Monday, January 2, 2012

The scholarship game

One of the most significant developments in the law school world over the past few years has been the explosion in so-called "merit scholarships."  The definition of a scholarship can be tricky: traditionally the term was used to describe money generated by endowed funds given to a school for the purpose of offsetting attendance costs, but now it tends to be used more generally to mean any discount off the advertised price of attendance, from whatever source.   In fact at present the vast majority of "merit scholarships" offered to prospective law students don't come from endowment income, but rather from tuition cross-subsidization. (Harvard, Yale, and Stanford, who are in the unique position of not really competing with other law schools for students, claim all their financial aid is need-based.  Need-based financial aid at other law schools ranges from skimpy to non-existent. I'm not going to discuss in this post the dubious practice of handing out "merit scholarships" that come with continued eligibility requirements that, because of law school grading practices, guarantee that many recipients will lose those scholarships after their first year).

It works like this:
suppose a school nominally charges $40,000 per year in tuition, and admits 200 students per class.  In theory each class pays eight million dollars per year in tuition, but in fact it only pays $6.4 million. This is because the school uses the tuition money it receives from the class to distribute "merit scholarships" equivalent to 20% of nominal tuition to each class. The majority of students pay $40,000 per year, and the vast majority pay more than the "average" (mean) tuition of $32,000. What this means, of course, is that the students who are paying full tuition are subsidizing students who are paying less.  Essentially, schools are charging some students to pay some or all of the costs of buying the attendance of other students.

This system, like so many other aspects of contemporary American legal education, has arisen as a consequence of the ratings game.  The entrance qualifications of each class, in terms of LSAT and GPA numbers, make up 22% of the USNWR ratings formula, and so schools invest resources in buying students who would otherwise go to higher ranked schools.  Unfortunately, the bulk of those resources are extracted quite directly from other students (Merit scholarships in the traditional sense of endowed funds exist, of course, especially at higher ranked schools, but most "scholarships" are simply tuition cross-subsidization).

Since on average a student's combined LSAT and GPA numbers to some extent predict how well the student will do in law school (with many individual exceptions of course) the upshot of all this is that the students who are the most likely to get good legal jobs, or any legal jobs at all, are those who are paying significantly less, on average, for their law degrees than their classmates who are getting worse jobs, or no jobs at all -- and indeed the latter group is paying for much of the legal educational costs of the former.

While this arrangement is no doubt pleasing to Ayn Rand, wherever she may be currently located in plus soul time or minus space time, those of an even mildly egalitarian political bent ought to find it quite troubling.

Another interesting question raised by this system is the extent to which the scholarship game is an efficient market.  In other words, to what extent are students who choose to go to School A over School B because School A is much cheaper as a consequence of tuition cross subsidization making decisions that are likely to benefit them in cost-benefit terms?  Because of the wonders of the internet, it's now possible for prospective students to get an excellent sense of how much money they're likely to be offered in "scholarships," and to play schools off each other in the application process.  Consider this site,  which provides 0Ls with an amazing amount of information regarding exactly what schools they can expect to get into, and exactly how much money they can expect those schools to offer them.

Let's take a look at an applicant from last year's admissions cycle to see how this game works.  Vegenator sported excellent LSAT and GPA numbers -- high enough to get her admitted to one T6 school and wait listed at two others, although she was rejected by HYS.  She was accepted by most of the rest of the T14 to which she applied, as well by every non T-14 school to which she sent her application.

Eventually, Vegenator had to decide whether to:

(a) Attend Chicago at sticker, meaning she would end up paying around $150K in tuition.

(b) Attend Michigan for $15,000 per year off listed tuition, meaning she would end up paying around $100K in tuition.

(c) Attend Duke for $19,000 per year off listed tuition, meaning she would end up paying $85K in tuition

(d)  Attend Texas for $25,333 per year off listed tuition, meaning she would end up paying around $40K in tuition.

(e) Go to WUSL, Illinois, Iowa, or Indiana, pay no tuition, and have most or all of her living expenses during law school covered as well.

(I am omitting a host of various other options she had, as they were by comparison non-starters).

Now, in order to make this decision in a reasonably rational (and therefore "efficient") manner, what this applicant had to do was to calculate the probable differences on ROI from a law degree from these various institutions.  In order to do this, of course, she needed to have reasonably transparent employment and salary data available to her at the time she made her decision, which, given that she made it a year ago, she for the most part did not.

If she were making her decision today, her situation would be somewhat better, but still very far from optimal. As more and more prospective law students get savvier about the fact that they have the choice of either being subsidized by their fellow classmates, or subsidizing them, the pressure on law schools to disgorge the information 0Ls need to make these decisions rationally will build. And that's all to the good.

Whether the current system of tuition cross-subsidization is defensible in moral and political terms is of course a wholly different question.

47 comments:

  1. I'd have recommended she take the full ride at Washington U.--she'd probably be close enough to the top of her class there to get into Big Law, and she'd sure save a heck of a lot of $$!

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  2. People often make irrational choices in situations like this. They will choose a better prestige school based on vanity not economics.

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  3. If I wanted "prestige" I would go to Chicago, which will give her a very good shot at biglaw, clerkships or other highly coveted positions and an excellent faculty (and low faculty/student ratio).

    If I wanted economic ROI, I would go to WUSTL which will give her a so-so chance at those coveted jobs, but which will essentially be a proposition with little risk. (That being said, we really need transparency on these "not T-14 but not tier 2" schools. Who knows how many they actually place into good jobs? What if it's a mere 20% of their graduates?)

    If she has a particular interest in Ann Arbor, Texas or NC she can also consider Duke.

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  4. 8:42,

    You don't understand the term "rational." Rational means that she would pick the school that gives her the best chance of getting what *she* wants.

    You live in an idiotic world where the only "rational" choices are ones viewed as "rational" through your eyes. You're the problem.

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  5. Lest anyone forget how criminally dishonest law schools used to be about job placement, read this article from 2007.

    I quote, " . . . it's no longer news when a Brooklyn Law School graduate who didn't make the law review ends up at a prestigious firm such as Dewey Ballantine or Cahill. 'Even going deeper in our class, they still can't get as many as they want,' says Joan King, Brooklyn Law School's director of career services. 'I've had more calls this year than in the last three from firms like Cleary Gottlieb and Skadden, complaining they didn't get enough acceptances from our students.'"

    http://www.crainsnewyork.com/article/20070225/SUB/70223014#ixzz1i3rss739

    These CSOs are on the defensive now. Now they're trying to figure out how to get their reported salary percentage down so they don't have to show all those low salaries, but all in all when you deal with law school administrators and professors you are dealing with people whose ability to profit from lies is on par with any psychopath.

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  6. (Hat tip jdu for that crains link)

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  7. In 2006 I faced nearly the same situation as Vegenator. Go to Columbia or U of Chicago at full sticker, Virginia or Michigan at deep discounts or Northwestern giving $100,000. Came down to Northwestern and Columbia and was a very difficult decision and went back and forth a million times. But this was before the big crash and wanted to work in Big Law in NY....chose Columbia and am now working in a white shoe firm. Got very fortunate in the end with everything that happened post-2007 combined with the fact that I'm not miserable working where I work while everyone around me is (not to mention all the unemployed and underemployed).

    Still have some regrets about all that money lost but have a bad feeling I wouldn't be working where I work now if I made a different decision. In the end I got very lucky but feel sick that Im part of a system that has cannibalized its young.

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  8. Joan King was smart. She saw the writing on the wall and bailed out of the law school scam right when the negative PR began to hit the fan. She now sells real estate in Connecticut.

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  9. The problem you describe is particularly acute at law schools with part-time programs especially ones started in the last few years. Until recently law schools could admit students part-time and they didn't count in US News. Law schools would use the extra tuition money from part-time students to fund merit scholarships for students that did count. (Reverse Robinhood) These schools put very little effort into their night programs and they didn't care whether the student could graduate or pass the bar. US News has now stared counting part-times students so some of these schools are terminating their part-time programs. Beware of part-time programs especially recent ones and ones that are day part-time programs.

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  10. Lucky Pierre, You could have worked at Cleary or Skadden by accepting a full ride at Brooklyn. You f'd up son!

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  11. Speaking of part-time programs and Brooklyn Law School, it was just a mere 2 years ago that Brooklyn Law School "inadvertently" forgot to submit part-time LSAT & GPA numbers to US News when they were required to do so. Bob Morse wrote a blog post chastising them for doing so, but of course they suffered no other ill consequences. Joan King can spew such nonsense and fraudulent bile because she knows that she can get away with it. US News and the ABA love to censor and slap law school administrators on the wrist for their blatant fraud and misrepresentations, but the deans know that they are nothing more than yapping poodles with no teeth.

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  12. Keep in mind that not all of these merit scholarship recipients will perform well enough in law school, to hang onto their scholarship. Typically, renewal of the offer is contingent on maintaining a certain GPA.

    Scholarship students may feel that they can easily earn a 3.3 GPA. Especially, if they had a high LSAT score, and earned a 3.9 in undergrad. However, with forced grading curves, it can be difficult to earn a 3.0 GPA. "Law professors" teaching first year courses DO NOT pass out many high grades - even if several students produce high quality essay exams. The difference between an A and a B- can be very slight.

    Overall, Campos is correct in his assessment. Even when those scholarship students who hold onto their offers for the three years, it is troublesome. Those with poor grades will not receive scholarship money - and they will face pathetic job prospects. As such, their tuition dollars and non-dischargeable student loans will subsidize those students who do not to worry much about their job possibilities.

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  13. Is it true that the Beastie Boys went to Brooklyn Law School? They got good jobs.

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  14. LawProf,

    This is one of your best posts yet. Good work.

    The part-time issue mentioned by a few commentators is interesting. Perhaps you could do a post on the economics of part-time programs and, if known, the outcomes of part-time grads? In general it is known they are in retreat after the USNWR methodology change, but certainly some programs still exist and it would be interesting to know more about them from the perspective of economics and value.

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  15. I would imagine part-time students do better on the job market, since the reason you go part-time is that you are already working at a job.

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  16. It's a perverse "Reverse Robinhood" system where the winner takes all, and the American taxpayer is on the hook for the 95% who fail. Hello, IBR!

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  17. 10:28 -

    One would assume that to be the case, but I know people who applied to FT programs (only) and were not working, and were called by admissions offices and asked if they would consider PT (some ultimately enrolled PT, b/c their FT offers were from worse schools). That was before the USNWR change, and presumably these ppl had numbers that the law school did not want to have to report. Nevertheless, even with the change, I would suspect some PT programs continue to be less selective than their FT counterparts and thus continue to enroll people who do not have day jobs. So I don't think we can assume PT grads have better luck on the job market on account of already being employed.

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  18. You are right 10:36. Some law schools force students who want to be full-times into part-time. They do this to meet their budget. If they try to do this to you, run!

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  19. How do these part-timers do on the bar? I bet they have a low passage rate. Aren't law schools not supposed to admit students they think will have trouble passing the bar?

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  20. 11:23: In 2009 two ABA schools had bar passage rates below 50%, five were below 60%, 20 were below 70%, and 41 were below 80%.

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  21. "The majority of students pay $40,000 per year, and the vast majority pay more than the "average" (mean) tuition of $32,000. What this means, of course, is that the students who are paying full tuition are subsidizing students who are paying less. Essentially, schools are charging some students to pay some or all of the costs of buying the attendance of other students."

    LawProf

    Does this mean that average students are paying 20% more tuition to subsidize the scholarships of others? That's the way I read your post.

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  22. In the example, students who are paying $40,000 (list price) are paying 20% more than the mean tuition, i.e., total tuition paid divided by students. The median tuition (the tuition paid by more than half the students) will probably be $40,000.

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  23. Interesting, so law schools charge 20% more because of merit scholarships. I thought law schools were supposed to be liberal institutions that fought for justice and the disadvantaged. Turns out they are just looking out for number one, themselves.

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  24. The value of my scholarship was pretty much equivalent to the down payment on my house. I wouldn't here gone to LS without the money...

    No intentions to be a lawyer...

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  25. How can you place a market value on prestige? The social status and cache gained by telling people that you went to an elite institution like Duke (but not Univeristy of Chicago, Texas or Michigan because those are state schools) is priceless.

    Do you not want respect and status?

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  26. I refer to poor Vegenator again. The illustration LawProf makes is intended to demonstrate the impact of "scholarships" or subsidies for some students I think. The comments regarding "prestige" of a law school remind me of the old proverb "Pride comes before a fall." Vegenator's choices to make remind me of the lyrics to a country song "...what part of no don't you understand?..." The data on law school transparency's website demonstrate that obtaining a biglaw position from almost all schools is a risky proposition. At best the odds are between half and two thirds at the schools that have the best placement in biglaw. The biglaw model as confirmed by Citi Accounting Group in Q3 2010 insures that somewhere around 80% of those who enter biglaw won't be at the same biglaw firm 5 years later. Having lived biglaw for more than a decade, I can tell you that the majority of that 80% do not simply lateral to another biglaw firm. Once the gig is up, it's up for the majority. In view of that, who in their right mind knowing the data, the truth, would take on needless loans to attend a more "prestigious" law school for a greater chance at what will for the vast majority amount to no more than a temporary job of a few years duration?

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  27. 1:58: That's an excellent point, which is constantly obscured by the focus on high average starting salaries at the handful of schools that can legitimately claim them for their graduates.

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  28. I say take the full ride. A JD for free would certainly free up her career choices.

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  29. I'm just going to throw this out there, but nerdy kids who want a social life in law school need to be careful about taking the full ride at a lower tier school. The lower you go, the cooler, better looking, more athletic the class (albeit they may be "dumber" if sub 160 LSAT equates to dumbness.) Do you want to be the ugliest and nerdiest kid in your class?

    . . . trolling trolling trolling

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  30. Worth mentioning:

    According to her profile, Vegenator ultimately enrolled at Michigan. Wonder how she feels about it halfway through 1L.

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  31. The beginning of the end of IBR: Conservative columnist labels program as "bailout of young and privileged borrowers."

    http://seattletimes.nwsource.com/html/opinion/2017129139_will01.html

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  32. Oooh good link 4:56. It's actually a true statement. You won't see too many really poor or ghetto kids applying to law school.

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  33. I think taking Michigan with a $45,000 discount (over the three years) over Chicago was a mistake, unless she has some connection to Ann Arbor. Either way she'll wind up borrowing a lot of money, and Chicago is better on so many levels. Any way, none of my business.

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  34. I went to a law school that was part-time for most of its long history, until it added a full time program to get ABA accreditation. I met several part timers, and was always impressed by their dedication (by 7PM I'm brain dead, I could never take up the study of Evidence at that hour) My purely anecdotal sense is that many do well in the job market, as they work as paralegals, or DA/PD investigators etc. so have real marketable skills...

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  35. that was my impression too 527

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  36. "Network"

    - Joan King

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  37. Why not just eliminate merit scholarships? The law degree should be a professional degree supported with the tuition supported by future earnings. If the ABA banned merit scholarships, the schools would no longer play the rankings game. (With no one playing, I suspect that the impact on rankings would be minimal).

    By your calculations, 80% of law students would get a discount. Those who would have received merit scholarhips could attend better schools.

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  38. Really, Lee? (is that southern or asian, by the way?)

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  39. Great idea Lee. Deans won't do that because they want to move up the feeding chain and get a deanship at a better law school or become a federal judge. Then they leave their old law school in the gutter where they found it.

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  40. What the hell are you people talking about?

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  41. 6:43,

    A poster above said that Joan King is doing real estate work in Connecticut. Looks like she will have to practice what she preaches. LOL

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  42. Another interesting aspect of scholarships is the games law schools play for you to keep the scholarship in years 2 & 3 once you have been admitted. I know many people who were given scholarships for their first year but had to maintain a certain rank to get the money in years 2 &3. The students who received scholarship money were ALL then placed in "seminar" classes with other smart students who received scholarships. As they were all in the same class, it made it very difficult for them to maintain a high rank in their entering class of 500 people (some had to stay within the top 20% of the entire entering class rather than their seminar section) as none of the other sections had the bright scholarship students in them. This not only impacted their ability to continue to get their scholarship money in the future but also the lower grades had a long term impact on their ability to find a job. A crappy thing for schools to do to save a few bucks in the future.

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  43. God went to the TOILET in downtown Newark NJ and the SETTTTON HALL LAW TOILET was formed!

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  44. Reverse robin hooding is a good term for law schools are doing!

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  45. In finance, you learn to evaluate the potential return on an investment by multiplying the probability a given event will occur by the return generated by that event. For example, if I invest $1000 in a stock, and there is a 20% chance that stock will be worth $2000 in a year, but there is an 80% chance that stock will be worth $700 in a year, the expected return would be calculated as follows:

    0.2 * 1000 + 0.8 * -300 = -40

    It's a pretty simple analysis and requires some sweeping assumptions, so it's not perfect, but the conclusion is clear and powerful - buying this stock isn't a great idea, because I will most likely lose some money.

    Given the class rank associated with a law school GPA, I wonder if the same principle could be applied to analyzing the risk associated with scholarships. For example, let's say Law School A and Law School B both charge $40,000 per year in tuition. A offers me a $30,000 per year scholarship, but in order to keep the scholarship all 3 years, I need to maintain a 3.3 GPA, which is the top 10% of the class. B offers me a $20,000 per year scholarship, but all I have to do to keep it is not flunk out. The offer from A is tempting, but if I do an expected value calculation like the one above, I can make a more accurate comparison of what I can expect to pay at both schools.

    At A, I have a 10% chance of spending $30,000 on law school tuition over 3 years. I also have a 90% chance of losing my scholarship after my first year, which which would lead to me spending $90,000 for law school tuition over 3 years. So at A, my expected cost of tuition is as follows:

    0.1 * 30,000 + 0.9 * 90,000 = $84,000

    At B, there is really only one scenario (assuming I don't flunk out) - I pay $20,000 per year over 3 years for a total of $60,000.

    It seems to me that under this analysis, even though the "face value" of B's scholarship is lower, it's a better financial deal with less risk than the offer made by A.

    Do you think prospective law students approach the evaluation of their scholarship packages with this mentality, or do you think that everyone who gets offers from schools like A just assumes they're going to be in the top 10% of the class? Or do you think law schools largely just give renewal thresholds as GPAs without class rankings to provide context?

    Do you think that this is even a valid or intelligent way to incorporate risk into comparing scholarship offers?

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  46. While your use of Ayn Rand makes you appear 'clever' to the typical 'social justice' crowd I'm sure you run in, it clearly shows you know nothing about Ayn Rand. While I agree with a lot of what you're saying here, stick to what you truly know.

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  47. My tier 3 law school charges about $43,000 a year, and we don't even have a decent gym (It's a class room with a total of 15 machines). I hope I get my ROI from this education because the information out there about lower tier schools and jobs is scary.

    Just venting.

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