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.