Wednesday, October 28, 2015
N.Y. Times is Mistaken: Law Student Loans are Safe and Profitable for the Government (Michael Simkovic)
This weekend, The New York Times Editorial Board published a sensationalist lead editorial, “The Law School Debt Crisis,” claiming that law student borrowing is harmful to taxpayers. The New York Times is mistaken.
The Times cited Florida Coastal School of Law, a for-profit institution, as its prime example of law schools “vacuuming up hordes of young people, charging them outrageously high tuition and, after many of the students fail to become lawyers, sticking taxpayers with the tab for their loan defaults.” Florida Coastal seems like an easy target—even a Federal Court which dismissed a fraud suit against Florida Coastal described it as having “some of the lowest admissions standards of accredited or provisionally accredited law schools in the nation.” The Times has repeatedly criticized for-profit colleges, which it deems “predatory” based on their unusually high student loan default rates. (See opinion, upshot, news and news again).
If the Editorial Board's accusations were true—if the “majority of law schools” really were running “a scam” in which they load down their students with “crushing amounts of debt” which “they can’t repay”—Florida Coastal and other law schools should have among the highest default rates of any institutions of higher education in the country.
They don’t and they aren’t.
For the cohort entering repayment in 2012—the most recent year of data available*—the national 3-year cohort default rate on federal student loans was 11.8 percent. The comparable figure for Florida Coastal was only 1.1 percent—more than 10 times lower.
This isn’t a one-time fluke. In 2010 and 2011, Flordida Coastal's 3-year Default rates were 1.6 and 5.2 percent, respectively, compared to much higher national rates of 13.7 and 14.7 percent.
Other measures tracked by the Department of Education, like repayment rates, also show law school borrowers performing as well or better than most.
We see the same pattern across law schools and going back decades for which data is available.** Even low ranked law schools with allegedly “outrageously high” tuition generally have much lower student loan default rates than either the national average, or the average for institutions that grant bachelor’s or advanced degrees.
Law students not only have higher debts than most student loan borrowers; as professional students, they also pay higher interest rates on government loans than undergraduates.
Law students rarely default because the financial benefits they receive from attending law school are usually far greater than the costs.*** Law school typically boosts annual earnings by around $30,000 (median) to $60,000 per year (mean) compared to a bachelor’s degree.**** Even at the 25th percentile, toward the low end of the distribution, the annual boost to earnings is around $20,000 per year—more than enough to repay typical law school loans over the course of a career.
Taxpayers also benefit. For every extra dollar a law graduate earns, the federal government receives an extra 30 to 40 cents in payroll and income taxes. The federal government charges far more in taxes than most law schools charge in tuition.
But the government isn’t paying for most law graduates’ education. In fact, loans to law students are among the most profitable in the federal government’s student loan portfolio, thanks to high interest rates and low default rates. Many law graduates are such good credit risks, and are overcharged so much by the government, that private lenders have offered to refinance law graduate loans for substantially lower interest rates.
There are cases in which particular individuals have unusually bad outcomes and struggle to repay their loans. Thankfully, these situations are relatively rare among law graduates.
Incomes for law graduates may seem low when they first graduate, but typically climb rapidly over the next several decades. Education loans exist precisely so that borrowed money can be repaid later in life, when employment is more stable and incomes are usually higher.
The New York Times is right that many law school graduates—around 40 percent—do not practice law. But law graduates do not have to practice law or earn spectacular salaries to benefit financially from their degrees and repay their loans over their careers. They need only earn roughly $10,000 per year more than they would have earned without a law degree. The overwhelming majority of law graduates, including those not practicing law, receive substantially larger boosts to their earnings.
Thanks to income based repayment programs with debt forgiveness and progressive taxation, the overwhelming majority of successful law school graduates can offset the risks of investment in education for those rare unfortunate individuals who do not benefit as much from their educations.
It would be a mistake to let the small tail of defaults wag the much larger dog of public benefits.
Scaling back access to federal student loans to law students will not benefit taxpayers. To the contrary, the loss of revenue would mean larger deficits for the government, and eventually higher taxes for the rest of us.
*This reflects defaults for those who entered repayment in 2012 over the following 3 years. Thus it includes relatively recent defaults. The data was released in September.
**Data on default rates is available for approximately 25 law schools that report separately from a larger university. 23 out of these 25 institutions rank in the bottom half of ABA-approved law schools (one is not ABA-approved), and only one ranks in the top quarter of law schools. 2-year cohort default rates are available from FY 1990 to 2011. 3-year cohort default rates are available from 2009 to 2012.
***A rival explanation is that law students will not default on their loans even though repaying them is a hardship, because defaulting would preclude bar admittance on “character and fitness” grounds. If that were driving the difference in default rates, then law schools’ relative advantage would shrink as more law graduates gained admission to the bar. But in fact, law schools’ default rate advantage does not diminish as we move from default within 2 years to default within 3 years.
Another explanation is that law graduates could be avoiding default by disproportionately taking advantage of income based repayment plans with debt forgiveness. This explanation is also unlikely to explain most of the gap because (1) law school borrowers default rates were relatively low long before these programs were introduced and their advantage has remained relatively constant after their introduction; (2) if law students were disproportionately using income based repayment to avoid default (rather than to pay down their loans at a slower pace, similar to schedules available through graduated and extended repayment plans), the percent paying down their debt should be unusually low; in fact, law school borrowers repayment rates are generally as high or higher than most institutions according to recent Department of Education data; (3) law schools are nowhere near the default rates at which negative institutional consequences materialize, and therefore have little incentive to try to artificially push down their default rates (4) After the JD found that law students from the class of 2000/2001 have paid down their loans rapidly (5) to the extent that law graduates are enrolled in programs tied to public service, rather than low incomes and high debts, these public service loan forgiveness programs are working as intended by narrowing the compensation gap between private and public sector work.
**** These estimates take into account the fact that law school graduates and bachelor’s degree holders will both suffer periods of unemployment and that the average law student has higher innate earning potential than the average college graduate. The estimates include the many law school graduates who do not practice law and the few who never pass the bar exam. (The data only has a field for law degree, not one for bar passage, so those who do not pass the bar exam are indistinguishable from those who do but do not practice law).