyone and it would loose the cachet that made it a target for the 1%.
 

I'm hesitant about the idea of a per school cap, since it would tend to eliminate diversity and competition in the marketplace — schools would be encouraged to all be the same size as the top schools, basically, and students would have less choice between different options. I see why per student caps wouldn't work, but what about per faculty?

I think "Fat Man" above also makes a very good suggestion (though it's unrelated to this thread). I'd just add that there is perhaps a social value to the "cache" of the legal profession, insofar as that cache translates into incentives that help enforce valuable professional norms.

Finally, maybe the way to decrease loans without hurting access is to make the cap for a school tied to a FAFSA-like evaluation of the need of its students.
 

Verbal precision is a mark of good lawyering.

cachet: 4. superior status; prestige: The job has a certain cachet.

cache 1. a hiding place, especially one in the ground, for ammunition, food, treasures, etc.
2. anything so hidden.
 

Please excuse the typo. I didn't realize that blog comment threads were in the domain of lawyering. :)
 

There's no need for a cap, and no reason to think that the federal government would be in a good position to determine the appropriate level.

All that's needed is to revert the treatment of private student loans to what it was prior to 2005, on a prospective basis. Private bank loans for law school will dry up immediately, at least for most students at most schools. Then the schools can get into the lending business, or guarantee the portfolio of loans for the classes they put together, or otherwise creatively address the problem that their management decisions have created.

The loan eligibility requirements applicable to for-profit schools should be applicable to law schools to. They are profit centers, aren't they?
 

Under the current system, are loans available only based on need, or are they available to most or all students. If the latter, why?

Do the schools themselves, like their undergraduate counterparts, provide substantial need/merit based scholarship aid?
 

Today's NYTimes (10/25/11) features Clifford Winston's op-ed "Are Law Schools and Bar Exams Necessary?" that may be somewhat of a reaction to high law school tuitions. While this article opens the barn door to potentially provide consumers with lower costs for legal services, there are serious concerns with the quality of such legal services and adequate protections to the consumer for such quality failures. The article is opportunistic on certain failures of law schools that Brian has been addressing. My concern has been and continues to be that the consumer of legal services is entitled to a proper delivery of such services at affordable prices. Winston's proposal does not adequately address this. Perhaps I am too much of an old fogey to comprehend how a virtual deregulation of the practice of law would provide a public benefit. Winston's argument is not new but perhaps law school actions over the years have given the argument new incentive.
 

Yesterday’s (10/29/11) NYTimes Business Day section features on its first page John Eligon’s “Selling Pieces of Law Firms — Outside Investors May Take Some Control From Lawyers” that might add some twists to this post. The photo accompanying the article depicts the legal services offerings of Quality Solicitors at the West London store of the retailer WHSmith.

Is the commodification of legal services the future for the profession (assuming it remains a profession)?
 

Here's something that it occurred to me that I haven't seen in this whole discussion - whether from Prof Tamanaha or Prof Campos - that I would really like to see - what do actual law school budgets look like?

In this post Prof T talks about combined debt per class of in the $90 million ballpark for Cooley and proposed $45 million/class cap.

So, assuming for a moment (and we know this isn't so) that students are funding 100% of their educations through loans, this $45 million cap would give law schools an operating budget of $135 million/year (3 classes in school at any one time).

This seems like an absurdly high number to be spending every year for a law school. My knee-jerk reaction tells me I could run a school with a much lower budget than that. But with the law school being a cash cow for the university, prof salaries, etc, what does the actual breakdown look like?

Prof T, is there any info on this sort of thing that you're able to present? I'd be curious to see it.

Thanks.
 

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