Sunday, October 25, 2015

Bootleggers and Baptists in the Student Loan Debate

Frank Pasquale

The New York Times editorial board has intervened in the student loan debate, focusing on law schools. There are many problems with the piece, but three are fundamental. First, it inexplicably focuses on limiting federal loans to law schools, when the private loans likely to replace them feature harsher terms. Second, it conflates for-profit and non-profit law schools, saying the latter "increasingly" act like the former, while ignoring clear differences in governance and mission. Third, it provides surprisingly little data to back up its assumptions about defaults--assumptions that one of the Times's own contributors questioned last month. 

1) From Federal to Private Lending: Out of the Frying Pan, Into the Fire

Private lenders are sure to be pleased by the editorial.  Law school loans are lucrative for them because of "extremely low student loan default rates for law school borrowers." They and their foundation allies have been lobbying for years to bring us closer to the Bush era of privatized loan profits. The stage is now set for a bootlegger/baptist coalition: as prohibitionists cut off the flow of federal loans, private lenders line up to take their place. 

Given the unnecessarily high rates now prevailing for federal loans, that might not seem to be a problem. But things can always be worse.  Just look at this chart contrasting private and federal loan terms. Moreover, as Brooks & Glater observe
Private student loans are usually much more costly for students; a government report from 2012 found interest rates in excess of 16%, and nothing has improved since then. By contrast, the rate on the most widely used federal student loan currently is 4.29%.
The NYT worries that "millions of poor and lower-income Americans remain desperate for quality legal representation." So, too, did the architects of the Public Service Loan Forgiveness (PSLF) program--a federal loan program to forgive the debt of those working in the public interest ten years after graduation. The financialization of education in all its forms is problematic. But by focusing its attack on federal loans, the NYT is accelerating trends in education finance that reduce incentives for young attorneys to serve the disadvantaged.

2) Painting all Schools with the For-Profit Brush

As John Quiggin recently observed, "There is now overwhelming evidence that for-profit education has been a disastrous failure wherever it has been tried, and particularly where for-profit firms can gain access to public funds through policies designed to enhance ‘consumer choice.'"  The American legal academy has been fortunate not to see the mass infiltration of for-profit providers. But that doesn't stop the Times from using the private equity-owned Florida Coastal as its poster child for law school excess (both in this piece and an op-ed earlier this year). 

The differences in outlook between nonprofit/state educational institutions, and for-profit vendors of instructional services, are profound. Universities have at least three educational functions: to prepare students for democratic citizenship and leadership, to train them for jobs, and to prepare them to compete for relative advantage in a hierarchical society (while also acting to mitigate unfair aspects of that hierarchy).  They also have multiple scholarly and community service missions. Many law schools' clinics do tens of thousands of hours per year of pro bono work for the most disadvantaged.  

By contrast, a profit-driven governance structure almost guarantees that research and service will be increasingly legacy missions at a law school. If you want a glimpse of the future of for-profit legal education, check out the record of unaccredited schools in California, or online schools generally. At one for profit, online California law school, only one in five students graduates. I have not been able to find a record of its contributions to community legal needs, or its research.

Of course, policymakers should be attentive to the emerging phenomenon of the "shadow for-profit." But they should also remember the $574 million collected by a single University of Phoenix VP, and other massive compensation packages and investor returns. The for-profit sector's issues are far more troubling than those prevailing at most nonprofit or state institutions. To paint them all with the same brush is misleading.

3) Diverging Characterizations of the Debt Crisis

Student debt is far too high. And emerging empirical research is giving us a clearer picture of the problem--which is sometimes counterintuitive. From the NYT's own contributor, Susan Dynarski

It’s natural for people listening to the politicians to connect the two facts with a causal arrow: More debt leads to more default. But the reality is surprising: Borrowers who owe the most are least likely to default. The reason for this strange pattern? The biggest borrowers tend to become the highest earners.

In particular, borrowing is highest for those who go to graduate school. Forty percent of new loans go to graduate students. Among those earning law and medical degrees in 2012, median debt (undergraduate and graduate school) is $141,000 for lawyers and $162,000 for doctors. Those holding graduate degrees tend to handle higher debt because they earn more.

I don't endorse those debt levels--I'd much rather see an education finance system where greater public support and price controls on tuition lead to far lower debt for graduates. Bankruptcy reforms are also imperative. But if such changes are politically impossible at present, let's at least be honest about the dynamics the NYT's preferred policy position will set in motion.

First, if Congress does further limit federal loans to law students, then the gains the government would have made from most of those loans will, instead, go to private lenders (who are already offering many law students lower interest rates than the government offers). There will be less money in the system as a whole to support income-based repayment options and other features of federal loans more protective of borrowers. That will lead to even more business going to private lenders, and more free cash for them to use in lobbying the government to make federal programs even worse--in order to, once again, drive more students to private lenders.

Critics of federal loans may argue that any additional financing options will increase tuition. But, as Mike Simkovic has stated, they "have not shown that the introduction of income-based repayment with debt forgiveness, or changes to the terms of these programs, has actually affected the rate of tuition increase net scholarships and grants." Moreover, there is probably more chance of price controls via conditions imposed on federal funding, than there is in the "private market." Consider health care finance, where Medicare drives a tougher bargain with hospitals and doctors than private insurers do.

The federal government has already outsourced far too much of its administration of loan programs. Accelerating privatization is not going to reduce the cost of legal education--and could do much to degrade its quality. It's unfortunate that the NYT can't see these dynamics. But the paper's biased view of higher education in general is inflecting its take on law schools. We can only hope that policymakers take a more holistic approach.

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