March 27, 2018
Dangerous new bill could hurt taxpayers and make financing education more expensive (Michael Simkovic)
Higher Education could soon become substantially more expensive to finance. The federal government may reduce how much it lends to its most profitable borrowers—graduate and professional students—undermining the financial strength of the federal student lending program and reducing competition in the market for student loans. Borrowers could lose an important safety net that limits federal student loan repayments if student incomes are lower than expected. Public sector and non-profit employers could struggle to recruit and retain educated workers as a wage subsidy is eliminated and public-sector compensation becomes even less competitive with the private sector. For-profit lenders and dodgy for-profit online education programs could see huge financial benefits.
- Cap federal Graduate PLUS loans
- Scale back Income-Based Loan Forgiveness
- Eliminate Public Student Loan Forgiveness (PSLF)
- Open federal student loans to for-profit and online programs with questionable track records
Capping Graduate PLUS loans hurts taxpayers. A recent analysis by the Department of Education and the Government Accountability Office found that Graduate PLUS loans are the most profitable in the Federal government’s portfolio, even after accounting for the costs of debt forgiveness.
Figure 13 of the study shows that PLUS loans and unsubsidized Stafford loans make money for the government, after accounting for the cost of income driven repayment.
PLUS loans charge the highest interest rates in the government’s portfolio—often more than private lenders would charge similar borrowers. However, federal student loans come with a safety net that caps repayments as a fraction of a borrower’s income if the borrower’s income remains low relative to debt service payments for an extended period of time and eventually forgives the remaining balance. Risk averse borrowers may find this safety net attractive—public and private student loans are difficult to discharge in bankruptcy.
The Income Based Repayment safety net enables the federal student loan program to compete with private lenders, reducing borrowing costs even for those who opt for private sector loans. The government’s profits from graduate and professional student borrowers help defray the costs of subsidizing other borrowers more heavily.
Figure 5 of the GAO study shows Graduate Plus Loans in Income-Driven Repayment have the lowest subsidy rate of any loan program—that is, graduate and professional students repay more of their loans.
The GAO/DOE study has several limitations that overstate the costs and understate the benefits of these programs. If Graduate PLUS loans are curtailed, the federal student loan program will become less profitable and therefore more politically vulnerable to future cuts. The bill also threatens to undermine the performance of federal student loans by opening the floodgates to funding of low quality for-profit online programs.
Private lending is more volatile than federal lending. Private lending has an unfortunate tendency to become unavailable when it is most needed. During the recession of 2008-2009, private student loan origination volumes plummeted even as demand for education surged. Capping loans to graduate students could lock prospective students from poor and middle-class families out of graduate and professional school if they have the misfortune of graduating college during a recessionary credit crunch—precisely when the opportunity cost of pursuing more education is lowest because the labor market is weakest.
Limiting debt forgiveness could make federal student loans more “profitable” as a pure lending program but could have much larger costs to taxpayers if eliminating this safety net reduces investment in human capital.
The U.S. is already dramatically underinvesting in and overtaxing higher education, as demonstrated by the high public and private returns to education. The public returns to investment in higher education are greater than the expected returns to the stock market or bond market because we have a shortage of high skilled, highly educated labor. The proposed policy changes are bad for students, and they also threaten to undermine the long run economic growth and fiscal health of the United States.
November 17, 2017
Following up on my previous post, Republican Tax Hikes Target Education,
[U]nder the House’s tax bill, our waivers will be taxed. This means that M.I.T. graduate students would be responsible for paying taxes on an $80,000 annual salary, when we actually earn $33,000 a year. That’s an increase of our tax burden by at least $10,000 annually.
It would make meeting living expenses nearly impossible, barring all but the wealthiest students from pursuing a Ph.D. The students who will be hit hardest — many of whom will almost certainly have to leave academia entirely — are those from communities that are already underrepresented in higher education. . . .
The law would also decimate American competitiveness. . . .
Graduate students are part of the hidden work force that drives some of the most important scientific and sociological advancements in the country. The American public benefits from it. Every dollar of basic research funded by the National Institutes of Health, for example, leads to a $1.70 output from biotechnology industries. The N.I.H. reports that the average American life span has increased by 30 years, in part, because of a better understanding of human health. I’d say that’s a pretty good return on investment for United States taxpayers."
November 06, 2017
The draft tax plan unveiled last week by House Republicans targets students and educational institutions for tax increases. The Republican proposal would eliminate the lifetime learning credit (worth as much as $2,000 per year per student), tax graduate students on tuition waivers, eliminate the (already limited) tax deduction for student loan interest, and tax endowments at leading research universities.
The plan would also eliminate the tax deduction for most state and local taxes. If taxpayers react by demanding state and local tax cuts, this move will put pressure on budgets at K-12 public schools and at public universities. It will also make it more challenging for local and state governments to fund police and fire protection and economically vital physical infrastructure. A lower cap on the mortgage interest deduction for new buyers might cause property values to fall, further eroding local tax revenues.
Cuts to funding for education and local government will help defray the costs of major reductions in corporate income tax rates, tax cuts for passive income, and elimination of taxes on inherited estates larger than $5.5 million.
In aggregate the Republican tax plan is expected to increase federal debt levels by more than $1.5 trillion over the next 10 years. Repaying this debt without future tax increases will likely require significant cuts to funding for Social Security, Medicare and the U.S. military. These programs account for the overwhelming majority of federal spending.
Reductions in funding for education and infrastructure could hurt economic growth. A few Republicans claim that the tax cuts will dramatically boost growth, but many acknowledge that this is unlikely. In the 1980s, and again in the early 2000s, Republicans claimed that tax cuts would cause the economy to grow so fast that the ratio of debt to GDP would fall. Those predictions proved to be incorrect. Tax revenue lagged projections and the ratio of federal debt to GDP grew from from 30 percent in the 1981 to more than 100 percent today.
September 09, 2017
New American Foundation fires a prominent researcher who criticized one of its largest donors (Michael Simkovic)
The powerful Washington D.C. think tank New America Foundation, which has ties to the technology, finance, and aerospace industries, recently fired a researcher within days after the researcher praised the European Union for fining Google for antitrust violations. Google and its CEO are among the largest donors to New America Foundation, as well as other think tanks. The head of New America Foundation claims the firing was for a lack of collegiality, but declined to discuss specifics.
The firing echoes similar incidents at other think tanks, including the American Enterprise Institute and Brookings Institute, where researchers have been fired shortly after offending other important donors or political patrons.
As the Economist magazine explains:
[Think tanks suffer from] a fundamental flaw. Unlike other institutions designed to promote free inquiry, such as universities or some publications, think-tanks do not enjoy large endowments, researcher tenure or subscription revenue to insulate thinkers from paymasters. And thinking costs a lot.
The New America Foundation has played a prominent role in efforts to privatize student loans by making the terms of federal student loans less attractive and making the loans less widely available.
August 25, 2017
Todd Henderson (Chicago): Lawyers make better CEOs in industries with high litigation risk (and worse CEOs elsewhere) (Michael Simkovic)
Professor Henderson finds that: "CEOs with legal expertise are effective at managing litigation risk by, in part, setting more risk-averse firm policies. Second, these actions enhance value only when firms operate in an environment with high litigation risk or high compliance requirements. Otherwise, these actions could actually hurt the firm."
April 27, 2017
I could not agree more with Northwestern Dean Dan Rodriguez:
Whittier's sudden closing is obviously a tough thing for current students and faculty. Perhaps the decision will be unraveled in the face of public pressure or via littigation. Yet there seems precious little basis to jump into a matter whose complex issues are essentially private, despite the efforts of many in and around the school to make this into a public spectacle. Perhaps bloggers should neither aid nor abet these efforts.
The hubris of the unknowing.
Sometimes Stephen Diamond (Santa Clara) has been a voice of reason amidst the mindless blather about law schools in most of cyberspace (and I have linked to him on a number of occasions over the years), but here he has completely missed the boat: the general legal market has been improving, true, but it is hardly mysterious why an institution would close a law school where far fewer than half the graduates even pass the bar. Diamond just politely ignores all the relevant facts about how this school's graduates have been faring, and, of course, is ignorant of the actual finances of the school.
But far more egregious is the presumptuous intervention of Robert Anderson, Associate Professor of Law at Pepperdine. Faculty members at Whittier are going to lose their jobs, and some may never work again as law teachers or work again at all. Yet Anderson has the audacity to scold them for not having taken an early retirement in the financial interest of the school. Seriously? Does Prof. Anderson pay the bills for any members of that faculty, does he know about their college-age children or their elderly parents or their chronic medical conditions that require a salary and a health insurance plan? Does he know that a job is not just a paycheck for many people (maybe not Robert Anderson), but a focal point of purpose and meaning in a life? Does he know that many did take early retirement a few years ago, and that others might have quite reasonably believed that the school's fortunes, now that both its faculty and student body were smaller, would rebound?
I'm sure Anderson doesn't know any of these things, he's just another blogging blowhard who has decided to use someone else's misery as an opportunity to attract some attention to himself. Anderson is guilty of far worse than unknowing hubris.
UPDATE: Some choice quotes from Prof. Anderson's posts:
"The reason Whittier is closing is because of intransigent, highly paid, unproductive law professors hang around for decades even when they haven't published anything or updated their courses since they were doing the Macarena."
"The unfortunate truth of this story [about Whitter] is that none of this needed to happen..... The number of retirement-age faculty was (and is) enormous, likely larger than it has ever been. If faculties had looked beyond their own personal financial self interest they could have easily contracted to meet the market demand and avoided the disastrous effects that have afflicted law students and now law schools. Sadly, the very faculty members whose institution provided them an outrageously rewarding career over many decades seemed the least likely to 'pay it forward' by helping to reduce expenses....Thus, the story of Whittier is a story of generational wealth shifting that is seen throughout tuition dependent law schools, and indeed throughout our country."
April 18, 2017
Mark Hall and Glenn Cohen have extended Brian Leiter's approach to ranking faculty by scholarly citations (based on Sisk data) to the field of health law.
According to Hall and Cohen, the most cited health law scholars in 2010-2014 (inclusive) are:
|Rank||Name||School||Citations||Approx. Age in 2017|
|2||Mark A. Hall||Wake Forest||480||62|
|3||David A. Hyman||Georgetown||360||56|
|4||I. Glenn Cohen||Harvard||320||39|
|5||John A. Robertson||Texas||310||74|
|6||Michelle M. Mello||Stanford||300||46|
|10||George J. Annas||Boston U||270||72|
The full ranking is available here.
February 02, 2017
Should a law school Dean be writing op-eds in support of controversial (or even uncontroversial) political appointees?
That's an issue posed by a dispute between Nancy Staudt, Dean of the law school at Washington University, St. Louis--who wrote an opinion piece in support of Andrew Puzder, Trump's nominee for Secretary of Labor, who is also an involved alum of Wash U--and Emeritus Professor Richard Kuhns, whose open letter you can read here: Download Puzder letter Kuhns. Professor Kuhns thinks it was inappropriate for the Dean to write this column; I am inclined to agree. But I am curious what others think about the propriety of Dean Staudt's piece. Signed comments only: full name and valid e-mail address. Submit the comment only once, it may take awhile to appear.
January 17, 2017
January 04, 2017
A partner in a prominent San-Francisco-Bay-area venture capital firm recently told me, “The tech sector is eating the world. The menu is full of inefficient legacy industries.”
The thesis of USC Professor Gillian Hadfield’s new book, Rules for a Flat World, is that the legal profession should be near the top of the menu. Hadfield argues that law is overly complicated, expensive and inefficient. This is because lawyers have monopolized the practice of law, locking out more efficient, technologically empowered, venture-capital backed competitors. These competitors—software engineers backed by venture capital money, perhaps in cooperation with lawyers and paralegals—could hopefully improve quality, reduce costs, and generally run circles around overly conservative law firms and inefficiently subscale solo practitioners.
This book will engage venture capitalists and entrepreneurs, established legal technology companies, individuals interested in regulation of the legal profession, and more broadly, those who study privatization and deregulation.
She raises important questions about which regulations of the legal profession protect consumers or serve other legitimate public policy goals and which might be merely protectionist. She targets prohibitions on practice of law within a corporation and prohibitions on profit-sharing with non-lawyers. Without such regulations, it would be easier for non-lawyers to invest in and make high level decisions for legal services providers. Non-lawyers might place more trust in technology than lawyers and might be more open to new business models.
Hadfield’s analysis focuses on the aspects of law that are an economic service (she describes it as “economic infrastructure”). Hadfield is primarily focused on commercial and corporate law. Hadfield notes that while criminal law may be more salient in popular culture, since the time of Hammurabi, most law has been about money, property rights, risk allocation, and supporting business activity.
Hadfield argues that if companies such as Westlaw, Lexis and Legal Zoom could hire lawyers to provide customer support directly to end-users, these companies could improve the appeal of their offerings and more easily compete with small and solo-practitioners. Moreover, these companies would have economies of scale and efficiencies that solo practitioners cannot readily match. Because of these efficiencies and expansion of the legal market to under-served populations, lawyers working for incorporated legal services providers would not necessarily earn less than solo practitioners currently earn, although lawyer-employees would have substantially less autonomy than lawyer-owners.