August 03, 2015
John Brooks (Georgetown) and Jonathan Glater (UC Irvine) argue in today’s Los Angeles Times that the Federal Government should raise the borrowing limit on federal student loans so that college students can borrow more from the government and less from private lenders.*
“Banks and other lenders offer so-called private loans, which often have higher interest rates and less flexible repayment terms [than Federal Student loans]. . . Private student loans are usually much more costly for students; a government report from 2012 found interest rates in excess of 16%, and nothing has improved since then. By contrast, the rate on the most widely used federal student loan currently is 4.29%.
[B]ecause federal loan caps have not budged even as tuition has increased, private lending is rising . . . borrowing is going to happen in some form anyway. This is not about whether college is a good investment (although it is), it is about whether students should be forced to take out loans that put them at greater risk of repayment difficulty and possible default.”
Brooks and Glater have effectively framed the student loan debate. Federal Student loan policy is not a question of how much students should be allowed to borrow, but rather only a question of who they should borrow from, how much they should pay, and when they should pay. Any government imposed loan limit is the point at which the borrowers will shift to expensive private sources of credit.
In other words, private student lenders have a strong incentive to scale back public student loan programs. The less available and less generous public programs become, the larger the market opportunity for private lenders. (It is possible that higher or lower interest rates could affect the amount that students ultimately borrow—i.e., the quantity of credit demanded may respond to the price of credit—but Brooks and Glater are clearly correct that a federal student loan limit is not a hard cap on borrowing).
The idea that increases in federal student loan availability or other public higher education funding programs will increase tuition is sometimes called the “Bennett Hypothesis,” and those who wish to scale back public investment in higher education frequently tout it. However, there is little evidence in the peer-reviewed literature that increases in the availability of public student loans drive up tuition net of scholarships and grants at non-profit and public institutions of higher education (there is some evidence that this might be the case at for-profit trade schools). The evidence of harm to students is even slimmer when one considers the potential benefits of tuition increases, which can fund better instruction, better administrative support, more modern facilities, and more generous scholarships, and the possible role of public funding in increasing enrollment and completion rates. By contrast, higher interest payments will generally only benefit student lenders, unless higher rates convey useful information about risk to which students respond. For a review of the literature, see here and here.**
Those advocating scaling back federal student loans argue that it is theoretically possible that income based repayment with debt forgiveness could lead to an explosion of tuition growth because, for some students, the marginal cost of additional borrowing will be zero and these students will not be price sensitive. (See here)
However, federal student loan critics have not shown that the introduction of IBR with debt forgiveness, or changes to the terms of these programs, has actually affected the rate of tuition increase net scholarships and grants. (Indeed, tuition increases, less scholarship, have been relatively mild in recent years). And this is not surprising—most students do not know in advance whether they will need or qualify for debt forgiveness, and will not know for sure until 10 or 20 years after they graduate. Most of them will likely ultimately repay their loans in full. Ex ante and in expectation—when they are shopping for a college or professional school—student borrowers do not face zero marginal cost.
Similarly, think tank arguments about high costs to taxpayers from income-based repayment and debt forgiveness rely on dubious assumptions such as:
- Starting salaries for recent college and professional school graduates will grow at an extremely low rate (much lower than one could reasonably forecast after examining the historical data)
- Every single dollar of debt forgiveness is a cost of the debt forgiveness program, because if not for debt forgiveness programs, no borrower would ever fail to repay their loans and the government would collect every last dollar on time
- A loan in which the government recoups partial payments with a present value exceeding the amount of the original loan is not a profitable loan; it’s actually a loss
- The cost of lending $100,000 and receiving partial payments over the next 10 or 20 years is somehow much higher to the government than the cost of giving away $100,000 today and receiving no payments in return (this is related to assumptions 2 and 3 above, as well as inappropriate uses of discount rates and growth rates).
- Income based repayment plans have no impact on enrollment and provide no benefits to the government in the form of a more educated workforce that pays higher taxes and depends less on taxpayer funded social services
* Brooks and Glater also praise income based repayment plans as a progressive-income-tax-like system of higher education finance in which those who earn more pay more. These arguments will be familiar to those who have followed Brooks and Glater’s research. (here and here)
**The Wall Street Journal publicized a recent working paper that claims to have found a possible link between federal student loan availability and tuition growth at undergraduate institutions. While some of the nuance may not have been reflected in the WSJ's coverage, the authors of that working paper note that: (1) They do not have good data that can distinguish an increase in borrowing from a shift between public and private loans; (2) They are only looking at sticker tuition, not actual tuition paid less scholarship and grants; (3) There are many ways in which public funding can benefit students even if it does increase sticker tuition; and their findings do not demonstrate that public funding is a harmful policy; (4) Variables omitted from their analyses could be driving tuition increases and introduction of additional controls dramatically changes their results.
His biography; his “intent”; the phases of his twenty-year career; the context [historical, philosophical] in which he wrote; his interpretation by others; indeed “the” meaning of his writing … all of that fosters erudite avoidance … and so will be out of bounds. The seminar is for “amateurs” able to take Nietzsche’s passionate, enigmatic words personally – and, so, able to be provoked by them.
Now that's embarrassing that an academic institution offers a course premised on the idea that utter ignorance is a virtue, since basic scholarly knowledge and competence would allegedly lead to "erudite avoidance."
July 31, 2015
One of the key claims of critics of legal education in general, and of ABA-approved law schools in particular, is that accreditation requirements drive up the costs of legal education without improving quality. If only we could deregulate law schools and unleash the creative power of free market competition and the awesome technological potential of online learning, legal education would become cheaper without any loss of quality. Or so the story goes.
Fortunately, deregulated law schools exist alongside regulated law schools, so we can get a sense of what deregulation might look like. And while unaccredited California law schools are less expensive than their accredited counterparts, their completion rates and bar passage rates are much lower than those for even the lowest ranked ABA approved law schools, as revealed by a recent Los Angeles Times investigation.
This is likely due at least in part to the incoming academic credentials and life circumstances of the students who enroll in unaccredited schools, and not simply due to differences in quality of education. But there is no law preventing unaccredited law schools from competing with accredited law schools for the best students who want to stay in California, a large and prosperous state where many lawyers will spend their entire careers. If accreditation is really an inefficient waste of time and resources, the unaccredited schools should have substantial advantages in the competition for students, and those students should have advantages in the competition for jobs.
At first glance, deregulation hardly looks like the panacea its advocates have made it out to be. ABA accreditation also looks pretty plausibly like standard consumer protection--a paternalistic attempt to eliminate low quality, low cost, and high-risk options--rather than a self-serving scheme to inflate prices.
There are usually tradeoffs between cost and quality. It's not surprising that as goes the world, so goes legal education.
The Wall Street Journal’s recent story about law-school funded jobs is a good example of the slant that has pervaded its law school coverage for the last several years. The general outline of the WSJ story is as follows: job outcomes for law school graduates have become so terrible that law schools are creating fake jobs for their graduates, not to help students succeed, but to game the U.S. News rankings. The implication of the story is that law school is not only a bad idea for economic reasons, but that law schools are fundamentally corrupt and dishonest.
The problem is that the WSJ has taken information out of context and presented it in a way that is misleading. Like a Rorschach test, the story reveals more about the Wall Street Journal than it reveals about the subject of the story.
Here are some problems with the WSJ's coverage:
1. The data visualizations are misleading
There is a standard and widely accepted way to present percentage data. The minimum possible value is 0 percent. The maximum possible value is 100 percent. Therefore, a figure showing percentages should almost always be scaled from zero to 100 percent. The Wall Street Journal violates this rule of data visualization in ways that are revealing.
The WSJ scaled the figure at the left, showing law school employment, from 60 percent to 95 percent. This makes law school employment look lower than it really is, and exaggerates the decline in employment.
The middle chart, showing law-school funded employment is scaled from 0 to 6 percent. This makes law-school funded jobs look like a huge proportion of employment rather than a tiny one (4 to 5 percent). Contrary to the thrust of the WSJ’s story, there does not seem to be much of a relationship between overall employment outcomes and the proportion of school-funded jobs.
(The third chart, showing the proportion of school-funded jobs that are full time, long-term legal jobs increasing over time, is not commented on in the text of the story).
2. There is no discussion of what percentage of graduates of other programs are working positions funded by their institutions and little discussion of whether such jobs might be helpful
School-funded jobs are not unique to law schools. Whereas press coverage of law schools hiring their own graduates has been overwhelmingly negative, coverage of colleges hiring their own graduates has generally been positive or the issue simply hasn’t been covered. People might have doubts about educational institutions that never hire their own graduates for open positions, just as we might doubt a manufacturer or retailer that did not use any of its own products.
Are law schools more likely than other educational programs to hire their own graduates? Are law-school funded jobs better or worse than these other school-funded jobs? Are law-school funded jobs more or less likely to lead to good outcomes over the long term?
None of these important contextual issues are raised by the WSJ.
Even Above the Law provided a more balanced discussion of the possible upsides and downsides of school-funded jobs.
A similar issue arose with press coverage of competitive merit scholarships. Law schools were condemned harshly for policies that are also widely used by colleges and state governments, whereas colleges generally received more balanced coverage. This was the case even though law students were actually more likely to keep their competitive scholarships than were many undergraduates.
3. There is no discussion of how overall law school employment compares to employment for recent college graduates or graduates of other programs.
When it comes to apples-to-apples comparisons of law school graduates to similar bachelor’s degree holders with similar levels of work experience at the same point in time, law school graduates are more likely to be employed, more likely to be employed full time, and no less likely to be employed in a job that is related to what they studied. They are also likely to be earning substantially more money than their less educated counterparts. For the overwhelming majority of law school graduates, the lifetime boost to earnings more than makes up for the cost of law school.
The problem is not law school employment outcomes. The problem is that the labor market in general is challenging for everyone, especially the young and inexperienced. Law graduates generally do better than similar college graduates, who in turn generally do better than similar high school graduates.
Law schools are not the employment story. The employment story is the debate about aggregate demand and fiscal stimulus, and how best to provide more workers with the benefits conferred by higher education.
4. There is no discussion of how law school employment reporting compares to employment reporting for other educational institutions or standard definitions of “employment” used by the government
Under standard definitions of employment used by the U.S. government and just about everyone else, employment counts as employment whether it is school-funded or not, whether it is long term or full time or not, whether it is highly paid or not.
The use of non-standard definitions by law schools makes law school difficult to compare to alternatives. This does not reflect higher or lower ethical standards—it simply reflects data collection and reporting practices that are not well thought out. It can bias the presentation of the data in a way that makes law school look worse relative to alternatives when in fact law school employment outcomes under standardized measurements are usually better than many likely alternatives.
The standard definition of employment is not the only interesting measure of outcomes, so law schools may also want to consider other measures. But any measure they use needs to be standardized and comparable across educational programs rather than used exclusively by law schools.
July 28, 2015
It's educational malpractice to recommend that incoming law students read Llewellyn's "The Bramble Bush"...
...as, alas, Michael Krauss (George Mason) does in The Washington Post no less. Llewellyn's book is delightful and rich with interesting material, but I guarantee it makes no sense to someone who hasn't already read a lot of cases and studied some basic common-law subjects, like torts and contracts. (I offer the basic Jurisprudence course here as a 1L elective in the Spring Quarter, and to those students it makes a lot of sense precisely because they've already seen so many examples of what Llewellyn is talking about.) The one book I recommend to students who ask what to read before starting law school is Ward Farnsworth's The Legal Analyst (though the "Jurisprudence" part of the book isn't really about jurisprudence). This is accessible to a novice, and provides a beginning law student with a variety of useful analytical tools. (Farnsworth, now Dean at Texas, is a graduate of the University of Chicago Law School, and the book actually covers much of the material covered in "Elements of the Law," a required fall quarter class for all 1Ls here--indeed, one of my colleagues who teaches "Elements" uses Farnsworth's book in the class.)
July 14, 2015
Two Colorado law professors (actual scholars, not the notorious clown!) have undertaken an interesting longitudinal study of law school success, looking at data, though, from just two schools: Colorado and Case Western. It is informative about schools with similar profiles, but I wonder whether the results hold if one looks at much stronger or much weaker schools?
(Thanks to Dean Rowan for the pointer.)
June 22, 2015
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 18, 2015
A number of recent analyses purporting to show the negative effects of student loans compare group A, which has student loans and a bachelor’s degree to group B, which has the same level of education but no student loans (see here for an example). Not surprisingly, the studies find that the folks who have a college degree but no student loans are doing better on a variety of measures. Unfortunately, many of the studies improperly conclude that student loans are causing the bad outcomes.
The problem is that the likely alternative to student loans and a college degree for people who need to borrow to afford college is not a free college degree. The likely alternative is no college degree and no student loans—i.e., lower earnings, and eventually, a lower net worth.
Among those who will eventually graduate from college, those who will graduate with no student loans are very different from those who will graduate with student loans. These differences are present before they even set foot on campus.
Why do some people graduate from college with no debt?
1) Their parents are rich and pay for college—and most likely provide additional financial support after college
2) Their parents are not rich but are extremely devoted to their children’s education and find a way to pay for college—and most likely provide additional support after college
3) The students are exceptionally talented academically, athletically, or artistically and obtain large scholarships
4) The students are unusually hard working and market savvy and find a way to earn a lot of money while in college
5) The students live in a wealthy city or state that generously funds public services such as higher education, and probably also funds other public investments (Note that most public colleges are not generously funded and have lower completion rates than resource-rich private colleges).
These “student loan studies” are not studies of the effects of student loans. They are studies that find that people who are more talented, harder working, come from wealthier and more supportive families, and live in richer communities with more enlightened governments are more successful. This is neither surprising, nor is it relevant to student loan policy.
Eliminating student loans won’t magically give everyone rich, devoted parents, boost students’ intellectual, athletic, or artistic abilities, or turn the least developed and most mismanaged parts of the U.S. into centers of economic activity and paragons of efficient public administration.
Criticisms of student loans seem to be motivated by an idealized conception of public, taxpayer funded higher education. In practice, these systems are too often characterized by weak, underfunded institutions, misguided political interference (for an example of left-wing interference, see here; for right wing interference, see here, here, and here) and micro-management (here and here) by political leaders , price controls (here and here, and here), disruptive budgetary uncertainty (here, here and here), and resulting shortages (here, here, here, here, and here).
This does not mean that we should abandon the goal of a well-funded public higher education system where academic freedom is protected, but it would be imprudent to put all of our eggs in a single basket, particularly one that political leaders frequently raid to close budget gaps.
Scaling back student loans will undermine investment in higher education, to our collective detriment. Without access to credit, students from modest backgrounds will too often be trapped in the under-resourced institutions that our tax-adverse political systems is willing to support (or denied access altogether because of enrollment caps) instead of at least having the option to pursue the higher quality education that is ultimately in their best interests.
June 16, 2015
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).
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.