Law schools significantly understate graduate debt (Part I)

This blog turns one year old today.  A lot has happened in and around legal academia in that year. In particular,  the law school transparency movement has made remarkable progress. It's much harder now for law schools to hide the ball in regard to employment and salary data, and the conventional wisdom about law school has shifted perceptibly, to the point where it would be a remarkably naive 0L who would manage to enroll this fall without realizing that law school (indeed all law schools to varying extents) has become a very risky proposition.

Of course greater transparency is a necessary but not sufficient condition for beginning to bring about real reform.  And much work regarding transparency remains to be done.  Here's an example of how misleading some of the official ABA-approved numbers remain:

This weekend DJM pointed out to me that we may have missed a very significant distortion in the reported graduate debt numbers -- one that is far more systematic and practically important than the fact that a handful of schools (Rutgers-Camden, Georgia State, and Barry for certain; Southern, Texas Southern, and Faulkner in all likelihood) had been misreporting their debt data to the ABA until a few months ago, and that this misreported data has yet to be corrected on the only site where it's available to prospective students.

What DJM realized, in the course of analyzing the debt of the student whose situation formed the basis of this particularly important post, was that there good reasons for thinking the graduate debt numbers law schools report to the ABA do not actually represent real graduate debt at all, but instead another -- and here's a surprise -- significantly lower number.

We each did some investigation yesterday, which confirmed her suspicions.It turns out that when law schools report the educational debt accrued by their graduates over the course of law school they're not really reporting that: instead they're reporting the mean total of law school loans taken out by their graduates.

To see why this is an important distinction, consider the effect it has on the debt numbers at the typical graduating class of 2011 at a private law school.  According the ABA Journal, the ABA reports "the average education debt for law grads at private law schools last year was nearly $125,000" (given that Barry under-reported its graduates debt by a factor of three we can ignore the "nearly.").

But that wasn't the average education debt.  Leaving aside for the moment that this figure doesn't include other educational debt, the average (mean) balance of the law school loans 2011 private law school graduates had when their first payments became due in December was approximately $142,565.  The extra $17,565 in debt represents interest accrued on those loans over the course of law school. Recall that with the exception of the first $8,500 of a subsidized Stafford loan (a subsidy that was eliminated this summer and will not be enjoyed by students going forward), interest on loans starts accruing as soon as they're disbursed.

The practical upshot of this is that real law school debt -- that is, the actual balances carried by graduates when their first payment becomes due -- is on average quite a bit higher than the numbers reported by law schools to the ABA.  And the effect becomes stronger the more a graduate owes, both because the effect of the subsidized Stafford loans is minimized, and because the gross dollars represented by a percentage increase become larger:

Reported average graduate debt: 

$75,000

Actual average graduate debt:

$82,670

10.2% higher

Reported average graduate debt:

$100,000

Actual average graduate debt:

$112,575

12.6% higher

Reported average graduate debt:

$125,000

Actual average graduate debt:

$142,565

14.1% higher

Reported average graduate debt:

$150,000

Actual average graduate debt:

$172,500

15% higher

Reported average graduate debt:

$200,000

Actual average graduate debt:

$232,400

16.2% higher

So for example when American University -- where 36% of the 2011 graduating class had jobs as lawyers nine months after graduation -- reports that the average (mean) debt of its graduates in that class who had law school debt was $151,318, that means the real number was actually approximately $174,100.

Are law schools being intentionally deceptive on this subject?  Here are the ABA's instructions for filling out the relevant part of its questionnaire (this is courtesy of Law School Transparency, who pointed out the interest accrual problem quite awhile ago, although nobody in legal academia seems to have noticed until now):

For Question 17, only include information for:

 1. J.D. students who graduated in 2009-2010
2. Only law school debt (e.g. not including undergraduate debt)
3. Total loans for law school processed through the university or law school financial aid office.
4. Do not include post J.D. loans (i.e. bar loans) even if distributed prior to graduation.

This certainly gives law schools a lawyerly excuse for reporting average totals of loans disbursed rather than actual average law graduate debt at graduation (By the way law schools do have ready access to the latter numbers).  Of course a scrupulously honest institutional system would report actual average debt. A less scrupulous but more cautious system would at least include an explicit caveat that the reported numbers do not include interest accrued over the course of law school.  Instead our public advertisement for this system describes these numbers as "average indebtedness of 2011 graduates who incurred law school debt."

But this is not the only way in which law schools significantly misrepresent the debt incurred by their graduates.  We'll have more on this throughout the week.