Such loans, more than anything else, are what has allowed private law school tuition to nearly triple in real, inflation-adjusted terms over the past 25 years, and public law school resident tuition to increase by a factor of five (Again, in real dollars. One sign of how out of control the situation has become is that when I present these numbers to even highly educated people who have no recent contact with higher education, they sometimes find it impossible to understand what I'm saying, apparently because their incredulity when confronted with the numbers is so great that, despite my description, they assume I must not be adjusting for inflation. I often have to clarify this point. And when you think about it, the situation in regard to the rising cost of law school really is rather crazy -- it's as if a Honda Accord cost $20,000 in constant dollars in 1986 but costs $100,000 today, with the explanation from the manufacturer being that now it features a very nice DVD player and optional moon roof).
How did this happen? I'm far from an expert on matters of finance, but I would appreciate it if someone could explain to me how the federal government giving a private bank the ability to borrow money at 2%, which the bank then loans out at 7%, while the government guarantees that loan against all risk of default, is something other than risk-free arbitrage, aka roughly the equivalent of a license to print money. I'm also not a political scientist, but I suspect you don't have to be Kenneth Arrow Jr. to figure out that the people benefiting from this scheme are going to do everything in their power to keep it in place, no matter how many "negative externalities" it may generate for society in general, and law school graduates in particular. (Edit: The new student loan regime in place as of last year limits non-dischargeable loans to loans from the federal government, although some of these are serviced by private banks for a fee).
What we seem to have here, in other words, is some sort of bastard child of laissez-faire ideology and regulatory capture. The laissez-faire part is the idea that potential law students don't need paternalistic institutional actors (law school and university administrators, federal and state governments, the ABA, etc.) to protect them against the consequences of their financial decisions because, in the immortal words of Harvard law professor John Chipman Gray:
The common law has recognized certain classes of persons who may be kept in pupilage, viz. infants, lunatics, married women; but it has held that sane grown men must look out for themselves, that it is not the function of the law to join in the futile effort to save the foolish and the vicious from the consequences of their own vice and folly. It is wholesome doctrine, fit to produce a manly race, based on sound morality and wise philosophy.
Harrumph. Gray wrote this in the late 19th century, but of course the last three decades or so have seen this sort of social Darwinism make a big comeback on the American political scene (although curiously enough in the context of a political movement that largely rejects the theory of natural selection as applied to biology -- apparently it only works in economics).
The regulatory capture part involves ensuring that 100% of the risk generated by the loan decisions made jointly by students and lenders will be borne by the students, rather than the lenders. This is a doctrine fit to produce a remarkably rich race of bankers, based on pure class privilege and endemic political corruption (it's also working out quite well for law school faculty and administrators).
What to do? Again, I'm far from an expert on anything related to this subject, so my thoughts regarding reform are very tentative (As always, the first step toward reform is recognizing the inherent rottenness of the current system -- a step which is only beginning to be taken in higher education in general and legal academia in particular). With that caveat in mind, it seems to me that either real laissez-faire or genuine regulatory paternalism would be far preferable to the current hybrid, which manages to combine the disadvantages of both with very few of the advantages of either, at least from the perspective of law students and taxpayers.
As things now stand we are producing a generation of graduates whose lives are being wrecked by debts they will never be rid of (or, if they go into the Income-Based Repayment program, will be rid of in 25 years, which to be fair is only five years longer than the term of service for ordinary soldiers in the Roman Legions when that empire was at its height). The extent of that debt is truly startling, and will be the subject of my next post.