Tuesday, August 7, 2012

Know before you owe

Earlier today, LawProf laid out the basics of how law schools and the ABA understate the extent of law graduate debt. The ABA's Council of the Section of Legal Education asks the law schools to report the average "amount borrowed in law school," by graduates; the law schools do just that and nothing more.  Schools average the amounts originally borrowed, without including origination fees (more on those in another post), accrued interest at graduation, or the interest that will accrue during the six-month grace period before the first payments are due.  The ABA also helpfully allows schools to exclude bar loans, even if those loans are received--and begin to accrue their own interest--during law school.

Why would the ABA request, and schools report, "amount borrowed" rather than "debt owed" at graduation?  Interest is an essential feature of any loan.  Indeed, it's often the accumulating interest--not the original principal--that overwhelms the borrower.  When a seller touts the amount borrowed, rather than debt owed, that's a recipe for misunderstanding and financial mismanagement.  That's why Richard Cordray, Director of the new U.S. Consumer Financial Protection Bureau, said recently:  "Students need to know how much their loans are ultimately going to cost when all the interest and fees and other costs are factored into the equation. We are standing up for a simple and sensible concept:  Students should know before they owe."

We agree with Director Cordray:  Prospective law students deserve to "know before they owe."  When reading "debt" statistics in US News, ABA publications, and law law school materials, students should get a sense of the average graduate's actual debt at graduation.  They should also understand the potential size of that debt six months after graduation, when most students typically begin repayment.  (The government gives graduates a six-month grace period before interest starts to compound, and most law grads need that period to take the bar and find some type of job, before they can hope to begin repayment.  But interest accrues every day of that six months--just as it accrues every day of law school, once each semester's loan has been disbursed.)  

Law schools feature their employment rates nine months after graduation, giving themselves time to achieve higher rates.  Until recently, again with the ABA's encouragement, they adopted very generous definitions of "employed" without giving much detail about job types.  At the same time, schools and the ABA have been reporting debt in the most narrow way possible:  (a) amount borrowed, (b) from the federal government, (c) for law school only, (d) on graduation day, and (e) without any origination fees or accrued interest. 

This is such a narrow, unhelpful number that even law schools and the ABA can't keep it straight.  When publishing the figures it gathers, the ABA repeatedly refers to "average debt," "debt load," "student debt," and "debt figures."  Even the ABA's January 2012 cover story on law school debt got this wrong.  The story refers to the "average debt load . . . collected from law schools."  That's the number that prospective students need to know, but it's not the number that the ABA is requesting or law schools are reporting.  Instead, they're collecting a carefully pared figure that is "amount borrowed"--and then publicizing it as "average debt" at graduation.

We'll be following up with more information, examples of how these figures mislead students, and suggestions for how students and graduates can take action on these issues.  Meanwhile, congratulations to LawProf for a year well done! A year ago, I had no idea I would be involved in this enterprise--but I'm honored to be.

62 comments:

  1. I tried to link in previous post the CBS article- just look for campos on google news.
    Way to go law prof.

    ReplyDelete
  2. DJM-would it be helpful to you if we got students on TLS to post how much they will owe at the six month date and what school they go to? How much do you think people should assume tuition will go up the next two years?

    ReplyDelete
  3. TLS is a great idea. Even if students post just their current balance (which should be available on the federal loan portal), year in law school, and school, that would be helpful--and might open the eyes of some 0Ls. We could do some calculations from that info on what their accumulated debt will be 6 months after graduation. As for predicting tuition, I don't know what to say about that. I'm starting to look at the 2012-13 rates, which have been posted, and some schools have depressingly large increases. Ugh. Maybe 5% per year on average nationally? That being three times the current rate of inflation...

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  4. The CFPB has their head up their ass. They're constantly focusing on and attacking private student loans, as if that's the ***only*** problem.

    ReplyDelete
  5. at 8:14 and 8:40, great idea but TLS, once they figure out what you're up to, will ban you so fast your heads will spin.

    ReplyDelete
  6. Does telling a 22 year-old oL who knows nothing about life after school that actual debt will be $115,000 vice $100,000 actually help? I doubt it.

    One thing I never see on here is ideas to avoid debt, other than dropping out (which seeks to remove potential competitors from the job market). When I was in law school, I rented a place and sublet the extra rooms to other students. Their student loans, or whatever source of money they had, paid my living expenses. I decided early on to skip the "opportunities" to gain "experience" for no money. I worked at a drug store to pay a chunk of my tuition (which was the sticker price). I took summer school to graduate a semester early.

    After 2 1/2 years, I graduated in the midst of recession. But having just a little debt gave me tremendous freedom and, dare I say, the ability to be a little choosey. My employer appreciated it too because I wasn't peeking around the corner for other job opportunities.

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  7. This comment has been removed by the author.

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  8. 9:35

    Wow, cool story bro.

    Renting and subletting a place, great idea. You could probably make... say, around 15k doing something like that? Pretty good savings, you could lower your debt after 2L from 115k to 100k.

    What a maroon.

    ReplyDelete
  9. "One thing I never see on here is ideas to avoid debt"

    People comment on this from time to time, but they're usually attacked and derided as "clueless boomers" (whether they happen to be a boomer or an X-Y etc.).

    After a while, you get the point - people who have already absorbed a profligate amount of debt do not want to hear how they might have avoided having done so.

    It's a pretty standard avoidance technique according to my shrink friends.

    ReplyDelete
  10. ^^^^ SEE @ 9:42? I was still typing and hadn't seen 9:42's little nugget of racist history until after I'd posted my own comment at 9:49.

    And this one is the mildest such I've seen.

    ReplyDelete
  11. I must note, really I must, that I cannot quite get my head around it a year out from graduation. The two numbers that mattered, the cost and the benefit, when I was looking at law schools were simply not truthful. Instead they were fabricated. They were made of whole cloth.

    I can handle my bills. So, don't cry for me, Argentina. But, c'mon! If I have to provide information on every police encounter (under age possession of alcohol, traffic tickets, etc.) going back to when I was in high school... never mind. Who cares. The concept of fitness applies to only those who apply, not those who are members.

    How can any kid be expected to be a, what was the phrase again? Sophisticated? "College graduates 'seriously considering law schools are a sophisticated subset of education consumers, capable of sifting through data and weighing alternatives before making a decision regarding their postcollege options,' Justice Schweitzer said." http://dealbook.nytimes.com/2012/03/22/9-graduates-lose-case-against-new-york-law-school/.

    Yeah, that's rich. If the law school tells you an incorrect number for the debt you can be expected to incur (cost), another incorrect number for the amount of graduates who were employed as attorneys (nine months after graduation), and a third incorrect number for the average salary of those graduates (benefit), now in the world can anyone, sophisticated or not, possible determine anything upon this foundation of sand?

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  12. 9:35 --

    I am sick of listening to people like you spin Horatio Alger stories of pluck and frugality.

    The costs of education have become so exorbitant that there is little ability for the average student to meaningfully reduce their debt before graduation.

    My _public_ law school is charging more than $50K a year in tuition and fees for residents. Time spent at a $10-an-hour job won't make a dent -- and every hour spent away from studies could reduce my class rank or chance to grade on the top journal and, consequently, be interviewed.

    The system is designed so that you are forced to play Russian Roulette with insolvency. I'm tired of hearing people like you brag about how you cleverly found a seven-chamber revolver to play with.

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  13. If the self-flagellating monk from The Da Vinci Code attended law school, someone will claim his lifestyle was too lavish and he deserved to be in debt.

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  14. @ 10:09 that is hilarious. well done

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  15. Clearly he missed one salient method of saving money.

    Instead of shaving his pate, he should have let his hair grow out. At the same time, let his toe- and fingernails grow long.

    Then cut the hair and nails at the same time, braid the hair and tip it with the toenails.

    Viola! ZERO COST FLAILS.

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  16. @9:35
    When you went to law school were you required to apply to the LSAC? Did you have to take the LSAT?

    Today the process of just applying is much more expensive than when you went to law school.

    Subletting? So you are going to risk your credit even more by relying on other people? What happens when someone can't pay you or decides to move? The whole idea is just a big head ache.

    The only way for someone to graduate with minimual debt from law school today is to save the money before hand and have a spouse working while you attend.

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  17. @DaleyCenter

    is the reason for banning is....?

    ReplyDelete
    Replies
    1. I didn't realize that I was banned, I just thought the server was down for whatever reason. If you know something I don't, please enlighten me. I have no idea why I would have been banned if that is in fact the case.

      Delete
    2. I should clarify, you're talking about JDU, right?

      Delete
  18. Just a thought. Assuming that one had a large enough line of credit, could a law student pay for law school with a credit card and then have all that debt later discharged in bankruptcy?

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  19. Funny how people here are so against being "frugal" and just insist that one must borrow the entire cost of law school, NOT work at all, and NOT try to save money in any other way.

    If you have that attitude, you deserve your debt.

    ReplyDelete
    Replies
    1. Wages are not keeping up with tuition. It's impossible.

      Delete
    2. The ABA does not allow students to work during the first year.

      And then you are only allowed to work part time for the rest of law school.

      And if you can work part time and make enough money to graduate with minimual debt why would you be in law school? Obviously you already have a kick ass job.

      Delete
  20. I was frugal in law school. From 2002 to 2005 I spent about 30K on living expenses. I spent another 30K on tuition and graduated with 60K in total debt.

    My school (Ohio State) has since more than doubled tuition (and interest rates are more than doubled) An equally frugal person, spending the same on living expenses, would graduate today with 100K in total debt.

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  21. @ 1am
    If you have a line of credit at 22 that can pay off law school, chances are everything none of the advice in this blog applies to you since you are, in all likelihood, a trustafarian.

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  22. "Indeed, it's often the accumulating interest--not the original principal--that overwhelms the borrower."

    How true. Stories of doubled ar tripled SL balances are all too common now.

    I believe my loans were at a 19% or 20% rate when in school, and then dropped down to 9% after.

    But in a basic ieological sense, and going way back to when student lending started, wasn't the motivation to help students rather than drive them into financial ruin?

    In other words, were the loans not made available with the understanding (express or implied) that they were a kind of social contract and a special category of benign loans in the sense that the lenders would refrain from piling on all sorts of fees, interest and penalties, and come up with all sorts of excuses for doing so?

    On, that doesn't sound to clear. Let me say it this way: Were not the loans like a friendly Casper the ghost at one time and not a devouring blob monster swallowing up whole populations?

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  23. Yes, if schools get to report employment at 9 months, they should have to report law school and bar debt at 9 months.

    ReplyDelete
  24. The CFPB has their head up their ass. They're constantly focusing on and attacking private student loans, as if that's the ***only*** problem.
    August 7, 2012 8:54 PM

    Agreed.

    Also the increased costs of Law School should act as a signal to consumers to stay away, unless they are sure they can earn enough to pay back any loans taken.

    However, because loans are guaranteed to everyone through a Federal Loan program, students cannot appreciate these pricing mechanisms, or think critically about investment of time and money vs return.

    What's left is overly-indebted attorneys that end up working for the same system that puts the screws to other consumers.

    Shut down the federal loan program, and let private lenders decide on the appropriate rate for a law school loan, while absorbing the risk for default.

    Want a law school loan? Here's a low rate at 19%!

    ReplyDelete
  25. @9:35
    Subletting... good idea! When I first graduated college I lived in a 60-sq ft room in a 4br, and paid net $350 per month in rent (in New York!) It was tight but cozy, and boy did I ever save money. And if I hadn't had a tender-hearted flatmate also on the lease I could've raised the rent on the other three rooms and actually made money on the deal.

    Did I mention I've never been to law school?

    My cool story is just as irrelevant as yours. Deals like this are hard to find and come with a lot of risk; people shouldn't go to law school to discover how much they can extract being landlords; sooner or later you run out of suckers, we can't all be living in each others' closets paying off each others' student loans with our own.

    But most importantly of all, trying to fund one form of rent-seeking (the exorbitant, extractive tuition rates charged by law schools) with another (literally collecting rents) does nothing whatsoever to increase the economic justice in the world, it just maybe helps you personally. It doesn't end the scam. You haven't solved the problem merely by turning your share into somebody else's problem.

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  26. I've posted this link here before, but I'll do it again. At least one law school, BU Law, has come up with a calculator that allows students to project both tuition increases and actual debt at time of repayment. The calculator is still missing some things -- most notably, any information on historical tuition increases that would guide the student in choosing which percentage increase to use in her calculations -- but it's still one of the best and easiest to use I've seen thus far. (I've mentioned this and other gaps to the admissions office -- there have already been some updates to it, and I'm hoping for more in response.)

    You can use it for all schools, not just BU.

    http://www.bu.edu/law/prospective/financial_aid/calculator/

    - PreLawAdvisor

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  27. Anecdotal tales of frugality are pointless, especially considering that they miss the entire point: law school is far too expensive. If people constantly post tales of their frugality, law school deans simply think "oh look, these students are finding creatinve ways to let us continue to raise tuition".

    For every person who worked through law school and sublet their bathroom floor to a family of five, there are a dozen people who worked through law school and who got bad grades as a result, or who got fleeced by nonpaying tenants, or whose money-saving schemes ended up costing money.

    Besides, we go to law school to become lawyers and study the law, right? Not to spend the bare minimum of time in class and the library because we're so rushed off our feet earning money outside class. Yes, law school doesn't teach the law, but it teaches it far better to someone who dedicates their time to learning rather than dedicating their time to graduating with a massive $5000 less in total debt because they worked at a minimum wage job for fifty hours a week.

    Frugality takes divert the conversation from the true issue - reducing the cost of college. And I sometimes feel that these random "frugality" posters are really insiders trying to alter the conversation or minimize the effects of rising tuition. I mean, how easy would it be for people on the inside to post here and claim that they were able to pay their law school tuition and graduate with less debt by working their asses off? (It's like JD Painter, who I also now treat as an industry insider - he does so much to minimize the seriousness of this debate that he can't be anything other than someone secretly created by Sallie Mae or some law school insider somewhere, with the sole purpose of making the debate over law school debt look like nothing more than a problem of stupid students making dumb decisions.)

    So enough with the silly money saving ideas like "I used banana skins as socks during law school and saved $10!" Such comments should be met with "who cares - law school still costs too much!"

    ReplyDelete
    Replies
    1. Piggy backing off of your thought. Why in the hell would risk getting bad grades when you are paying over 40k a year in tuition alone? All these ideas about trying to cut corners on law school debt could have huge repercussion to a students success in keeping a high enough gpa and graduating.

      Delete
  28. I hope these calculators gain some popularity. Georgetown has one as well.

    http://141.161.16.100/finaid/GeorgetownLawFinancialPlanningCalculatorforProspectiveStudentsV2.htm

    And law school transparency has a helpful chart which estimates total non-discounted debt levels at graduation for all law schools.

    http://www.lawschooltransparency.com/clearinghouse/?show=compare&sub=costs

    I'd like to add that DJM and Law Prof's recent posts pointing out understated post-grad debt are incredibly important. An argument could be made that a student graduating with 100K of debt could make that work on a smallish salary.

    Obviously, the burden of living under a mountain of debt gets worse steadily from there, until it reaches a point of sheer impossibility.

    That the ABA has sought to misrepresent or hide what the actual figure might be, especially when, until recently, it is so close to a breaking point, is awful.

    That breaking point, for the average debtor, is well past, unless a 3:1 debt ratio is just fine. Of course the number, $145,565, may be more symbolic than practical, since each applicant should calculate separately their invidual investment-gamble.

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  29. Gen X'er here and I realize that even the period I went to law school--late 90's/early 00's--is long gone. The scam was going on then but not really evident like it is today.

    FWIW I went to law school part time and worked full time. Also lived with my significant other who paid some of the bills. So I paid for all of my living expenses and some tuition out of my pocket, without borrowing very much. A disadvantage was that I had no time for "internships" or moot court/law review, but I knew even during my first year I didn't want to work in biglaw anyway (even if they wanted me). I know the conventional wisdom is to do all that stuff to get interviews--but how many law students kill themselves doing "everything right," and still wind up with no job? At least I didn't accumulate much debt, and I could say that I went to law school while working full time, so people knew I could handle a lot of work.

    10:01 PM--I agree the costs of higher education, esp law school, have skyrocketed such that most of us here lack perspective. And your analogy about playing Russian Roulette with a seven chambered revolver is brilliant.

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  30. Part-time JD program + working full-time is a legit way to reduce debt load.

    Nonetheless, even though I'm in the above category, I'm going to be taking a leave of.absence. #40K mistake

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  31. Just to make it clear, Top Law Schools will not ban you for posting your total debt level after 1L or 2L or graduation. There is at least one thread on this.

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  32. 7:19 - Thanks for the link to the Georgetown calculator. Very similar to BU's.

    I wish both of them broke out the "anticipated income" figures to monthly amounts so students could see how much of their income will be eaten up with debt service.

    - PreLaw Advisor

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  33. I am getting so upset reading this, I just want to start organizing. HOW DO WE GET ACTION!!!

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  34. I met Senator Richard Blumenthal and talked his ear off at a public gathering in Ct. He then asked for an email laying out the issue and I sent him one. If there is any other Connecticut residents here please email me at tappingreeve@aol.com and I'll provide this senator's email address.

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  35. Part-time programs anyone?

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  36. 9:35 pm here.

    I went to a state school 4-7 years ago. So yes, I took the LSAT. No I'm not a boomer.

    I was accepted to a number of comparably ranked (TT) private schools but they cost too much. Even today, my school charges about $40k for three years of tuition and fees (prolly goes up to $44k in 3 years time).

    I don't consider making $200 a week at a drug store to be a "kick ass" job. But I started after 1st year and continued for a year and a half till graduation. Many of my classmates fought to get that nonpaying temp job, probably sorting letters in the mail room for all I know. I new BigLaw wasn't looking for me, so why waste my time with OCI?

    The subletting is how I was able to stay above water. Imagine no living expenses. The rent I charged covered all that...the lease, the utilities, and my late night munchies. One guy worked at BigLaw, two worked in the mail room. All three wrote me a check every month.

    Is this all pointless? Maybe to those who said, "aw f**k it, I'm so underwater now that nothing matters." I never said law schools don't charge too much. I was offered whatever amount of debt I wanted. If I wanted to $200k I could have it; I opted for $25k. I probably got the same pointless education, but life since has been a whole lot easier.

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  37. 10:43 -

    You do realize that a lot of people are not underwater at the moment, but they are trying to figure out how to make law school make financial sense, right?

    And I don't think your Sublet System is gonna help.

    And further, taking the cheap school option post-recession, when hiring blows, may not be prudent either.

    ReplyDelete
  38. Pre Law Advisor,

    A couple of other calculators that I think would be helpful, once a student's total debt level is added up, is a loan calculator from bankrate.com and a post-tax salary calculator, like the one found here:

    https://onlinepayroll.intuit.com/external/business/paycheckCalculators.jsp

    This allows you to view your take-home pay in any state at different levels of gross salary. Actually that could probably be turned into an easy-to-read spreadsheet, so students could just look down a column and see what annual compensation they can actually expect, whether they live in a state with favorable income tax laws (FL, TX, TN) or not.

    --NotGoingtoLawSchool

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  39. what about paying tuition with a 0% intro APR, no annual fee, no balance transfer fee, balance transfer credit card while stashing the SL proceeds in a bank?

    ReplyDelete
  40. DJM : I'll set up a thread on TLS when I get home. I'm traveling now. They won't ban me. I'm hoping I can get people to post.

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  41. 12:36: Student loans for tuition go directly to the school. They're not disbursed to the student. Also, I'm not sure about this but I believe there's some case law out there on paying off student loans with a credit card and then declaring bankruptcy that treats this as a fraudulent transfer. (Not surprisingly this idea has occurred to people before).

    ReplyDelete
  42. "And I sometimes feel that these random "frugality" posters are really insiders trying to alter the conversation or minimize the effects of rising tuition. I mean, how easy would it be for people on the inside to post here and claim that they were able to pay their law school tuition and graduate with less debt by working their asses off?"

    Some of them are real, some are fake. In this thread, for example, 9:35 is probably telling the truth, 9:49 is probably Leiter.

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  43. The frugality posters unfailingly remind me of this:

    http://www.youtube.com/watch?v=13JK5kChbRw

    ReplyDelete
  44. Brrrrppttt. Wrong answerAugust 8, 2012 at 6:52 PM

    9:33 writes, "The ABA does not allow students to work during the first year."


    This is wrong. The ABA encourages students not to work 1L (and thereafter not more than 20 hpw), but it does not forbid work.

    Furthermore, what the AGA (and one's law school) don't know won't hurt them.

    I know plenty of people who graduated in my class who essentially worked 40+ hpw while FT in LS.

    ReplyDelete
  45. So if I worked full time during law school and was able to put, say, $50K towards tuition over three years, I'd owe $160K instead of $210K. And I would have arguably sacrificed job prospects from law review, moot court, etc.

    This is the frugality that will reconcile this scam?

    http://www.youtube.com/watch?v=13JK5kChbRw

    ReplyDelete
  46. This comment has been removed by the author.

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  47. @ 9:51

    What a load of Boomer derp,

    And, racist history? Are you really that idiotic? So, instead of noticing the Bugs Bunny reference you... assumed I was referring to 17th century Jamaican escaped slaves who organized their own colony in a densely forested mountain region... that's the conclusion that you came to? Honestly, don't give anyone any more advice, not even your kids. Especially not your kids.

    ReplyDelete
  48. http://www.insidehighered.com/news/2012/08/09/saint-louis-u-law-dean-quits-unusually-strong-attack-administration

    ReplyDelete
  49. "So, instead of noticing the Bugs Bunny reference you... assumed I was referring to 17th century Jamaican escaped slaves "

    You really are an idiot. When Bugs Bunny called someone by that name, it was because it WAS a derogatory reference to former slaves.

    Most of the cartoons from the 30s-50s area used a lot of racially unacceptable slurs. This was one of them.

    So don't use racial slurs and try to hide behind a bleepin' CARTOON, fer cryin' out loud. "Bugs Bunny Did It First" is NOT an acceptable excuse.

    ReplyDelete
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