Endgame

What are the economic implications for law schools of an admissions cycle that ends up attracting only 53,000 applicants?  To answer this question, we have to estimate how many matriculants such a cycle is likely to yield.  This is a function of two factors: how many applicants end up getting admitted to at least one school to which they apply, and how many admitted applicants actually end up enrolling.

As to the first factor, the percentage of applicants being admitted to at least one school has been rising for several years now:

2004:  55.6%

2005:  58.6%

2006:  63.1%

2007:  66.1%

2008:  66.5%

2009:  67.4%

2010:  68.7%

2011:  71.1%

In other words, law school applicants were 27.9% more likely to be admitted to at least one school in 2011 than they had been seven years earlier. We don’t have numbers yet for how many 2012 applicants were admitted to at least one school, but since the number of applicants fell by 13.7%, while the number of new 1Ls fell by only 8.6%, it seems certain that the upward trend in percentage of applicants admitted continued.

The second factor – how many applicants who are admitted to at least one school end up enrolling somewhere – has by contrast remained very stable:  86% to 88%.

Now let’s apply these percentages to the current admissions cycle.   If schools end up competing for 53,000 applicants, they would end up admitting only 37,683 people if they maintained the already highly inflated 2011 overall admissions percentage.  Assuming 87% of these people enroll, that would produce a first year class of the 32,784, which would be 26.3% smaller than this fall’s entering class, and 37.6% smaller than the size of the class that will be graduating this coming spring.

This, obviously, would be a disaster from a financial standpoint.  The typical law school derives around 60% to 70% of its operating revenue from tuition – a figure which rises to 80% and higher for low-ranked schools (by contrast elite schools get close to half of their operating revenue from other sources, mainly their endowments).   Thus a 30% decline in tuition will equal, for most schools something on the order of a 20% decline in overall revenues, which in turn will require a 20% budget cut.

How can schools avoid this outcome?  The most straightforward strategy would be to lower admissions standards even further.  But this approach has practical limitations.   Admitting a staggering 80% of all applicants to at least one school would still yield only 36,888 first-years.  And of course there’s the nice little collective action problem/prisoner’s dilemma that arises when schools have to decide individually how best to balance the need to fill seats with the incentives not to cut their admissions standards more than their competitor schools.

Beyond this, the bottom 50 or so law schools already have something very close to open admissions policies, and could hardly cut their standards further without admitting classes that will feature much large percentages of people who have little or no realistic chance of passing a bar exam (think 2.1 GPAs and LSAT scores below the tenth percentile).

Attempts to improve the accepted student to enrollee percentage will be even less fruitful.  Since nearly 90% of accepted applicants end up enrolling somewhere, any individual school that wants to improve its admit to matric yield will have to buy it, by spending even more money on “scholarships.”  But what law schools call scholarships are actually de facto tuition cuts.  Many schools are already in a revenue squeeze produced by a combination of smaller class sizes and lower real, as opposed to nominal, tuition.

Higher ranked schools do have one very obvious strategy available to them, which is to exploit the transfer market.  This, of course, is the very definition of a zero sum game: every transfer represents a gain of a student to one school and a loss of a student to another.  The higher a school is ranked, the better a position it will be in to take advantage of the fact that the LSAT and GPA numbers of transfers don’t get reported to the ABA, and thus have no effect on the rankings.

In recent years, schools like Columbia, Georgetown, and George Washington have been taking huge numbers of transfers, to the point where close to 20% of their graduating classes consist of people who started law school elsewhere.  I expect that this practice will become much more widespread among top ranked schools, with predictably dire results for schools further down the food chain.  In particular “first tier” schools outside the T-14 may find it difficult to entice the number of transfers they need to stanch their budgetary bleeding, when people who normally would have transferred to Boston College are suddenly ending up at Chicago instead.  Indeed the last admissions cycle featured the unprecedented development of top ten and even top five law schools offering significant “scholarships” (tuition breaks) to potential transfer students.

The transfer game will be a real disaster for bottom 100 schools, who are going to see an ever-growing percentage of their classes positively strip-mined by increasingly desperate elite, semi-elite, and non-elite but I’ve always kept myself respectable schools.  This will hasten the financial collapse of a bunch of schools that would have gone out of business long ago if legal education had any resemblance to an efficient market.

Fasten your seat belts – it’s going to be a bumpy night.