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Monday, September 24, 2012

Who Pays Our Salaries?

Like most people, I try not to think too hard or often about my life. It's a pretty good one, but reflection is a dangerous enterprise. Sometimes, though, I like to take stock. But I'm having trouble figuring out the answer to the most basic question about how I make my living: who pays my salary?

Most of the funding for most law schools today comes from student tuition. The students, though, pay very little of that tuition in "real time." It comes from the federal government in the form of loans, and has to eventually be paid back.  Now in the good old days -- call it 2006 -- it was easy to say: "OK, today's students are paying me for their education because they're taking loans out now that they'll pay back once they have decent-paying jobs as lawyers."

But at least three things have happened that make this no longer true, as has been well-documented by others:

(1) law school has gotten way more expensive; (2) the un- and underemployment rate for new law graduates is at least 40% and likely higher, and starting salaries even for the lucky ones who get real lawyer jobs is clustered between $30k and $60k and (3) the gov't capped loan payments at 15% of income (soon to be 10%) through the Income-Based Repayment (IBR) Program and will forgive the cost of the rest after 25 years (soon to be 20) for all those whose salary-to-debt ratio make it impractical to ever pay the loan back.

So most recent law graduates, for now and the foreseeable future, will be on IBR soon, if they aren't already. Their loan payments will be capped, but as a result, they won't even be keeping up with the interest accruing on the loan. These payments will provide the gov't some additional revenue in the short-term, but in 20-25 years, there's going to be a debt on Uncle Sam's books for each student for hundreds of thousands of dollars of principal and unpaid interest. When that gets "forgiven," it just means the cost gets transferred to the taxpayers, adding to the deficit.

Which means my best answer is that taxpayers in the 2030s and 2040s mostly pay the salaries of me and my fellow law professors. What do you think?

Posted by Jason Solomon on September 24, 2012 at 11:54 AM | Permalink

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I think the answer is "the students, helped along greatly by the government." But that brings up a related question: Are we sure that IBR will exist in 20 years? As the costs of IBR rise, won't there be pressure to cut it back or eliminate it? Or is the assumption that as soon as a government program is created, it stays on the books forever (for all the usual public choice reasons)?

Posted by: Orin Kerr | Sep 24, 2012 12:47:16 PM

Shortly, a member of your community will be along to inform you that law students are better off for having gone to law school, even if they earn no more in their first job after graduating than they could have with a BA (or, for that matter, a GED). Expanding young minds, building warrior-citizens for a fairer and more honest America everywhere but law school admissions offices, et cetera - it's so declasse to ask questions about "return on one's investment."

Posted by: Morse Code for J | Sep 24, 2012 1:29:46 PM

Your answer may make sense, Orin, if you're thinking about the students' loan payments over 20 years as going to the principal. If that's the case, though, then "the government" help you reference is going to be future taxpayers on the hook for hundreds of millions a year or more in accrued interest. And that's got to be included in who's paying our salaries (for education and scholarship) today.

Great point on IBR; I don't know but have also been wondering. As you may know, your dean appears to be quite bullish on IBR, encouraging students to take out loans with confidence that future taxpayers will pick up a big chunk of the tab. http://insidethelawschoolscam.blogspot.com/2012/08/so-it-has-come-to-this.html

Posted by: Jason Solomon | Sep 24, 2012 1:48:07 PM

Is a loan really a "loan" if we know (statistically) that it won't be repaid? If not, then the government is paying the salaries of professors at law schools where loan repayment is highly unlikely. (Keep in mind that law schools receive the money up front directly from the federal government.) A law school with an average debt above $120,000, where only a quarter to half of the graduating class obtain jobs as lawyers, and nearly all earn salaries of $60,000 or below, is in this situation. Without IBR (which some law schools are now pitching to ease the concerns of prospective students worried about the burden of high debt), these law schools would have a hard time filling their seats.

Posted by: Brian Tamanaha | Sep 24, 2012 2:06:57 PM

As the law stands, IBR participants will have to pay income tax on the amount of debt forgiven. So, if you were on IBR and in 20 years you have a balance of $300,000 forgiven, you will have to report this as $300k of ordinary income. So IBR is not quite the free lunch that it's made out to be.

The Obama administration has proposed to alter the rule so that debt forgiven under IBR is not income, but so far it has not been successful.

Posted by: Doug | Sep 24, 2012 2:48:59 PM

Saying that the future taxpayer is on the hook for accrued interest, reifies an interest rate that was set arbitrarily by Congress.

If the net present value of 25 years worth of 15% of income is greater than the borrowed principal then the taxpayer is coming out ahead.

Posted by: brad | Sep 24, 2012 3:18:58 PM

The good points raised by Jason & some commentators aside, taxpayers are already paying a portion of our salary through 1. the federal (and in some places, also state) income-tax deduction for gifts to the law school; 2. the exclusion of federal (and, again in some places, state) corporate income tax on university net earnings (e.g., interest on endowment); 3. the state-level exclusion for property taxes on school-owned property.

I'd be interested in other folks' views about whether these subsidies imply anything about the law school mission. My own view is that it suggests some obligation for us to provide public goods, and not exclusively to focus on the largely private goods (e.g., providing law firms with employees already trained up with task-specific expertise) that some have suggested as a new focus for law schools.

Posted by: BDG | Sep 24, 2012 4:12:17 PM

@BDG:

Which public goods, currently provided by law schools, would have to be sacrificed in order to make law graduates even marginally more able to practice law as an employee or sole practitioner?

Posted by: Morse Code for J | Sep 24, 2012 4:40:17 PM

BDG:
For better or for worse, the state and local governments have explicitly provided tax benefits for charities that are explicitly charted to provide non-public goods (think opera performances, excludable and rivalrous, not to mention pretty unpopular except among wealthy old people). I don't think the beneficiaries of such a policy need feel that they have to modify their missions in response to this explicit decision.

Posted by: brad | Sep 24, 2012 5:12:07 PM

The horror, the horror.

To find out that the food you eat is bought with the non-dischargable misery of your students must be a hard pill to swallow. Think of the British Empire waking to find that their prosperity is built on barbarism and slavery. However, your psychic pain pales when compared to the real pain of student debt induced poverty.

Posted by: terry malloy | Sep 24, 2012 5:48:37 PM

Also a feature of IBR- the accrued interest is capitalized when you leave the program. At the loan amounts we are talking about for the entering class of 2015 (150K-230K) and the likely starting salaries of 40-60K in either a law job or BA type employment, law students must keep current on the interest- at an expense of between 10,000 and 18,000 per year or risk seeing their loan balance grow. To keep current would take a huge chunk of their income. Not paying, however, effectively dooms most of them to perpetual participation in IBR, since reasonable salary increases aren't enough to make up the difference.

BDG- I think inherent in that duty is a responsibility to keep costs low for the students. Society is not well served with a lot of above average students saddled with tens of thousands in debt.

Posted by: BoredJD | Sep 24, 2012 5:53:01 PM

Thanks to all for the comments. A few quick reactions: Doug, good point on income tax, and Brad, I agree: that's the six-million dollar question -- how much are these loans really worth? I think most people, including the CBO, think they're worth a lot less than current budget estimates would indicate (see below). BDG, I think there's a good case that legal scholarship is a "public good" better funded by taxpayers than law students. Of course, the same could be said of most areas of university research in the U.S.

On Brian Tamanaha's point that it's hard to call it a "loan" if you know it's not going to be paid back, I don't disagree. And certainly you're right that the money goes directly to law schools so in a real sense, the government now is paying law prof salaries.

When you shift the focus to taxpayers, though, it gets a little trickier, I think. Because Congress mandated the use of "accrual accounting" for student loans, the loans don't show up as an expenditure by the government. Rather, the government calculates net present value by using Treasuries as the relevant discounting rate, and so our current budget shows the USG making money off current loans (because of interest payments and fees). It will only show up as an expenditure by the gov't in 20-25 years when the loans are forgiven. That's why I think "future taxpayers" is best answer to who pays. The CBO and House Republicans like Paul Ryan think that this accounting method significantly understates the real market value of the loans, and I hate to say it (as a Democrat): but I'm inclined to agree. This stuff explained at links below. http://lawschooltuitionbubble.wordpress.com/student-debt-data/
http://febp.newamerica.net/background-analysis/federal-student-loan-cost-estimates

Posted by: Jason Solomon | Sep 24, 2012 6:05:48 PM

Jason, I find your original post and comment at 6:05:48 to be quiet myopic in a couple of key ways. First, you are making conclusions about a long-term set of assets (student loans with very long durations) based on short-term data points (the current job market, employment rates, income) that are almost certain to experience a high degree of (positive) variance in the near future. Lest you have forgotten (which you appear to have), we are coming off the worst financial crisis in our lifetimes, and we know that large financial crises have historically always been correlated with (arguably have caused) anemic economic growth and large increases in total (public and/or private) debt. To essentially write off most law student loans as bad investments based entirely on the current situation really suffers from a bad case of recency bias.

Second, why should the federal government use "market rates" as the basis of scoring its loan programs, as Ryan suggests? The federal government, unlike the private sector, is not seeking to maximize returns to its shareholders. And it is typically providing loans not to displace the private sector (although of course that is disputed by some of the libertarian/right folks like Cato/Heritage) but to service market segments (and products) that the private sector doesn't. Given the unique policy priorities of the federal government vis-a-vis the private sector, and given that it's not seeking to make a 15% rate of return on its investments, I have no idea why anyone would think that forcing the federal government to score its lending programs based on what the private sector (which is actually seeking to provide a 15% return and which doesn't have any policy priorities) rather than on whether these lending programs will actually cost the taxpayer any money makes any sense. Actually, let me revise that. I know why Ryan and his colleagues want to implement this: they want to drastically reduce the role of the federal government.

Posted by: Pre-tenured Prawf | Sep 24, 2012 6:36:46 PM

Pre-tenured Prawf,

I think you make some good points, but I think it is worth thinking about the difference between who pays for law school loans that are incurred this year, or in the coming years and who pays for the loans incurred in the crash (2008-2012?). The new loans are likely to experience significant postitve changes in value, relative to current salary and job outcomes, for the reasons you outlined. The old loans, the crash loans, are not likely to experience such an increase for the simple reason that when the M and A market, and other sources of high wage legal work return those returns will go to people who are just starting their careers at that point, whereas those who graduated during the crash are likely to have left the field or become trapped in its lower echelons. Or to put in another way, the lost classes will remain lost. For a bunch of reasons, high paying firms are not interested in hiring those who graduated without employment during the bad year.

Another aspect of this of course is that this is an completely crazy way to run a system of higher education finance, in that you have the subsidies/socialized losses of a system of public finance with basically none of the cost containment that generally goes along with such a system. In some sense, student loans on this view are a heads I win, tails you lose bet, with I being the student and you being the taxpayers of the future, this seems like not a good way to run a system of higher education fiance.

Posted by: Jesse | Sep 24, 2012 7:20:41 PM

@Orin Kerr

I have only seen one estimate for the cost of IBR, from Barclays, which estimates that IBR and defaults will cost the federal government at least $225 billion (with a "B") by 2020. Which is, of course, a shocking amount of money - the total amount of outstanding student loans as recently as 2000 was only about $200 billion (it's somewhere between $1 and $1.15 trillion this year). $225 billion is enough to fund the Navy AND the Marines for one year (figures found on Wikipedia), so yes, I think it is a safe assumption that IBR will not last long enough for anyone's loans to be forgiven by it.

On a related note, I don't think Barclays's estimate includes the hoped for/proposed growth in the number of college graduates that President Obama and others are hoping comes to fruition. Unfortunately, President Obama, whose life was transformed by college education (but more accurately, his life was changed by attending Columbia and Harvard Law, which are hardly normative institutions), seems to be taking his talking points on college completion from The Lumina Foundation, whose "Big Goal" is to roughly double the percentage of Americans with college degrees from 30% today to 60% by 2025. You see, The Lumina Foundation, with a $1.5 billion endowment, is the creation of Sallie Mae and the erstwhile student loan guarantor USA Group, is run by student loan executives and ex-college presidents, and seems to exist solely to propgate an endless stream of "we need more college graduates!" studies, regardless of actual need. And yes, that's the same Sallie Mae who created the Student Loan Asset-Backed Securities (SLABS) market in the 1990's, and led the charge to make private student loans nondischargeable in bankruptcy in 2005 to make those SLABS more attractive investments for pension funds and such, eventually pushing the total valuation of the SLABS market to a remarkabe $2.67 TRILLION. The same Sallie Mae who owns most of the authorized student loan collection companies, which also profited from the nondischargeability of private student loans (which aren't eligible for IBR). The same Sallie Mae whose longtime CEO built himself a 200-acre estate just outside DC, with his own private 18-hole golf course. That Sallie Mae.

Follow the money.

Also, @ Pre-Tenured Prof,

"First, you are making conclusions about a long-term set of assets (student loans with very long durations) based on short-term data points (the current job market, employment rates, income) that are almost certain to experience a high degree of (positive) variance in the near future."

Really? So, even though I've been unemployed for X years and can't even get jobs working out-and-out manual labor, all while my loans have been accruing interest, once the economy gets better, I'll make hundreds of thousands per year and come out ahead? Give me a break. I'm all done, and 'twas the cost of law school that did me in.

Posted by: Unemployed Northeastern | Sep 24, 2012 9:26:20 PM

West of the Hudson, most higher education was traditionally supported by state government, with many universities started under the Morrill Land Grant Act, passed during the Civil War. Thus, higher education, like K-12, was viewed as a public good, supported by government. It sounds to me that IBR makes sense, sharing the cost between the graduates and the nation.

I also agree that we can't extrapolate from the present recession and assume the numbers will apply for the first third of this century.

Pete Linzer,
University of Houston Law Center

Posted by: Peter Linzer | Sep 24, 2012 10:24:42 PM

West of the Hudson, most higher education was traditionally supported by state government, with many universities started under the Morrill Land Grant Act, passed during the Civil War. Thus, higher education, like K-12, was viewed as a public good, supported by government. It sounds to me that IBR makes sense, sharing the cost between the graduates and the nation.

I also agree that we can't extrapolate from the present recession and assume the numbers will apply for the first third of this century.

Pete Linzer,
University of Houston Law Center

Posted by: Peter Linzer | Sep 24, 2012 10:24:44 PM

@Pete:

Nobody is asking you to extrapolate from the present recession and assume the numbers will apply for the first third of the century.

On the other hand, it would be wonderful if more than a few (frequently ridiculed) law professors were to ask the most basic questions about how their graduates make a living and whether law school is helpful to most of them. For all of law schools' interest in scholarship, student employment outcomes remain a lightly researched area.

Posted by: Morse Code for J | Sep 24, 2012 10:59:04 PM

And while I'm thinking about it, maybe a few more voices asking for disclosure of the most accurate employment data available with full explanation of its caveats would be good too.

Posted by: Morse Code for J | Sep 24, 2012 11:00:02 PM

You're asking excellent questions, Jason. A major problem with the educational loan system is that universities can name any price they want and admit as many students as they desire; the government imposes no oversight or caps. I'm not in favor of government oversight, but imagine if we ran Medicare that way--i.e., allowed doctors and hospitals to demand reimbursement for any rate they wanted. If the government is going to get involved, then it has to do so responsibly: It shouldn't issue blank checks.

I see major economic damage coming from the rising levels of educational debt. Lawyers are a relatively small group in the economy as a whole, but the debt problem affects all of higher education. One problem, as you mention, is that the debt may not be repaid, and taxpayers will shoulder the balance. Another is that the next generation of middle and upper-middle class wage earners (those with college and post-college degrees) will have 10%-15% less discretionary income for 20-25 years. What will that do to the economy? Adults in their prime spending years will have significantly less to spend on houses, cars, electronics--even, perish the thought, lawyers. I'm not sure policymakers have thought through the effects of that reduced spending on the economy. Seems like a massive "unstimulus" on the horizon.

Posted by: Deborah J Merritt | Sep 25, 2012 12:27:29 AM

It's common on internet for people to simply assume two things about IBR which at this point are nowhere near clear

1. IBR can be cancelled by the congress for people currently on it anytime it wants

is this really true? I am not an expert in this area but if a borrower signs a loan document containing certain repayment terms can it really change those terms after the loan is made? suppose it decided buget was really tight and it modified the loan terms to make all the debt due tomorrow? how is this any different from changing the interest rate or principal after the loan is made? it seems fundamentally different from, say, changing social security-something where the only governing law is the federal law, and no contractual relationship exists between the person and the government. as far as i know the few supreme court precedents on when retroactive law cancelling and is not unconstitutional as a taking are hardly clear on this.


2. debt forgiven under IBR will be taxable, and taxable as ordinary income all in the one year it is forgiven.

its waaaaaaaaaaay more complicated than that because:

a) again per 1 above we don't know what the law will look like down the road.
b) even according to current law when people are in public interest work and get the quicker loan forgiveness under IBR DO NOT have their debt forgiveness included at all the IRS explains this a http://www.irs.gov/publications/p4681/ch01.html#en_US_2011_publink1000244078
c) also under current law, people who are insolvent (defined as a negative net worth-or most people coming out of law school) when their debt is forgiven do not have the amount of debt forgiveness greater than the amount of insolvency (the difference between assets and liabilities) included in income for ANY kind of loan forgiveness-even non educational loan forgiveness like a mortgage modification the IRS explains this at http://www.irs.gov/publications/p4681/ch01.html#en_US_2011_publink1000244078
d) HOWEVER there is also state income tax-and some states might have additions to income for certain income excluded under the federal rules.

Posted by: questions | Sep 25, 2012 1:55:44 AM

@questions,

Re: #1 and "but if a borrower signs a loan document containing certain repayment terms can it really change those terms after the loan is made?"

I know plenty of people in law school in 2005 when Congress unilaterally and retroactively made their private student loans (we are in the pre-GradPLUS days) nondischargeable in bankruptcy - so as to bolster Sallie Mae's Student Loan Asset-Backed Securities market.

Posted by: Unemployed Northeastern | Sep 25, 2012 2:39:58 AM

@ unemployed northeastern

the bankrupcy code is more like changing social security retroactively-it doesn't change a contract between the party and the government-it changes a law the government had before that helped the debter-that now helps the debter a lot less because now he can only get "undue hardship" discharge.

changing the bankrupcy code does not alter the terms of a contract between the government and a party unilaterally-it just changes the benefit prior conferred on the debter by the bankruptcy code.

of course, the supreme court has said that an existing contract between private parties does not prevent congress from making supervening law altering the contract because congress isn't taking anything for its own benefit, Connolly v. Pension Benefit Guaranty Corporation, 475 U.S. 211, 224 (1986) I don't know about a contract between the debter and the government itself (i.e. direct loans)

Posted by: questions | Sep 25, 2012 3:26:07 AM

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Posted by: Ramesh | Sep 25, 2012 3:31:23 AM

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Posted by: Ramesh | Sep 25, 2012 7:41:41 AM

Taxpayers aren't "paying" for law school--all they are doing is providing credit and earning a handsome return on their investment.

The interest rate on student loans for graduate students is now 6.8 percent for stafford loans and 7.9 percent for grad plus loans. 10 year treasuries are now yielding 1.7 percent; 20 years are 2.5 percent.

The government is charging a credit spread of between 6.2 percent and 4.3 percent above the risk free rate. Plus origination fees. Even though the recovery rate on student loan defaults is above 80 percent. In the old days, we used to call this usury.

To put this into context, the 3 year default rate on student loans would need to be higher than 50 percent for the government to start losing money.

And that is ignoring all of the money the government is making on additional income and payroll taxes paid by high earners with law degrees.

Taxpayers aren't paying law professors' salaries.

Rather, law schools and law graduates are paying for social security, medicare, and the military and helping to keep taxes lower for everyone else.

The question we should be asking is why the government is overcharging our students so much on their loans and taxing them so much on their investment in "human capital."

Posted by: Anon | Sep 25, 2012 8:56:14 AM

Student loans were made non-dischargeable not all that long ago in response to well-publicized cases of abuse, e.g., doctors and lawyers and other highly paid professionals declaring bankruptcy at the beginning of well-paid careers, when they had huge debts and no assets but lots of earnings potential. The problem is that non-dischargeability traded one form of moral hazard for another. Currently, student loans are granted (by the government and private lenders) without regard for ability to service the loan over any kind of reasonable period of time. Why not? the borrower has a whole lifetime to pay it off.

It's time to re-think non-dischargeability, but in a way that does not reintroduce the old problems. Maybe we should think about allowing discharge after 10 years of diligent efforts to service the loan, and at the same time, make the educational institution contingently liable for some portion of the discharged debt. Such system might ensure that everyone has the right incentives: student loans should only be made if there is a reasonable expectation that they can be paid off within a reasonable period of time (I would say 10 years). The schools would have an incentive to make sure that students didn't borrow too much. Students would know that they couldn't just walk away from the loans, as in the old days. I don't know if this is the right answer, but I do know that handing $200,000-loans to students who have no reasonable prospects of paying them off in any reasonable period of time and no ability to discharge the debt, just to avoid pain for the schools and professors, is unconscionable.

Posted by: Douglas Levene | Sep 25, 2012 9:17:16 AM

"Student loans were made non-dischargeable not all that long ago in response to well-publicized cases of abuse, e.g., doctors and lawyers and other highly paid professionals declaring bankruptcy at the beginning of well-paid careers, when they had huge debts and no assets but lots of earnings potential. "

And bankruptcy was granted? (other than in the odd, well - oddball case?)

Posted by: Barry | Sep 25, 2012 9:38:30 AM

If we want government out of the law student loan business, one idea is human capital contracts. In other words, students pay no (or at least MUCH lower) tuition for law school. In exchange, law schools get a percentage of the student's future earnings for a certain number of years. From the student's POV, this is essentially IBR, without the negative impacts on her credit score or the risk of cancellation of indebtedness income at the end of the rainbow.

From society's POV, law schools bear the downside risks instead of taxpayers. Students who go on to biglaw would pay more (probably) under this scheme than the current loan scheme. However, since there would be much less pressure to flock to biglaw under the human capital k regime, biglaw firms would have to make life more humane for associates, so they're not necessarily losing overall. And don't discount the positive pyschological effects of not having to get a biglaw job to pay off one's loans.

Posted by: Doug | Sep 25, 2012 9:46:42 AM

@Jesse:
I don't think you're thinking about this quite the right way. From an actuarial perspective, a large, long-duration loan program like federal student loans doesn't necessarily look ex ante at any particular bucket of loans, but rather at the big picture. Maybe the Southeast regional area is a particularly bad economy in the next 10 years, and so those loans are relatively devalued, but the point is that you can't predict ex ante these types of variations. So you have to look at the big picture. Is the overall portfolio of positive or negative value? Unintentional cross-subsidizations within a given portfolio (which is what you're essentially describing) happen all the time, because we can't predict the future. Another way to think about it. Bank A has been around for 40 years, took a bath on home loans originated from 2004-2007, but is still solvent and now is profitable. Would we say that home lending or Bank A is necessarily a bad business model?

@Unemployed Northeasterner
Sorry to hear about your circumstances. I hope things improve soon. That being said, I think you're missing my point, which wasn't that all student loans would perform. Rather, I was pointing out that the overall loan portfolio was likely to see a significant increase in value in the near future as economic circumstances improved and the prospect of loan defaults decreased. That would apply to you and your peers, as well as everyone who took out a federally guaranteed student loan before and after you did. Whether or not that's enough to ensure a positive carrying value for taxpayers is an open question, but it's pretty clearly flawed to rely on today's dismal economic numbers as your primary basis for arguing doom and gloom for a long-term program (which was the author's argument).

Posted by: Pre-Tenured Prawf | Sep 25, 2012 9:48:25 AM

@P-TP:

"(T)oday's dismal economic numbers" are also the most detailed that NALP has ever collected.

Until very recently, the ABA allowed law schools to report 25% of those whose employment was unknown as employed for purposes of their employment rate. It might have made sense at one point, but it surely doesn't now.

Until very recently, NALP didn't track part-time employment for JDs, or make any special effort to note that relatively few salaries actually approached the median reported salaries for law graduates generally. Certainly most law schools did not make a point of telling prospective students that their median salaries were based on the reports of a statistically unrepresentative portion of the class.

The bad days will not continue forever, but it may be that the good days weren't nearly as good as law schools would prefer to believe. Before the Internet, a law graduate who never had the chance to make the fullest use of his degree as an attorney just vanished - NALP wasn't looking for him, and the BLS wasn't curious about whether there were more JDs than attorneys. We're just starting to understand how big the mass grave of aborted legal careers from the Golden Age of American legal education is, and notwithstanding the old saw about the universal value of a JD, the people who aren't working as attorneys are almost always going to be the ones whose loans the taxpayers will just have to eat.

Posted by: Morse Code for J | Sep 25, 2012 10:38:48 AM

I think there are a number of issues here that show a certain amount of wishful thinking, for example in the original posting:

"in the good old days -- call it 2006 -- it was easy to say: "OK, today's students are paying me for their education because they're taking loans out now that they'll pay back once they have decent-paying jobs as lawyers."

I think suggesting 2006 was the "good old days" especially for William & Mary (as opposed to say Harvard, Yale and Stanford) is simply not correct. There was already a substantial over-production of lawyers in 2006 and median lawyer incomes were even then under $100,000 - i.e., too low to justify tuition and lower than many applicants to law school would have been able to earn given the credentials that allowed them to go to a school in the 1st tier like W&M

But this wishful thing pales in perspective to that of "Pre-Tenure Prawf" (a handle redolent of wishful thinking itself because as thinsg are going there will be many "formerly tenured prawfs" but few "newly tenured prawfs") when he says:

"you are making conclusions about a long-term set of assets (student loans with very long durations) based on short-term data points (the current job market, employment rates, income) that are almost certain to experience a high degree of (positive) variance in the near future."

Frankly this statement is ludicrous. There may well be a downturn in legal hiring due to the recession, but is is the difference between jobs for 18-20,000 new lawyers and 22-24,000. Even if the recession ends there is no reason to believe that there will be jobs for the nearly 50,000 law graduates being churned out every year.

Running through pre-tuenured statements though they show a "doubling down" on this bad judgment, for example when he suggests that one should not "look ex ante at any particular bucket of loans, but rather at the big picture" and then goes on to suggest that the problem may be regional and cyclical "maybe the Southeast regional area is a particularly bad economy in the next 10 years." However, the issue is national - there is not a state in the Union without too many law graduates for the available jobs and there is no state, not even New York, where the majority of graduates are earning $160,000 - or even at this point even $100,000.

The statement from anon that "[t]axpayers aren't "paying" for law school--all they are doing is providing credit and earning a handsome return on their investment" is genuinely a "howler." The whole issue with IBR is that taxpayers will be paying the interest.

Now I am going to be very harsh and say that even if the market for law professors was strong - I think law schools should veer away from hiring "pollyannas" and in the current environment "nattering nabobs of positivity." In particular they should ask the hard questions of someone line pre-tenured - why are you right and the labor economists at the Bureau of Labor Statistics wrong? Where is the demand going to come from to absorb 50,000 law graduates a year in the US economy? How is a cost of attendance at law school exceeding $200,000 going to be justified?

Posted by: MacK | Sep 25, 2012 10:55:22 AM

@Douglas Levine:

The argument used for non-dischargeability of federal student loans was "cases of abuse, e.g., doctors and lawyers and other highly paid professionals declaring bankruptcy at the beginning of well-paid careers, when they had huge debts and no assets but lots of earnings potential" but somewhat like voting fraud everyone seemed to have heard of such cases, but the reality was that they were few.

The origin of non-dischargeability of private loans is more mysterious - the item slipped into a bill, but no one actually knows who authored the provision and put the language in - it appeared in conference a sort of immaculate conception.

Posted by: MacK | Sep 25, 2012 11:03:03 AM

I agree in part with Pre-Tenured Prawf that "a long-duration loan program like federal student loans doesn't necessarily look ex ante at any particular bucket of loans, but rather at the big picture." Certainly, if the issue were private investment, investment decisions would be driven by the overall performance of loans. But from a budget policy point of view, the federal government has the ability to limit lending in ways that target the loans least likely to be repaid (and therefore cost the taxpayers money). Looking for example at Phoenix School of Law--it had 969 students last year, and its median graduate borrowed nearly $190,000 (not including interest that accrues in law school); see http://insidethelawschoolscam.blogspot.com/2012/07/by-time-i-get-to-phoenix.html. Every year, Phoenix students alone add about $184 million to the federal loan total. Even if the economy improves greatly, I wouldn't expect this money to get paid back (and the nondischargeability doesn't make the loans risk-free--there is always a risk that student loan debtors simply will not earn enough to repay the loans). It may be that student loans at other schools perform well enough to offset the taxpayer loss at Phoenix, but the government does not *have* to invest indiscriminately--it can limit loan availability at schools where loans are unlikely to be repaid, and I would argue that it should do so. Phoenix is, after all, a for-profit law school--why should the federal government be in the business of ensuring a profit to shareholders? If I were in Congress, I would be recommending (1) no more loans at all to for-profit schools; and (2) at non-profits, a student may not borrow more in total than can be repaid (without financial hardship, as measured by current guidelines) by a graduate earning the median salary for the school.

Posted by: CBR | Sep 25, 2012 11:57:25 AM

@ MacK

I think you should re-read what I wrote, and then re-read what you wrote. I'm not actually arguing anything about the state of law schools or legal education or the job market for lawyers. I'm making a broader but less contentious claim that relying primarily on recent data to justify claims of the insolvency of the student loan program is flawed. Also, note that I am not talking about law school grads. I am talking about everyone with a student loan.

Thus, is it, as you claim, "ludicrous" to state that the current job market, employment rates and income will experience a high degree of variance in the near future? Well then every economist in the country is ludicrous.

And frankly, your argument is really weak. You use argument by anecdote in a situation where we're talking about really really large populations. You don't have any data to back up your claims. That's fine if we're talking about race relations among 18th century West Virginian farmers, but kinda weak when we're talking about whether or not the IBR will be insolvent in 20 years.

Posted by: Pre-tenured Prawf | Sep 25, 2012 12:07:35 PM

@ Doug

Human capital contracts are outrageously expensive. They are also very complicated and not well understood by the people who use them to borrow.

Human capital contracts are generally equivalent to a loan at around 18 percent interest, with some IBR component, generally less generous than government IBR.

Getting rid of student loans and replacing them with Human Capital Contracts will make higher education much more expensive and much less widely available. And it will destroy a student loan program that now turns a tidy profit for taxpayers.

The only winners will be predatory lenders. Taxpayers, students, and schools will all lose.

Posted by: Anon | Sep 25, 2012 12:10:55 PM

Well Anon, I did mention the possibility of a hybrid system where students pay some tuition along with the human capital k (HCC). This tuition could be used to make the HCC less onerous. Also, I would have the lenders be the law schools themselves--maybe some would consider law schools to be predatory, but your phrasing implies private non-law school lenders.

Moreover, thinking about an HCC as an 18% loan is the wrong way to look at it. The relevant comparison is a $150k-$200k loan with 6.8% - 8.5% interest vs. an HCC that takes, say, 10% of your salary for 20 years. Ex ante most law students today would be better off with the HCC, not just in terms of money, but mental well-being.

Not saying my single blog comment provided the solution, but your response isn't the coup de grâce either.

Posted by: Doug | Sep 25, 2012 1:07:08 PM

pre-tenured prawf:

There is ludicrous and there is not. Anyone suggesting that the end of the 1910-11 recession was going to lead to a resurgence of demand for say buggy-whip makers would be laughed at - the laughter would be extreme by 1929-32. Throughout the decade 2000-2010 there was a massive over-production of lawyers without an ongoing recession - the BLS projection through 2020 was created by projecting the trend line for the previous decade forward (and as someone who qualified in the early 90s I can assure you that there were too many law graduates then.) It is by the way the BLS projection of the trend line forward that attracts the criticism that it is too optimistic. The idea that some fairy godmother of a good economy is going to appear and double demand for new law graduates - or increase average lawyer pay to somewhere around twice what it currently is (where it would have to be to support the CoA of most law schools) is wishful thinking so extreme that it would be malpractice in a lawyer or an economist (but not in a prancing ninny ranting "think like a lawyer.")

Moreover, that you say that the issue is whether IBR will be insolvent again shows a shallow understanding ... IBR is backed by the US government - so unless you say that the US government will go insolvent obviously IBR will not - and that was not the issue in this thread. The real issue is whether the taxpayer will find some or all IBR unduly expensive and unsupportable - and react by introducing some sort of common sense underwriting standards - limiting IBR when the schools are in effect "milking" the system. The likelihood would seem high to every person looking at IBR that the Federal Government will fall for the idea that this is about "everyone with a student loan" if defaults and IBR expense is in fact primarily falling on a single sector or a limited set of sectors is low, especially if other sectors like say nursing, engineering, or science do not exhibit such issues.

Instead it is highly likely that the Federal Government will introduce restrictions on the what borrowing will benefit from IBR. Law school is the "poster child" for a course of study that would suffer acutely if even the most thin of underwriting standards were to apply. Law schools are milking the system and are transparently planning to milk IPR until it gets a bad case of mastitis. One would hope you would be aware that the Federal Government and the Obama administration have already been "cracking down" on for profit trade schools (many of whose practices are prevalent in law schools.)

And to be seriously snarky - as someone practicing law for over 20 years, I find it very depressing that aspiring tenured law professors can actually present what an old professor of mine used to call "piffle and nonsense."

Posted by: MacK | Sep 25, 2012 7:15:37 PM

MacK, you don't seem to realize that Pre-Tenured Prawf just wiped the floor with you. Go back to "practicing law."

Posted by: Brian | Sep 26, 2012 12:08:12 PM

Brian,

It depends on your frame of reference. If you have delusions about what is happening in law-school, or you want to pretend that this blog is not about legal education you might be right - but if you are not kidding yourself (or a prancing ninny saying "think like [what I am not] a lawyer") pre-tenured-prawf is demonstrating the core of what is wrong with US law schools - and a severe case of denial.

I am voting for denial....

Posted by: MacK | Sep 26, 2012 5:38:07 PM

Some of the people paying law professor salaries are foreign LLM students. See memotogeorgetownlawfaculty (at) gmail (dot) com.

Posted by: Darcy Hepworth | Oct 1, 2012 1:31:33 AM

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