Bill Henderson on the Law School Bubble

Indiana University law professor Bill Henderson, who for several years has been at the forefront of efforts to get law schools to consider the extent to which the return on investment for getting a JD does or does not justify the ever-increasing cost of doing so, has co-authored, with Rachel Zahorsky, a new article in the ABA Journal.  The focus of his piece is on the symbiotic relationship that now exists between direct federal educational loans and law school operating budgets.  Much of what he says will not be news to regular readers of this blog, but it's important to remember the extent to which many readers of a publication such as the ABA Journal are only vaguely aware of the scope of the financial crisis now enveloping the 44,000+ graduates pumped out by ABA schools every year.

Henderson points out that the long-term trends in the cost of legal education and the value of law degrees we have witnessed over the past generation are not mutually sustainable, citing the economist Herbert Stein's aphorism that "if something cannot go on forever, it won't."  Both the logic of this position and the facts justifying it would seem unassailable, but it remains the case that a remarkable number of people in legal academia continue to treat our role in all this as if we have no actual role in all this.  Consider this quote from a law school dean:

Mark Grunewald, interim dean of the law school at Washington and Lee University, thinks any blanket restrictions on federal student lending would be disastrous and unfair. “There are real differences among prospective law students’ economic circumstances, and new blanket restrictions on lending could hurt those most in need of financial support,” he says. “It’s also unclear what the legal employment market might look like after a general economic recovery. Market forces may ultimately prove to be a better corrective.”

This quote understandably exasperates Matt Leichter, author of the awe-inspiring Law School Tuition Bubble blog, who points out that in just the past seven years Washington and Lee's tuition has risen 35% faster than inflation. (On the other hand over the same time period my law school's resident tuition has risen by a tidy 133.45% over inflation, which by comparison makes W&L look like a model of fiscal restraint. The great thing about the law school racket is that it's almost always possible to find somebody who makes your own behavior look positively admirable by comparison).

Dean Grunewald's appeal to "market forces" is, under the circumstances, particularly chutzpahesque, give that his institution would have to either cut its prices drastically or go out of business if it were subjected to the dual market discipline of being forced to:

(1) Extract roughly half of its operating income from private student loans dischargeable in bankruptcy and not guaranteed by the government; and

(2) Reveal in sufficiently explicit detail exactly what happens to graduates of his law school one and two and five years (etc.) after graduation.

Grunewald, like so many legal administrators, talks about the cost of legal education as if it were a product of the laws of thermodynamics rather than the laws of what in a more enlightened era was called "political economy."  As Leichter emphasizes there is absolutely no reason why Washington and Lee, like the vast majority of law schools couldn't provide a much cheaper legal education than it does now with little or no discernible loss of quality.  After all, average law school tuition 25 years ago was literally a third of what it is today in constant dollars if you exclude all state subsidized tuition from the analysis.  In 1985 private law school tuition and non-resident public law school tuition averaged about $13,500 a year in 2010 dollars (if you included resident tuition, then and now, this comparison would make current tuition levels look much worse, as public law school resident tuition was $3,600 in 1985, compared to about $18,500 today. Again all of this is in inflation-adjusted dollars).

In other words, providing legal education at a reasonable cost doesn't exactly require some sort of technological or cultural breakthrough.  Law schools charge absurdly uneconomical -- from the perspective of their marks students -- prices because they can get away with it, period. And they can get away with it for two reasons: because they hide the ball in regard to employment and salary outcomes for their graduates, and because the federal government quite literally pays them to behave in this way.  As Henderson points out this is a situation that, from the self-interested perspective of legal academics and especially legal administrators, is too good to last, so it won't.

I do want to mention one aspect of Henderson's argument that's phrased in an unfortunate fashion.  Henderson points out that many recent graduates have $150,000 or more in law school debt, and then makes the following calculation:

According to NALP, the association for legal career professionals, the median starting salary for a lawyer who graduated from law school in 2010 is $63,000. For a recent, unmarried law school graduate making $63,000 and getting single-digit-percent annual pay increases, the chasm between income and prospective repayment is impractical for both the student and the government.


This combination of high debt and moderate income makes this all-too-typical law graduate eligible for the federal government’s income-based repayment program. According to FinAid’s IBR calculator, used by many law school financial aid counselors, the student will make monthly payments of $584 the first year and $1,605 in year 25. After 25 years, the loan is forgiven. At that time, more than half of the principal, $76,000, will not have been repaid, along with $26,000 in capitalized interest.

The government write-down for this student is about $103,000, which may be offset by an eventual tax payment: Under the current Internal Revenue Code, the law school grad would have $103,000 in imputed income for the debt forgiveness. Of course, the government would have to collect it from someone near enough to retirement to be eligible for membership in AARP.

I can understand that Henderson wants to use conservative estimates, if for no other reason than to avoid charges of alarmism from his head-in-the-sand colleagues.  But to a general audience, even a general audience of ABA Journal readers, this analysis gives a wildly optimistic picture of the present situation for law school graduates.  As Henderson is well aware, that $63,000 median starting salary for the average 2010 law school graduate is a completely fictitious figure.  It's based on the approximately 40% of graduates for whom a salary was reported.  How many of the 60% of the class for whom a salary was not reported had a salary of $63,000 or higher? Given the enormously strong incentives law schools have to discover and report the salaries of any and all of their graduates who have decent jobs, the answer is surely "almost none."  This suggests that hardly more than one in five graduates in the 2010 class had a salary of $63,000, and that the true median is far lower.

A $63,000 job with $98,000 of law school debt (this was the average law school debt for the class of 2010) is not a good outcome by most definitions of what counts as economic well being among the professional classes, but it isn't a catastrophe either, especially given the overall state of the economy. (Note that $63,000 is 23% more than the median household income in America and just about exactly double the median income of white males of working age).  Those are the sorts of figures that cause middle-aged lawyers and politicians to furrow their brows, then murmur platitudes about how things were tough in 1982 as well.  But as Henderson knows, 2010 law school graduates in such circumstances are in fact far better off than the large majority of their co-graduates. The members of the latter group are in circumstances which would, if more widely known, elicit something more than furrowed brows from the people who keep voting to let the federal government unknowingly encourage new classes of law graduates to bury themselves in life-wrecking mountains of debt.

That quibble aside, this is a valuable article which I hope reaches a wide audience.