Brian Leiter's Law School Reports

Brian Leiter
University of Chicago Law School

A Member of the Law Professor Blogs Network

June 22, 2015

ABA Task Force on Financing Legal Education Advocates Disclosure, Experimentation and More Empirical Research (Michael Simkovic)

The ABA Task Force on Financing Legal Education’s report  was released last week.  I was among the people who testified before the Task Force last summer, and the report cites both my presentation and my research with Frank McIntyre on The Economic Value of a Law Degree.  Consistent with our research, the report notes that challenges facing legal education are similar to challenges facing higher education more generally, and notes extremely low student loan default rates for law school borrowers.  

The report is forthright about the limitations of existing data and careful in its recommendations—most of which relate to:

  • disseminating existing information more clearly (especially about student loan repayment options),
  • gathering better information going forward (especially about tuition and scholarships), and
  • structuring “experiments” in legal education (e.g., relaxation of accreditation rules) as field experiments that facilitate causal inference by trained social science researchers.  

The report notes that legal education appears to be responding to market forces.  After declines in applicants, law schools reduced capacity and offered more scholarships.  Actual tuition increases have been lower than widely publicized increases in sticker tuition because of increased use of scholarships (tuition-discounting), although net-tuition has still increased faster than inflation as measured by CPI-U.

The ABA Task Force on Financing Legal Education report urges the legal profession to support federal student loan forgiveness programs that encourage public service.  

Some student loan forgiveness programs have been criticized by politically powerful, media savvy, and well-funded think tanks, which claim that these programs will be costly for taxpayers.  (I am skeptical of many of the think tank estimates for empirical and mathematical reasons, but that is a discussion for another day).  Loan forgiveness programs may be revisited in upcoming budget negotiations.  Many are expecting reduced funding for higher education to help fund increased military spending. 

The Task Force on Financing Legal Education’s report is a major improvement over last year’s report from another Task Force assembled by the ABA, The Task Force on the Future of Legal Education.  This year’s report is both better researched and more cautious in its claims and recommendations.


June 22, 2015 in Guest Blogger: Michael Simkovic, Legal Profession, Of Academic Interest, Science | Permalink

ABA Task Force on Financing Legal Education Final Report

Here.  The two most concrete proposals are to mandate enhanced financial counseling for prospective students, to be sure they understand federal loan programs and their options; and to mandate greater disclosure of law school finances, including tuition discounting.  I was also pleased to see on p. 22 that evidence triumphed over anecdote and ideology when, citing the work of Simkovic and McIntyre, the Report notes that, "Despite the cost, the best available evidence suggests a significant lifetime income premium for those with a law degree compared to those with a bachelor’s degree."


June 22, 2015 in Legal Profession, Of Academic Interest, Student Advice | Permalink

June 16, 2015

Understanding Student Loans in the Context of Legal Education (2 of 2) (Michael Simkovic)

So how should our understanding of student loans apply to law students?  Mortgages are routinely repaid over 30-years, even though owner-occupied housing is close to pure consumption (most of the value of housing is consumed as imputed rental income, with appreciation averaging only around 1 percent above inflation). Legal education typically provides a much higher rate of return than real estate, and is probably closer to investment than consumption.  

Rather than focus on initial salaries at graduation alongside student loan balances, it would be more appropriate to emphasize student loan debt service payments, assuming students pay their loans over several decades and with payments that match the expected trajectory of earnings.  This would be an apples-to-apples comparison—initial cash flows compared to initial cash flows.*

It also makes sense to report student loan payments in real terms by subtracting expected inflation (typically around 3 percent) from the nominal interest rate before calculating loan payments.**  (As inflation increases wages and the prices of goods and services, a nominally flat debt payment becomes less valuable in terms of what the money can buy and how much work is necessary to earn enough to make the payment).  Adjusting for inflation won’t take into account the increase in real earnings (above and beyond inflation) that typically comes with additional work experience and secular increases in economy-wide productivity, but at least takes into account increases in earnings that match inflation.

$100,000 in debt repaid in equal installments monthly over 30 years at a 3 percent real interest rate (6 percent nominal) comes to $5,059 per year ($422 per month) in real terms.  In nominal terms (without adjusting for the power of inflation to make debts easier to repay), the payments are $7,200 per year ($600 per month).

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With a graduated extended repayment plan over 25 years, the real initial monthly payments come to $3,420 per year ($285 per month).  In nominal terms (without adjusting for the power of inflation to make debts easier to repay), the initial payment is around $6,000 per year or $500 per month.  

Law graduates typically earn around $60,000 to $75,000 per year to start and have debt service payments of around $3,400 to $7,200 per year.  Recent law graduates have much more cash at their disposal than most bachelor’s degree holders of a similar age even after paying down their loans.

Law students’ incomes can support their debt service payments, as demonstrated by the exceedingly low student loan default rates for recent law graduates.  It is time for the ABA to rethink how law schools disclose debt balances and student loan repayment obligations so that students are not mislead into underinvesting in education. 

Journalists and education experts should also be careful to discuss student loans using apples-to-apples comparison—cash flows to cash flows, and lifetime present values to lifetime present values. 

* If student loan balances or initial cost of education are presented, these should be compared to the expected present value of the boost to earnings from the degree over the course of a lifetime.  Thus, for example, whenever reporting that law school costs around $100,000 on average, it should also be reported that the average value before taxes and tuition is around $1,000,000 and that the median value is around $750,000.

** Part of what graduated loan repayments accomplishes is to make real payments closer to level.  If nominal payments remain flat, as in standard fixed repayment loans, in real terms, payments decline over time and repayment of the loan is front-loaded.

 


June 16, 2015 in Guest Blogger: Michael Simkovic, Legal Profession, Of Academic Interest, Professional Advice, Science, Student Advice, Weblogs | Permalink

June 15, 2015

Understanding Student Loans (1 of 2) (Michael Simkovic)

A shorthand approach sometimes used to compare the cost and benefits of higher education—comparing student loan balances at graduation to first year earnings—can be seriously misleading.  The implication of this approach is that student loans have to be repaid in full shortly after graduation, and that graduates’ low initial earnings will persist for the rest of their lives.  

This is an apples to oranges comparison.  An investment in education pays dividends throughout one’s life. First-year earnings are one small, unrepresentative, slice of lifetime earnings. Comparing a lifetime investment to one year of expected returns on it feeds ignorance about how student loans and lifetime earnings actually work.  It thus risks misleading prospective students into making financially disastrous decisions to underinvest in education. 

Student loans are meant to solve a specific problem—the costs of education come as a series of large upfront payments for tuition and living expenses, while the benefits accrue later in life in the form of higher earnings.  Except for the minority of students who are fortunate enough to have rich and generous parents who cover their tuition, students generally have two options—save or borrow.

Saving is inefficient because it requires students to work for many years with a lower level of education and for much lower wages, and to complete their degrees much later in life.  Completing a given level of education earlier helps maximize the number of years of expected higher earnings with a higher level of education.  Borrowing to invest in education is therefore more efficient than saving to invest in education.  Some of the benefits of financing accrue to the student borrower in the form of higher lifetime earnings compared to saving, and some of the benefits accrue to the lender in the form of interest and fees.  Another approach to financing higher education—more popular in Europe, Australia, and Canada than the United States—features higher public spending and higher tax burdens, sometimes with a tax-like percent-of-earnings fee explicitly tied to university education.  The social democratic approach, like the U.S. approach, involves providing something of value up front in return for a fraction of graduates’ incomes later.

Student loans enable students to pay for their own education by converting the cash flows associated with investment in education from large upfront payments into a series of much smaller payments spread out over time.  Ideally, these payments should closely match the timing of the benefits of education—that is, the timing of the boost to earnings from education.  

Because the benefits of education accrue over the course of a career—perhaps 40 years or more—and earnings typically do not peak until middle age, the costs of education should ideally also be spread over a similar time frame.  

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The prospect of high payments needed to pay back loans very quickly ex-ante could cause prospective students to underinvest in education.  As life expectancy and career length increase, so should initial investment in education. 

If this goal of matching the timing of cash flows is accomplished, then at every point in time, with more education, students will have more cash at their disposal.  The boost to earnings from education will more than cover student loan debt service payments, and the initial borrowing will enable students to maintain a decent lifestyle while pursuing studies instead of working full time. (For a discussion of the advantages of leveraged investments early in life, see Ayers & Naelbuff).

That is one important reason why federal student loans can be repaid over 25 to 30* years (so-called “extended” repayment).  Plans are available under which monthly payments start low and increase over time to match the typical trajectory of lifetime earnings (“graduated” or “graduated extended” repayment), or in which payments dynamically adjust up and down with actual borrower earnings (if earnings fall below a certain level) to better match cash flows (“income-contingent” or “income-based” repayment).

Because these extended and income adjusted plans are better tailored to the purpose of student loans—matching positive and negative cash flows—one of these plans should be the default option for student borrowers instead of the now “standard” 10-year repayment period.  10-years to pay for an education that provides benefits over 40 years makes little sense.  For law graduates, real earnings typically continue to grow for 30 years after graduation.

 

* Consolidated loans can be repaid over 30 years, but some consolidated loans may not be eligible for income based repayment plans.

Paying loans back slower typically will not affect the economic value of education, notwithstanding the fact that nominal interest payments will increase.  Paying loans back faster or slower typically will not affect the economic value of education as long as two conditions are met: 

  1. Interest rates remain unchanged regardless of whether a loan is repaid over 10 or 30 years (this is the case for federal student loans, but not for mortgages or most other debt instruments most of the time)
  2. The interest rate on student loans is appropriate, in that it matches up with default and loss risk levels for lenders, the opportunity cost of capital, and time preferences.

If condition 2 holds, then the interest rate will equal the discount rate which is used to convert cash flows occurring at different points in time into the same currency so that they can be compared.  If the discount rate is 6 percent, then there is no valuation difference between paying $1,000 today or paying $1,060 one year from now, just as there is no difference between paying one U.S. Dollar or the equivalent in Euro cents.  If students choose to refinance or pay their loans back faster than they are legally required to repay them, this suggests that the interest rate on student loans is too high


June 15, 2015 in Guest Blogger: Michael Simkovic, Legal Profession, Of Academic Interest, Science, Student Advice, Weblogs | Permalink

June 12, 2015

Government Overcharging for Student Loans (Michael Simkovic)

The Department of Education has been overcharging low-risk professional school students for federal student loans (relative to the market rate) while keeping rates low for undergraduates who are far more likely to default. (For previous  coverage, see here, here and here).

Bloomberg BNA's Bankruptcy Reporter describes the predictable consequences of this politically driven mispricing: Professional graduates are refinancing into less expensive private loans and removing themselves from the government's risk pool. 

There is a simple solution that will shut down what Bloomberg describes as an "exodus of top borrowers" while preserving student lending profits for the benefit of taxpayers.   The government should charge low risk graduate students less.

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Update, June 13, 2015:  Jordan Weissmann at Slate covers the story.  


June 12, 2015 in Guest Blogger: Michael Simkovic, Legal Profession, Of Academic Interest, Student Advice, Weblogs | Permalink

May 25, 2015

Charleston Law School will enroll students this fall...

...while undertaking additional cost-cutting measures.  It appears the School enjoys some strong support in the local Charleston community.


May 25, 2015 in Legal Profession, Of Academic Interest | Permalink

May 19, 2015

A curious sign of the times: Charleston Law students, acting as "creditors," seek to put school into receivership

Story here.  Is this possible?


May 19, 2015 in Legal Profession, Of Academic Interest | Permalink | Comments (0)

May 14, 2015

Another sign of the times: financial crisis at Pace Law School (UPDATED)

According to a faculty member, the Law School ran nearly a five million dollar deficit this year, and the Dean has pledged to cut $2.1 million of that next year, with a combination of moves:  the elimination of all sabbaticals, all research stipends, a 5% salary cut for senior staff, and a 10% salary cut for all faculty.  To make matters worse, the Dean, according to one source, "forbade anyone from speaking to the press about this. The materials he passed out carried two watermarks, one large across the text, and another secret one (or so he said), with each faculty member's name so he will know who the leak is, he said."  Since everyone familiar with legal education knows that many law schools are struggling with financial problems, it's mysterious (and counter-productive) for a Dean to make such a threat.

Pace faculty are concerned that there has been no attempt to buy out faculty (as other schools have done) and fear a further salary cut is in the offing before long.  The elimination of sabbaticals also has a number of Pace faculty perplexed, since with a reduction in its class size, Pace has excess teaching capacity, so it's not like sabbaticals require hiring adjuncts or visitors, so they do not add to costs.

UPDATE:  Prof. Alexander Greenawalt (Pace) writes:

I have not polled my peers but I believe that most of my colleagues would agree that there are serious inaccuracies in the report you received.  Of course I’m not thrilled to have my salary cut, but the truth is that we are part of a university that is continuing to support us, and I still have a great job at a great law school.  The main thrust of the dean’s remarks was that he is implementing budget cuts that will reduce our deficit without compromising the quality of the education we provide our students.  On that score, I believe he succeeded.  We are not the first law school to experience a faculty salary cut, and I don’t think this is a sign that we are a sinking ship. 

 

As to the specific allegations, the document in question is an internal memorandum written by my some of my faculty colleagues identifying possible budget cuts, several of which have not been adopted.  I think it’s obvious that any law school would treat this as a confidential document.  I doubt that my colleagues who authored it wanted it made public, and I think the dean would have been well within his rights to limit our access to it, for example by making it available for review only in hard copy in the dean’s suite.   Instead he decided to distribute individual copies, while taking measures to discourage (without prohibiting) public disclosure.  I haven’t picked up my copy yet, so I can’t tell you what it looks like or what watermarks it might have.  Perhaps he should have handled this distribution differently, but my honest belief is that he was acting out of a desire to be transparent rather than punitive.

 

In particular, I want to emphasize that there were no threats of any kind.  David did not forbid communications with the press, and indeed when asked about this he was quite clear that we were free to do what we wanted.  He did ask that we not leak the document to the press, and I think that’s a reasonable request.  Certainly, he did not specify any consequences if we did.

 

Regarding sabbaticals, David [the Dean] was clear that they will still be available for important scholarly projects.

 

I can’t speak for my anonymous faculty colleague, and certainly I am not accusing that person of dishonesty, but obviously we have very different recollections!

I thank Prof. Greenawalt for contacting me about this.  My source stands by the original account.  I think some of these issues may be matters of interpretation.   I do not think Pace is a "sinking ship" at all; it has an unusually strong faculty for a regional law school, and, as I noted originally, is facing the same issues that most American law schools are now facing.


May 14, 2015 in Faculty News, Legal Profession, Of Academic Interest | Permalink

May 12, 2015

Law students are more likely than college students to retain competitive scholarships (Michael Simkovic)

Critics of competitive scholarships tied to GPA or class rank claim that these scholarships are especially troubling when used by law schools, because the mandatory grading curve means that more law students are likely to lose their scholarships than undergraduates.  However, as I noted in my last post, the data actually shows that law students are more likely to retain their competitive scholarships than are undergraduates.

Nevertheless, the newspapers have provided balanced coverage of competitive scholarships for undergraduate institutions  while lambasting law schools for the same practice. 

The remaining critiques of competitive scholarships are not strong.  According to one critique, if competitive scholarships are disproportionately used by law schools who admit students with low LSAT scores and GPA and are not used by the elite law schools, this suggests something suspicious about these scholarships.  Lower ranked law schools serve different student populations with spottier academic preparation who are at greater risk of failing the bar exam and may have worse study habits.  Some policies and practices that are helpful to motivate this population and encourage greater study effort may not be necessary for higher ranked law schools, whose students are already highly motivated and can pass the bar exam and learn challenging material without much effort. 

Another argument is that after law school critics and The New York Times attacked law school competitive scholarships, and the ABA responded by requiring disclosure of this practice, the number of law schools using competitive scholarships declined.  Critics claim that the disclosure caused law schools to stop using competitive scholarships, thereby proving the scholarships were unethical all along. 

But perhaps law schools were simply attempting to avoid criticism, whether merited or not.  In other words, perhaps the criticism caused both the mandatory disclosure and the reduction in the use of competitive scholarships.  If The New York Times quoted an impressive sounding source claiming that those who typically tie their left shoe before their right were liars and thieves, and the Justice Department disclosed an annual list of everyone who tied their left shoe first, we might find that the percent of people who tie their left shoe first would drop, notwithstanding the fact that which shoe you tie first has absolutely nothing to do with ethics.  Or, as Matt Bruckner suggests, perhaps some other factor, such as changes in relative market power or law school budgets help explain the shift in financial aid policy and neither the criticism nor the disclosure had much to do with it.  Without more sophisticated methods of causal inference, its premature to make strong causal claims. 


May 12, 2015 in Guest Blogger: Michael Simkovic, Law in Cyberspace, Legal Profession, Of Academic Interest, Student Advice, Weblogs | Permalink

Sign of the times: $3.8 million deficit at U Mass Law School

Story here.  The school still awaits ABA accreditation.  U Mass/Dartmouth is footing the bill for now.


May 12, 2015 in Legal Profession, Of Academic Interest | Permalink