A Looming Asteroid for Law Schools

My last post focused on proposed aggregate debt caps for federal loans. But as a recent article from Inside Higher Ed points out, a more immediate problem for educational institutions and their students may be the Prosper Act's proposed annual lending limits. The bill would limit federal loans for non-medical graduate and professional students to $28,500 per academic year.

Again, debt caps are not unprecedented--federal loans were capped until the GradPlus program was created in 2006. But so much has changed since 2006 that re-instituting federal lending caps would create chaos in law school finance.

The GradPlus program does one thing really well--it makes graduate school accessible to students regardless of their family wealth. The federal government offers loans up to the full cost of attendance (defined to include both tuition and reasonably living expenses) for graduate and professional programs. Parents do not have to co-sign the loans. Combined with income-driven repayment plans that cap repayments at 10% to 15% percent of a graduate's income, it makes attending graduate school a low-risk proposition. But the GradPlus program also helped create conditions that allowed for institutional exploitation. David Frakt, for example, has done a lot of work analyzing how some law schools have admitted students with a very low chance of ever being able to pass the bar exam. Those students often leave their educational programs saddled with some of the highest average debt rates and limited employment opportunities. 

But one of the less obvious impacts of the GradPlus program is that it frees graduate and professional schools from having to worrying about how their students will pay for school. In the decade between 2006 and 2016 average private-law-school tuition rose from  $30,520 per year up to $45,099 per year. Average public-law-school in-state tuition rose from $14,245 to $26,053. Living expenses add on at least another $20,000 or so per year for students. Even if the availability of federal lending didn't increase prices (though it may have, at least to a small degree), it did make it easier for law schools to rely on tuition increases to compensate for factors such as reduced support from state governments.

The Prosper Act would change all of that immediately, for the 2018-19 school year. If it passes (which it has a decent chance of doing--it is the House's version of the Higher Education Act reauthorization bill) there would be an immediate crisis in funding law school--after all, the federal loans would barely cover the cost of living (and at schools in high-cost areas, wouldn't even be enough to cover the cost of living). There would be little to nothing left over to cover tuition. Certainly, some students could rely on family contributions, and some may be able to lessen living expenses by living at home while attending law schools. But not all families are in a position to help, and the legal profession would suffer greatly if only the very privileged could join. Private loans may step in to fill some of the gap--though again, I suspect that the availability of such loans would be significantly more restricted than the current open-door policy of GradPlus. And in any case, private loans have decreased so much (declining by more than half) in the years after the introduction of GradPlus that I doubt private lenders could ramp up fast enough to avoid massive disruption in the short term. Finally, any such private loans would probably have more onerous terms--it is unlikely that they would qualify for income-driven repayment, and they would likely require a cosigner.

In short, if the Prosper Act passes in its current form,  students will face immediate difficulties in financing their graduate education--and the scale of the problem will create a financial crisis for schools as well.