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Monday, November 12, 2012

Reforming Legal Education's Finances: Cut Tuition or Class Size?

The first question for our financial reform forum is whether it is better for schools to cut tuition or cut class size.  The rapid rise of law school tuition has been well-documented. Tuition for private law schools has risen roughly 250% since 1988, while tuition for public schools has risen almost 600%.  This rise, in turn, has led to a significantly higher debt burden for students across the board.  The drastic crash in legal employment has made these debts even harder to handle.

However, there are strong incentives for law schools to cut class size.  The applicant pool has shrunk each of the last two years, making it harder to find students of the same credentials.  Law schools that can afford to cut class size can improve their relative US News rankings in a variety of ways: better incoming credentials, higher average resources per student, higher bar passage rates, and better chances of finding employment nine months after graduation.  Moreover, past alums of the school would want a cut in class size, especially recent grads who are still looking for entry-level positions.  Cuts in tuition could increase competition for jobs; cuts in class size could improve US News rankings, which may help recent grads on the job market. 

So as to the question--cut tuition or class-size--it appears that many schools have opted to cut class size.  In fact, the incentives are so strong for schools to cut class size that I think it'd be difficult for a school to cut tuition.  If you have $X to spend on either option, it seems to me that the incentives all push for cutting class size--no matter how many dollars you have.

So what do you think?  Is it better to cut tuition or class size?  And if you think we need to cut tuition, how and when is it going to happen?

Posted by Matt Bodie on November 12, 2012 at 11:50 AM in Life of Law Schools | Permalink

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I think there are a couple of reason why schools are more likely to cut class sizes, rather than tuition. The first relates to the fact that tuition is really the ceiling price (not necessarily the average price) for a student to attend. Thus, if a school cuts its tuition, it loses revenue from price insensitive students, of whom there are many. Why cut tuition when you can instead try to use scholarship money to buy price sensitive students you want, and a high base tuition to get price insensitive students? Lowering tutition, and thus just lowering the price as to all students is not wise way to reduce revenues (at least if a school is concerned about rankings that go off GPAs and LSATs averages.)

Also a class size cuts are more attractive for two closely related reasons. First, cutting students does allow schools to cut some costs as well, that is even though most costs are fixed reducing class size can carry some cost cutting benefits no associated with charging lower prices. Second, lowering the total number of students can cause an upward movement in the US news and world report rankings. Assuming a constant number of faculty, it causes student to faculty ratio to improve. It also causes their expenditures per student amount to rise, for the same reason. It also makes it cheaper for a law school to increase its GPA and LSAT averages with scholarship money (since they don't need to buy as many to get their averages to move up.

In sum I think for a school that cares about its US news rank (or maximizing its own revenue) there is no real reason to engage in tuition cuts. It would almost always be a better idea to use scholarship money to price discriminate between students. Both for revenue and for US news rankings gaming.

Posted by: Jesse | Nov 12, 2012 12:04:35 PM

I realize that your original post made many of the points I did. Sorry I did not read yours more closely. To add one thing though, while it is true recent alumni might want smaller classes, I doubt that really matters, people currently on the job market (or about to be) are not really competing with current 1Ls for jobs. Also, there is a collective action problem in any large market as far as cutting to improve job prospects goes, any one school will only have a tiny impact (even if they all cut it would have a large effect) but the school takes the full downsides of a cut you listed.

Posted by: Jesse | Nov 12, 2012 12:08:48 PM

"Law schools that can afford to cut class size can improve their relative US News rankings in a variety of ways: better incoming credentials ... higher bar passage rates"

Out of the four you mentioned, I think a tuition cut (if significant) would easily be just as effective at boosting incoming LSAT/GPA and outgoing bar passage rates as reducing class size.

If you don't believe it, just look at UCI. They offered full, then half, then one-third scholarships and as a result, ended up attracting students with LSAT/GPA credentials comparable to schools in the 20-30 range. The tuition cuts are obviously extreme, but UCI is also an unranked, unaccredited school in an overcrowded market. If an existing school in the top 50 was able to cut tuition significantly, it would attract better students just as much as trimming the bottom 25%.

Posted by: Dean | Nov 13, 2012 12:50:01 AM

No one would question that lower the price do not attract higher quality students, but it is almost certainly better to use merit scholarships to do so in a targeted way, since it allows you to continue collecting large amounts of tuition from price insensitive students.

UCI took a very aggressive approach which I think made sense for them, in that they were trying establish themselves as a top 25 school right out of the gate, so they needed to take drastic measures. Major tuition cuts of that sort would be too costly to established well ranked schools, relative to the potential upsides.

Posted by: Jesse | Nov 13, 2012 5:59:32 AM

Dean -- you are right that my differentiation reflected an oversimplification, as tuition cuts (particularly in the form of merit scholarships) can also improve credentials. I'm not sure, though, that a sticker cut would attract significantly better students -- I'm just not sure students are that price sensitive at this point. Maybe that's changing.

Posted by: Matt Bodie | Nov 13, 2012 10:36:45 AM

Is there a ethical dimension to this question? So far the comments seem to be all about maximizing outcomes for the institution. What about the students?

Posted by: brad | Nov 13, 2012 10:48:55 AM

It was defintely my intention to have an ethical dimension. But I also wanted to point out the various incentives that are at play here. Under the current system, there is little incentive to reduce tuition. But is that the wrong moral result? From a student perspective, I can see arguments both for reducing tuition and reducing enrollment.

Posted by: Matt Bodie | Nov 13, 2012 11:30:06 AM

What about the students? Generally, in a capitalist society, market participants don't consider the ethics of their pricing. I think there are ethical dimensions to disclosure, but I am not sure why ethics are relevant to the pricing of a commodity like legal education, anymore than they would be to Walmart's pricing of pop tarts.

It is all somewhat beside the point though, because law schools cannot really take ethics into account to any large extent because they have to maintain their financial viability, and if any one law school were to reduce their price out of concern for their students, they would likely suffer for it. Reduced budge means reduced faculty hiring and/or salaries, which would lead to attrition or a reduction in quality of new hires. This, and other factors, would likely lead to a reduction in the all important US news and world report ranking for such a school.

Now I suppose if you had a group of faculty members who were willing to work for below market compensation, this process could be short circuited. But, in my experience, not all that many people really care more about law students they have never met then the care about themselves, their own families, or their own favorite charity, ect. I think it would be hard to staff a law school with saints.

Posted by: Jesse | Nov 13, 2012 11:35:20 AM

Jesse -

If law schools are merely firms selling a commodity at whatever price the market will bear, then how can they justify having a tax exemption?

Posted by: brad | Nov 13, 2012 12:47:04 PM

Well, while I am not endorsing the tax exemption, making them tax exempt is just another subsidy, and by lowering their costs it lowers the cost of legal education. It also increases the returns to law schools. One could say the same thing with greater force about federally guaranteed loans. The existence of a government subsidy hardly justifies holding firms that receive them to different standards of behavior, and even if it did, incentives at both the institutional and individual level are very unlikely to produce different behavior.

Posted by: Jesse | Nov 13, 2012 1:23:20 PM

That's not how federal law sees it. The tax benefits are not in the form of an earmark to firms in a given market, but rather blanket treatment for organizations whose primary purpose is not to make money.

503(c)(3)
Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

---

If the school is run for the benefit of the faculty and administration, then it should be incorporated as a partnership. Taking the tax benefits aimed at public spirited organizations and then acting like a mercenary private corporation violates at least the spirit, if not the letter, of the law.

Leaving the law aside, how about the mission statements of the various institutions? I have yet to see one that lists maximizing revenue and maximizing US News and World Report Rank as its goals, and disclaims any interest in the welfare of its students.

Posted by: brad | Nov 13, 2012 2:27:23 PM

Between the two, I think it is much better to cut class size. I believe this even though I believe most law schools are charging far too high tuition. But ultimately, it would be hard to cut tuition meaningfully without radical changes (even something like, say, slashing all faculty salaries by 40% would not allow most law schools to lower tuition by more than, say, $7 to $10K a year - not a trivial sum, but not all that consequential considering that, with living costs and interests, most students could still easily rack up $150K in debt). Cutting class size simply helps students more by enabling the school to maintain its brand and reducing competition for jobs. Most students would rather have a somewhat better shot at a job than be slightly less in debt with no job. Again, it would be preferable if students had significantly lower debt levels overall, but that would be very difficult without fundamentally changing the nature of law school.

This is, anyway, my perspective as a professor who has talked about this issue with deans and students.

Posted by: Alice | Nov 13, 2012 5:01:24 PM

Jesse: "No one would question that lower the price do not attract higher quality students, but it is almost certainly better to use merit scholarships to do so in a targeted way, since it allows you to continue collecting large amounts of tuition from price insensitive students."

Matt Bodie: "I'm not sure, though, that a sticker cut would attract significantly better students -- I'm just not sure students are that price sensitive at this point. Maybe that's changing."

The cheapest school in the first tier is Alabama at $30,000, most of the rest are in the $40,000-55,000 range. At these prices, students are becoming very price sensitive. And without a low cost alternative, most are simply leaving altogether (applications down 25% the last two years).

Posted by: Dean | Nov 13, 2012 6:46:10 PM

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