October 08, 2015
Student loans are more difficult to discharge in bankruptcy than most consumer or business debts. Discharge is only available if repayment “would impose an undue hardship on the debtor and the debtor’s dependents.” 11 U.S.C. § 523(a)(8).
These restrictions on discharge are controversial. Supporters note the possibility of strategic filings by student debtors with low assets and high expected future incomes and the danger of such defaults driving up the costs of credit. Skeptics argue that such concerns are empirically unsupported and that bankruptcy discharge provides an important mechanism for spreading the risks of investments in higher education.
In policy circles, momentum seems to be building for at least some relaxation of the restrictions on student loan discharge. The Department of Education recently released a report supporting discharge of private student loans in bankruptcy. The report argues that federal student loans should be treated differently from private loans because federal loans are not underwritten and because income based repayment with debt forgiveness is available for federal loans. Adam Levitin made similar arguments in the Wall Street Journal several months ago.
Access Group announced its support for discharge of student loans after a 7 year waiting period, as long as the loans are not already eligible for income based repayment with debt forgiveness after at most 25 years. The proposal also calls for restricting discharge for those who have previously discharged student loans in bankruptcy.
Access Group’s proposal appears to leave open the possibility of private student loans retaining current protection against discharge in bankruptcy by offering income-based repayment terms similar to those available from the federal government.
September 01, 2015
Student loan borrowers with the highest debt levels have the lowest default rates (Michael Simkovic)
August 28, 2015
August 27, 2015
I recently posted about the need for law schools to fund the AALS so that it can become a resource for journalists and encourage more accurate and balanced press coverage. I noted how unrepresentative and disconnected from reality the press coverage has been, and that individual law professors and deans who have pointed this out have faced ad hominem attacks and other abuse, which has had a chilling effect on speech.
The online gossip blog Above the Law has been kind enough to illustrate my point by responding with a series of misrepresentations and ad hominem attacks. They’ve misrepresented my calls for provision of honest and accurate information as an invitation to lying and propaganda (and included a Pinocchio cartoon in cased anyone missed their headline) and somehow managed to dredge up completely irrelevant and salacious allegations against a former Dean, who I mentioned in my post only because of the attacks he and his law school faced immediately after his 2012 New York Times editorial.
I believe that law schools should provide accurate information to the public in an efficient way. There is nothing unethical about this view and no reason to keep it secret, which is why I have openly posted these views on a blog that anyone and everyone in the world can read.
ATL has done a terrible job in terms of accuracy and balance in their reporting—repeatedly misrepresenting (here and here) my and Frank McIntyre’s peer-reviewed research on The Economic Value of a Law Degree —and the way in which they’ve depicted well intentioned efforts to correct the record is yet another example of biased reporting, anti-law school vitriol, and of the need for active efforts to correct the record and provide greater balance.
August 24, 2015
Earlier this month, I charted the overwhelmingly negative press coverage of law schools and the legal profession over the last 5 years and discussed the disconnect between the news slant and economic reality. To the extent that news coverage dissuaded individuals from attending law school for financial reasons, or caused them to delay attending law school, newspapers will on average have cost each prospective law students tens of thousands, or even hundreds of thousands of dollars. The total economic harm across all prospective law students could easily be in the low billions of dollars.*
What can we learn from this?
August 10, 2015
Bloomberg reports on former Secretary of State and Senator Hillary Clinton's policy proposal for higher education. The proposal combines federal matching grants to encourage state investment in public education with increased oversight and cost control measures. The federal grants would be funded by increases in income tax revenue, through limits on itemized deductions for upper middle class taxpayers. In other words, the proposal is to tax the educated middle class to pay for education, while increasing federal government oversight and control.
Details are sparse, but it appears that increased federal funding would be available exclusively to public institutions. If enacted in its current form, this policy could provide public universities with a large advantage over their private non-profit and for-profit competitors.
Clinton's proposal incorporates some elements of an earlier proposal by Senator Sanders for more extensive public funding for higher education. Sanders' plan would provide more funding for higher education than Clinton's proposal, and fund it through a financial transactions tax. Sanders' funding mechanism would likely be more progressive than Clinton's, but would also be more dependent on a single sector (financial services).
In a recent column, the New York Times’ Nicholas Kristof confessed, “One of our worst traits in journalism is that when we have a narrative in our minds, we often plug in anecdotes that confirm it.” The quote is timely, given recent controversy surrounding New York Times’ coverage.
Newspapers tend to emphasize anecdotes over data. This gives journalists, editors, and their sources tremendous freedom to frame a story. A few individuals can serve as ostensible examples of a broader phenomenon. But if those examples are unrepresentative or taken out of context, the news story can be misleading by omission and emphasis. If you get your information from the newspaper, you might worry more about stabbings and shootings than diet and exercise, but you are roughly 38 times more likely to die from heart disease than from violent crime.
Similar qualitative problems—sensationalism, reliance on extreme and unrepresentative anecdotes, lack of context, and omission of relevant data and peer reviewed research—characterized press coverage of law schools and the legal profession. (See New York Times; The Wall Street Journal; New York Times again)
Newspapers conflated a generally weak labor market—in which law graduates continued to have substantial earnings and employment advantages over similar bachelor's degree holders (see The Economic Value of a Law Degree; Timing Law School; Compared to What? (here and here); Recent Entry Level Outcomes and Growth in Lawyer Employment and Earnings)—with a law-specific problem. They criticized law schools—and only law schools—for practices that are widespread in higher education and in government. (see competitive scholarships; school-funded jobs, measuring employment / unemployment) And they uncritically reported research, no matter how flawed, that fit the anti-law school narrative. (see Failing Law Schools' problems with data and citations; a free education as a hypothetical alternative to student loans; and other inapposite comparisons (here, here and here)).
Newspapers' sensationalist law school coverage may have helped their circulation—negative coverage attracts eyeballs—but it mislead students in harmful ways. Recent research suggests that each year of delaying law school—for example, to wait until unemployment declines—is counterproductive. Even taking into account the potential benefits of graduating into a better economy, these delaying strategies typically cost the prospective law student more than $30,000 per year because of the high opportunity cost of lower earnings with a bachelor's degree instead of a law degree. The longer the delay, the higher the cost.
So which newspapers and journalists provided the most negative coverage? And how has the news slant evolved over time? For an explanation of methodology, see the footnote at the bottom.*
The most negative newspapers were the Wall Street journal, the Chicago Tribune, and the New York Times, in that order. The Wall Street Journal was exceptionally negative—more than 7 times as negative as the average newspaper. A few newspapers, such as the Orange County Register, were net positive.
2011 to 2013 were exceptionally negative years, with dramatic reductions in negativity in 2014.
Did negative press coverage cause a decline in law school applications, independent of the events being covered? Differences in press coverage can move financial markets, according to research exploiting variation in local coverage of identical national events and local trading patterns, so perhaps press coverage can also affect other markets. (The leaders of Law School Transparency apparently believe that negative press coverage can reduce law school applications. One of them explained his efforts to pitch negative news stories in specific parts of the country where he thought law school enrollments were too high.) (PDF here)**
The New York Times and WSJ both went negative early, but the Wall Street Journal remained more negative for a much longer period of time. Most of the uncredited (no byline) stories in the NY Times and WSJ about law school were negative.
The WSJ had an unusually deep bench of anti-law school journalists. By contrast, most newspapers had a few very negative journalists and otherwise a fairly even mix of slightly negative and slightly positive journalists. The most anti-law school journalist was Ameet Sachdev of the Chicago Tribune, whose coverage was about twice as negative as either David Segal of the New York Times or Jennifer Smith of the Wall Street Journal.
Geographically, the hardest hit areas were New York, Illinois (Chicago), and Washington D.C. (This is counting the New York Times and Wall Street Journal as New York papers). Ohio was the only state that saw net positive coverage.
The pattern of coverage does not seem to have much relationship to the strength of the local legal employment market, but rather seems to turn more heavily on idiosyncratic editorial policies at particular newspapers that happen to be headquartered in certain states.
* I asked my research assistant (a third year law student) to gather articles about legal education and the legal profession from the top 25 U.S. newspapers by circulation for which data was available from Proquest back to at least 2010. My RA then rated each article as "positive", "negative" or "neutral" depending on whether the article would have made him more or less likely to attend law school if he had read it while deciding. For each newspaper or journalist, the number of positive articles was subtracted from the number of negative articles to arrive at a net-negative count, and newspapers were ranked on this metric. There are some obvious limitations of this approach--it doesn't measure how positive or negative each article is, it assumes that one positive article can balance out one negative article (negative articles probably have a bigger impact than positive ones), it relies on the opinion of a single third year law student. It also lacks context—perhaps newspaper coverage about all topics is generally negative. Perhaps newspaper coverage of all higher education was negative during this period. Nevertheless, this approach may provide some useful insights. All editions of the Wall Street Journal and New York Times tracked by Proquest are combined, but identical articles published in different editions are counted only once. The WSJ blog is included as part of the WSJ.
** Contrary to popular belief, there is little evidence that larger law school graduating class sizes predict worse outcomes for law school graduates, nor is there evidence that smaller graduating class sizes predict better outcomes. See (Timing Law School and a summary). In a recent robustness check considering many alternative definitions of cohort size (but not yet reported in the draft paper), McIntyre and Simkovic continued to find no evidence that smaller graduating cohorts predict higher earnings premiums for recent graduates.
August 07, 2015
Higher education provides massive benefits to the public fisc. These benefits come in the form of additional payroll and income tax revenue, less dependence on social welfare, and student lending profits.* Based on tax revenue alone, the government’s “cut” of the higher education earnings premium is typically far larger than tuition collected by the college that provides the education.
While there’s a lot of talk about the government subsidizing education, it’s actually the other way around. The public return on investment in higher education helps sustain the government’s expenditures in other areas that are unlikely to provide much of a financial return, like military spending (roughly 25 percent of the federal budget, including veterans' benefits). Even taking into account public subsidies to higher education, the federal government already taxes higher education far more heavily than many other investments.
Two Senators, Jeanne Shaheen and Orrin Hatch, want to tax higher education even more, although they euphemistically call their new tax “risk sharing.” Under their proposal, the federal government would shift some of the downside risk of education investment—delays in loan repayment by some student borrowers**—to colleges, but would not share the upside.***
Risk typically comes with rewards. If the government would like to “share the risk” of education investment with institutions of higher learning—like a corporation offering restricted shares to its employees—then along with student loan losses, why not offer colleges a proportionate share of the student loan profits and marginal increases in tax revenue ?
Real risk sharing—on both the upside and downside—would mean a massive increase in public investment in education, not additional taxes on this already overly-taxed sector of the economy.
* Because of progressive income taxes and payroll taxes, the federal government keeps approximately 40 cents of every extra dollar earned because the workforce is more educated. Federal student loan programs are profitable under conventional methods of accounting because the repayments the government receives exceed financing and administrative costs. Some have claimed that federal student loans are not profitable by arguing that if the government charges less than private lenders would charge, the government is still “losing” money it could be making. This calculus typically ignores the effects of lower pricing on boosting enrollment, increasing the volume of lending, and increasing tax revenue. This argument is the essence of controversial “fair-value accounting” claims, although the argument is typically framed in terms of cost of capital considerations.
** These charges for delayed repayment are not necessarily compensation for losses, but rather an estimate based on non-repayment of loans in the first few years after studies end. This estimate could enable the government to double-dip, charging institutions for delayed repayment in early years while recovering accrued interest, principal and collections costs from student borrowers in later years when their incomes are higher and their employment is more stable.
*** Some indeterminate fraction of this tax revenue would be returned to colleges that serve low-income students through DOE grants. However, those same institutions are the ones who are most likely to have students who struggle to repay their loans-and will therefore be the ones to pay the tax. The grants awarded could be substantially lower than the taxes collected. The bill is likely to be a drain on resources available for education, especially net of transactions and compliance cost.
August 05, 2015
College costs more than it used to. It's also worth a lot more than it used to be worth. The increase in value of a college education exceeds the increase in the cost of a college education by a very wide margin.
How much has the cost of college actually increased? It may be less than you think.
According to the Department of Education and the National Center for Education Statistics, at 4 year institutions, average college tuition is up about $1,900 in real (inflation-adjusted) terms in the five years from 2008-09 ($21,996) to 2012-13 ($23,872). This is an average increase of less than $500 per year. The real increase during this 5-year period has been higher at public colleges ($2,100) than at private non-profit and for-profit colleges ($1,400).
That's before taking into account scholarships and grants.
After subtracting scholarship and grants, according to the College Board, real net tuition and fees at 4 year private non-profit institutions have actually gone down. Real net tuition and fees increased at 4-year public institutions over the last 6 years by about $1,000, or about $170 per year.
So how much would the value of higher education need to increase to justify this increase in cost? The increases at public institutions come to around $5,000 more for a bachelor's degree.*
That extra $5,000 will pay for itself if 4-year colleges spend the extra money in a way that boosts their former students' real annual earnings relative to high school graduates by $220.** When we take into account increases in college completion rates over time and longer life expectancy, the required increase in annual earnings could be even lower.
So yes, improvements in the quality of education can easily pay for increases in the costs of education. If the rising earnings premiums and increase in completion rates within race over the last three decades are caused by increased college expenditures, tens of thousands of dollars in increased expenditures per bachelor's degree have more than paid for themselves so far, and by a very wide margin.***
The labor economics literature generally suggests that the marginal rate of return to higher education is high, whether the "margin" is defined as upgrading individual education from high school to 4 years, from 2 years to a bachelor's, or from a bachelor's to an advanced degree. Within a given level of education and category of institution, those with more resources can generally do more to boost their students' earnings. A high marginal rate of return to education means we should invest more in higher education if we want the economy to grow faster, and invest less in things with lower marginal rates of return. (See here).
Investing more in education without increasing taxes means that tuition will likely increase. When we consider the benefits education provides, more investment in education is a good thing. When we consider our political system's allergic reaction to tax increases, increasing tuition may be the only realistic way to get there.
* Multiplying $1,000 by 5 years (assuming it takes 5 years to complete a bachelor's degree), we get an increase of $5,000 at public 4-year institutions (and a decline in cost at private institutions). For an individual, the aggregate increase in real net-tuition during 5 years of college might be less. The idea of the estimate is to compare the aggregate cost of college for individuals who completed college 5 years apart.
** This assumes a 40 year career and nominal (real) discount rate of 6 (3) percent. The $220 figure is before taxes and represents the aggregate social benefit to the government as tax collector and to the graduate, who will earn higher wages. If the entire cost is placed on the student, assuming 35 percent tax rates on the earnings premium, real annual earnings premiums would need to increase by $340 to make the student better off after taxes.
*** The differences in earnings in the column charts are raw differences by level of education rather than estimates of causal differences. However, the change in the raw differences over time may provide a good proxy for the change in the causal earnings premium over time.
Over at TaxProf, Paul Caron covers a student loan working paper inaccurately. Caron's headline is "NY Fed: Federal Aid For College Has Jacked Up Tuition (Especially In Graduate Schools)." (Emphasis added).
I've already discussed some of the methodological limitations of the working paper in question (read the bottom of the post). Beyond these serious issues, the working paper notably is not the view of the NY Fed (it is the individual work of 3 researchers, two of whom happen to work at the Fed) and it does not make claims about graduate school tuition. The study focuses on undergraduate tuition.
From the study:
"The views expressed in this paper are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System."
"In this paper, we used a Bartik-like approach to identify the effect of increased loan supply on tuition following large policy changes between 2008 and 2010 in the maximum federal aid amounts available to undergraduate students."
Kevin Drum at Mother Jones manages to do an even worse job than either the WSJ or TaxProf, declaring "As Federal Aid Goes Up, College Costs Rise Enough to Gobble It All Up." The claim in the working paper is not that an extra dollar of aid increases tuition by a dollar. The claim is that federal aid is associated with an increase in tuition of between 0 and 65 cents for every dollar of aid--depending on the type of aid and the control variables selected by the researchers--but the study failed to account for the fact that much of that increase in tuition will be returned to students as increased grants and scholarships.