Brian Leiter's Law School Reports

Brian Leiter
University of Chicago Law School

A Member of the Law Professor Blogs Network

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 13, 2015

On legislative intent

I strongly recommend this review (and the book).


May 13, 2015 in Jurisprudence, Of Academic Interest | Permalink

May 12, 2015

Should student loans be dischargeable in bankruptcy? (Michael Simkovic)

In the Wall Street Journal, Professor Adam Levitin of Georgetown argues yes for private student loans and no for federal student loans, since the latter have debt forgiveness options already built in.  More discussion at credit slips. Those  interested in student loan issues may also enjoy Risk Based Student LoansPhilip Schrag's work on Income Based Repayment (here and here), or Rafael Pardo's work on undue hardship discharge, and a related empirical study by Jason Iuliano.  Jake Brooks also has an interesting new article coming out on student loan debt forgiveness as a pseudo-income-tax for funding higher education.

The classic argument against discharge of student loans in bankruptcy is Thomas Jackson in the first edition of The Logic and Limits of Bankruptcy Law.  Jackson wrote:

As a general rule, college and graduate students have few current assets but large future income streams. Using bankruptcy is relatively painless to them, as they have few assets to lose, and obtaining a discharge offers a substantial benefit, as it frees up the future income stream from the substantial obligation of repaying a student loan.


May 12, 2015 in Guest Blogger: Michael Simkovic, Of Academic Interest, Weblogs | Permalink

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

May 10, 2015

Competitive Scholarships, Mandatory Courses, and the Costs and Benefits of Disclosure (Michael Simkovic)

There is a wide range of views about the benefits, costs, and appropriate use of conditional merit scholarships—scholarships that under their terms, will only be retained after the first year of law school if students maintain a minimum GPA or minimum class rank (if there is a mandatory grading curve, a minimum GPA effectively is a class rank requirement).  These questions implicate both broad value judgments and also very specific empirical questions to which we many not have clear answers.  

1)   Is competition for grades a help or a hindrance to learning?

2)   Is competition, with greater rewards for winners than for losers, inherently moral or immoral?

  1. Does the answer depend on whether the outcome of the competition is driven by luck, skill, or effort?
  2. Does the answer depend on how large the differences in rewards are between winners and losers?

3)   Does disclosure alter student decision-making?  

  1. If so, how? 
  2. Is this a good thing or a bad thing?
  3. If it is a good thing do the benefits of disclosure outweigh the costs of providing disclosure?
  4. Are some ways of providing disclosure clearer and more meaningful than others?  Could too much disclosure be overwhelming?

Disclosures are sometimes very effective at improving market efficiency.  Sometimes disclosures appear to have no effect.  Sometimes they have the opposite of the intended or expected effect.  For example, disclosure of compensation of high level corporate executives of publicly traded companies may have contributed to an increase in executive pay (see also here.) 

In the case of conditional merit scholarships, the direct administrative costs of providing disclosure appear minimal.  The effects of such disclosure, if any, remain unknown.  I support access to greater information about conditional scholarship retention rates, not only for law schools but also for all educational institutions. 

Scholarship retention rates at many undergraduate institutions under government-backed programs appear to be lower than scholarship retention rates at most law schools.  Around half of Georgia Hope Scholarship recipients lost their scholarship after the first year.  Around 25 to 30 percent of Georgia Hope Scholarship recipients retained their scholarships for all four years of college.  Nevertheless, conditional merit scholarships can have positive effects on undergraduate enrollment  and academic performance.  A fascinating randomized experiment by Angrist, Lang and Oreopolous found that financial incentives improved grades for women but not for men.  A recent experiment also found evidence that merit scholarships tied to grades can increase student effort and academic performance at community colleges.

Unfortunately, there is some evidence that the use of merit scholarships tied to GPA by undergraduate institutions—where grade distributions and course workload vary widely by major—can reduce the likelihood that students complete their studies in science technology engineering and math (STEM) fields.  Students who major in STEM fields have a higher chance of losing their scholarships 

In other words, if students can shop for “easy As” rather than study harder to improve their performance, they can reduce their own future earning prospects.  The approach law schools take—merit scholarships tied to mandatory grading curves and a required curriculum—may be better for students in the long run.  Indeed, law students might benefit financially if additional courses, such as instruction in financial literacy, were mandatory.*

Greater disclosure of grading distributions may exacerbate grade shopping and grade inflation, which can undermine student effort and learning.  Some models suggest that grade inflation is contagious across institutions (see also here).  (It should be possible to disclose scholarship retention rates without disclosing grade distributions).

In some contexts, such as securities regulation or pharmaceuticals, disclosure requirements tend to be high.  In other areas, such as employment contracts, disclosure tends to be more limited.  We may not always get the balance right.  These questions have lead to a rich research literature in law, economics, and psychology (see Bainbridge, Lang, Mathios, Coffee, Kaplow, Easterbrook and Fischel, Romano, and Schwartz).  In all cases, whether and how disclosures alter behavior is an empirical question.  How the benefits compare to the costs are empirical questions mixed with subjective value judgments.

Given the current limited state of knowledge, and good faith and understandable disagreements about subjective value differences, strident views on one side or another, and moral condemnations of those entertaining different viewpoints, are not appropriate.  

Law professors have an obligation to teach students to think like lawyers, weigh evidence, and consider different arguments and different perspectives.  We should not shut down discussion with swaggering declarations of the moral superiority of our own views or ad-hominem attacks against those with whom we disagree.

A recent post (in the comments) by Brian Tamanaha (or someone posting under his name and with a similar rhetorical style**) highlights the unfortunate tendency by some toward moral posturing.  Tamanaha writes:

           
“[Those who condemn conditional scholarships are] speaking up for the integrity of legal academia. It is embarrassing that law professors would now rise up to defend employment reporting standards … criticized by outsiders (see New York Times "Bait and Switch" piece), practices which have since been repudiated and reformed by new ABA standards. I do not understand why Simkovic is re-raising these resolved issues, but it does not help us regain our collective credibility.

After reading these posts, I have begun to wonder whether a sense of professional responsibility is what separates the two sides in this discussion. It is not a coincidence that John Steele, [Bernard Burk], and others who strongly condemn these practices have taught legal ethics.” 

In other words, if you question Brian Tamanaha’s reasoning and conclusions—as I have—then you have no integrity and dubious ethics, are irresponsible and unprofessional, and are an embarrassment to the legal academy.

Bernard Burk, though declaring his disdain for ad-hominem attacks, accuses those with whom he disagrees of being “partisan.” He compares competition for grades and scholarships to physically beating students.  Burk compares law schools to gangsters and evil witches.  He claims that the positive effects of conditional scholarships on student motivation and learning “smells of post-hoc rationalization.”  (Most of the labor economics studies demonstrating positive effects of financial incentives on student performance were available before The New York Times and the law school critics targeted law school conditional scholarships; the critics overlooked the peer-reviewed literature).

Deborah Merritt, though generally providing an intelligent discussion of conditional scholarship issues, compares conditional scholarships in which adults who lose the competition for grades receive a free year of law school to the fictional “Hunger Games” in which children who lose a physical struggle are murdered.  (Paul Caron repeats this unfortunate comparison when summarizing the debate; so does Bernard Burk).

Paul Campos compares those who disagree with him about data disclosure standards to “Holocaust deniers.”

Law school critics have not persisted through the force of argument or evidence, but rather through their ability to make an honest discussion of the issues so unpleasant that very few who disagree with them wish to engage.  We should thank Professor Telman for his courage and for elevating the conversation from polemics to evidence-based inquiry.  As more professors and journalists raise substantive questions about law school critics’ narrative, it will become increasingly difficult for the critics to foreclose factual and ethical inquiry through ad-hominem attacks and hyperbole.

 

* A recent survey by John Coates, Jessie Fried, and Kathryn Spier at Harvard suggests that large law firm employers believe instruction in certain technically challenging business electives, especially accounting, corporate finance, and corporations, is particularly valuable on the job.  Data does not exist to evaluate whether enrollment in such courses actually boosts earnings or employment, or is even correlated with greater earnings or employment.  However, one working hypothesis is that such courses might be the law school equivalent of undergraduate STEM or economics majors.  A study of high school financial literacy mandates suggests positive long-term effects on enrollees’ financial well-being.  

** The first and only time I met Brian Tamanaha in person was at the 2013 Law & Society meeting in Boston where he spoke on a panel.  Professor Tamanaha shut down questions from the audience about whether his presentation of law school data was misleading by insisting that in our hearts surely we all knew he was right and that any question about whether he was wrong on the facts, and any attempt to rely on data rather than emotionally charged anecdotes, was a sign of flawed moral character. 


May 10, 2015 in Guest Blogger: Michael Simkovic, Law in Cyberspace, Legal Profession, Ludicrous Hyperbole Watch, Of Academic Interest, Professional Advice, Science, Student Advice, Web/Tech, Weblogs | Permalink