This story in the Economist does a good job of capturing the broad outlines of a crisis that's been building in higher education for a generation now: that is, ever since colleges and universities realized they could expand their financial operations via tuition paid by federally-guaranteed loans, that could be issued with little or no consideration given to whether those who took out the loans would be able to pay them back.
The government employs all sorts of accounting strategies to keep the real default rate on student loans looking lower than it actually is, including generous deferment options, very long delinquency periods before loans are declared in default, and of course IBR, which for most people who employ it is likely to result in default in all but name. Even so, with the current putative delinquency rate already over 10%, and sure to climb much higher as various deferment options stretching back to 2008 expire, this trillion-dollar mountain of debt is becoming a front-burner political issue (the Occupy Wall Street protests are surely playing a role in the issue's sudden prominence).
Last week the Obama administration announced it was moving up various changes in IBR previously slated to take effect in 2014 to next year (the most significant is that the period of government-financed peonage will be reduced from 25 to 20 years). And Ron Paul is highlighting the extent to which funding higher education through student loans ensures massive inefficiencies in the market for that service.
Now obviously it goes without saying that Ron Paul is crazy. (Interestingly, people who do any serious questioning of a status quo from which the economic elites benefit always turn out to be "crazy."). But consider the effect that limiting federal educational loans to a maximum of say $10,000 per year for tuition would have on, to pick an example at random, law school tuition. Is it possible to provide a "quality" legal education for $10,000 per year?
Given that 30 years ago many private law schools were charging no more than this in 2011 dollars doing so at present would not seem to require any innovations on par with the invention of the microprocessor or the 99-cent gordita. Indeed, given the staggering advances in information technology over the last 30 years, it ought to be far cheaper to provide the same quality of legal education that was being provided for $10,000 in 1981 for much less, or to provide a higher quality of education for the same price law degrees were being sold at the dawn of the Age of Reagan.
Anyway, if public money for tuition were limited to $10,000 per year, does anyone seriously doubt that dozens and dozens of law schools would soon discover that it was possible to operate with precisely that annual tuition? Instead, these schools are charging four and five times that, for the simple reason that they're being allowed to, courtesy of the U.S. taxpayer. (Another outcome of this change is that USNWR would suddenly discover that it doesn't make sense to reward law schools for achieving the maximum possible financial inefficiency, which they do now by using expenditure per student as a proxy for quality).
Indeed, it would make far more sense, in terms of both financial efficiency and economic justice, to simply give law students $10,000 per year of government money to spend on their education, than it does to allow them to borrow $70,000 per year, as many now do, in high interest non-dischargeable government loans.
Again, law school costs as much as it does only because of a system of debt financing that allows those costs to be decoupled almost completely from any rational calculation regarding its benefits. It's true that law students borrow absurd amounts of money to go to law school because law schools publish phony placement and salary statistics that make those borrowing decisions seem far less reckless than they are. But we shouldn't underestimate the extent to which the government's remarkable willingness to allow law schools to charge literally whatever they want at the (eventual) expense of the American taxpayer also plays a role in signaling to those students that borrowing $200,000 in high-interest non-dischargeable debt to go to a non-elite law school is not as insane a decision as it would otherwise appear to be.
Monday, October 31, 2011
The tuition bubble: coming soon to a presidential debate near you
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Where's all the money going?ReplyDelete
My guess is that it's a huge wealth-transfer from Gen Y and the government into the pockets of Faculty in the form of salaries and contractors in the form of unnecessary building.
Now obviously it goes without saying that Ron Paul is crazy.ReplyDelete
Oh, obviously. Of course. No reasonable person for a moment would think otherwise. Absolutely not.
The student loan bubble is classic corporatism and inverted totalitarianism. The Department of Education and the ABA are essentially hired thugs for moneyed interests. There is no easier mark than an 18-21 year-old who, despite 12 -15 years of education, doesn't understand what money represents or how compound interest works. It's a usurer's dream business model. Once you look at this issue from this viewpoint, the actions of the "government" don't look so illogical. Just good business for financial parasites and corrupted academics.
I think your last point about the "signaling" effect to students allowing them to take large amounts of money out is a point worth exploring. We may lament that OL's are wildly optimistic about their career prospects, but I do believe somewhere in the back of their minds they don't believe anyone would lend them hundreds of thousands of dollars if there wasn't a very strong chance it could be paid back. They just don't understand that there are structural forces at play that give all money up front to the schools and distribute the burden to the taxpayers (and of course the student)in the increasingly likely event of default. Not to mention, it is hard to undo the generational brainwashing that "education is the key to success." Are we not surprised by the outcome?ReplyDelete
Great post. This is, indeed, what is happening right now. Many of my friends are no longer able to defer payments on their loans because the 3-year lifetime deferment window has concluded. In the meantime, none of them have jobs that enable them to pay the $1500/month in monthly student loan payments. And the money that goes to the schools continues to fund a bloated bureaucracy that, if not for the fiscal influx of new federal dollars each academic year, would have already made some true business-like decisions in terms of cost-saving and efficiency.ReplyDelete
There are literally hundreds of people who work in these law schools in DC, for example, who are merely pushing paper and getting a "merit increase" in their wages each year simply for having been at the institution yet another year longer. There are no fiscal checks or business-like metrics by which their work is measured. Instead, what you find are ever more positions that are "created" to add yet another person to the payroll list.
Seriously, the law schools have become the institutional equivalent to the much-fabled "welfare queens" of the 1980's. They are just collecting their government checks each year with no incentive to do anything BUT DO THAT.
These loans are a form of despotism and wage slavery. If the free markets truly worked, then people would generally only be paying for what they could afford. The addition of these loans, however, is a conspiracy by banks, businesses and government to force people to take out loans so that the banks can make money/interest off the money they lend you...rather than all of this involve a simple, clean cash for service transaction.ReplyDelete
No, they don't want it to be that easy. Instead, they jack the prices up, knowing that the banks will loan you the money. The schools get their big money that completely circumvents the free market rationale...and the banks get their money off the interest on those big sums they lend out to you.
Having you earn your own money and pay for things outright with earning/savings hampers the profiteering of the banks and institutions.
I like the idea of the 10k cap on federal loans. It doesn't do anything for the folks already in the system, but that can be solved as well: put a 10k cap on non-dischargeability. In fact, I think a very interesting experiment would be making the bankruptcy change now, and phasing in the loan cap over, say, five years. This would give the schools a chance to restructure to meet the lower cashflow from tuition, without having thousands more students go into peonage to pay for it.ReplyDelete
@7:22 said: "There are literally hundreds of people who work in these law schools in DC, for example, who are merely pushing paper and getting a 'merit increase' in their wages each year simply for having been at the institution yet another year longer."ReplyDelete
Faculty salaries dwarf staff expenses. The money raked in by the law schools generally goes directly into the pockets of the tenured faculty and high-level administrators.
Also, as an earlier commenter noted, capital improvements and other factors designed to boost a school's US News ranking and marketability eat up giant piles of money too.
Does anyone know if the changes apply to those of us already in IBR?ReplyDelete
Good boy, you're finally getting it. Just follow the money.ReplyDelete
And CC, it would actually cost society much less if college education was almost entirely subsidized by taxes plus some sort of work program for people that couldn't afford the little that wasn't subsidized. Student loans either need to be treated like all other loans (dischargeable through bankruptcy) or just eliminated.
8:01 -- The state school where I live charges 10k to in-state law students -- 6k in general fees, 4k as a law school fee. The degree doesn't impress anyone on Wall Street, but then most JDs outside HYS don't.ReplyDelete
Anyway, I think there are good reasons for students to have to go significantly out-of-pocket (and I think 10k is significant) to cut down on people going to law school for no purpose other than to delay their working lives.
I don't see any reason for the feds to be subsidizing out-of-state students to come here. A 10k cap would require some serious adjustment, but nothing like the stupidity mills in large cities.
A post on why a fully subsidized education is so beneficial to society would be too long. And I meant for undegrad. But for grad schools non-dischargeable loans backed by the govt should be taken out of the equation while some sort of grant system for overachievers should take it's place.ReplyDelete
Student loans just need to go the way of normal loans, where banks take on the actual risk of nonpayment, or just die off. We are killing the youngest in our society with this shit.
And I wouldn't disagree with limiting subsidies to in-state tuition
This gets to the heart of the problem more clearly and concisely than anything you've ever posted on this blog. Nicely done. And of course, the question is not whether this bubble is going to pop, but merely when and how much it's going to end up costing all of us.ReplyDelete
At 7:57 I asserted that faculty salaries have grown in recent years. I've been looking for concrete information to back up my claim, but I haven't find anything useful. Can LawProf or anyone else with knowledge of the law school budgeting process prove me right or wrong?ReplyDelete
Have you guys put together that website, listing every law professor and whether they signed, or did not sign, the transparency petition?ReplyDelete
At some point the conception of higher education changed. It wasn't about economic mobility or better jobs (since most of the people send their kids to college were middle class people who assumed their kids would have middle class jobs) but about the "college experience" and adult day-care where students learn to live semi-autonomously. So colleges raced to provide better dorms, services, ten-thousand clubs, more counselors, bigger dining halls, and fancier classrooms. University recruitment brochures read like travel magazines now.ReplyDelete
Maybe some of these large capital improvements were paid for by alumni donations. But the increased staff and utilities required to maintain these improvements certainly weren't. If you start cutting things, if you can't show parents a new dormitory or dining hall, students aren't going to want the "learning experience" you have to offer because it's not really about the learning experience.
Law school tuition is a different animal- driven by two things. Universities use law school tuition to subsidize other programs. I wonder if lawprof or another prof could post something on how much money is taken annually by their parent university and whether that money goes to pay for utilities and other upkeep on law school buildings or is routed to non-law programs. Second, faculty salaries and perks. I know that some professors at my law school make at least half a million in salaries and benefits including school subsidized apartments, endless "centers for xxx" and travel and sabbatical arrangements. If there is cost reduction, it should start with this.
Students should take some of the cuts as well. Student organizations should be shut down or funded with alumni or student money. Student bar associations shouldn't be allowed to fund open bars on the school's dime. No more flat screen TVs or recliners- if you want to study do it at home. We don't need 10 career counselors or 15 librarians. As much as possible the school should offer part-time jobs, "insourcing" as much of their administrative work to students for work-study money. No more non-law review journals.
There's no doubt tuition could be at 15K again. It would just require massive cost cutting.
I discussed this topic generally with an aunt of mine who is a professor for a private college. She claimed not to know the tuition for her school. After a few more minutes, she admitted that she preferred not to know, because she was vaguely aware of the damage debt was doing. She brought the conversation to the damage that credit card companies do to students, and I asked "how is what you do any different?"ReplyDelete
There was an uncomfortable silence.
Great post? I read all of this years ago on the scam blogs and have since read it about 500 times as they repeated it each day/week/month since.ReplyDelete
A different view of higher education and the business model now applied to every aspect of American life.
The lack of a broken toilet photograph does make it a tighter statement. At least that's my opinion.
Is the any scholarship on where the money has gone? I can't find it.ReplyDelete
9:46: I have comprehensive historical salary data for my alma mater and my current employer. Tenure track faculty compensation ( i.e.,, salary, research money, pension contributions; this doesn't count the value of other benefits such as employer-paid health insurance) has doubled over the past 30 years at both schools. Administrative salaries have tripled.ReplyDelete
The less comprehensive data I have for other schools suggests these numbers are fairly typical.
Lawprof: 9:36 here. I did forget to mention the administrative salaries and also the growth of administrative departments in terms of numbers of employees. My anecdotal evidence from talking to older attorneys suggests that career services employees have probably increased five-fold or more over the last 30 years, as have admissions departments (as professors and deans abdicated their responsibilities in that sector) financial aid, and other student life departments.ReplyDelete
career services employees have probably increased five-fold or more over the last 30 yearsReplyDelete
Alchemy is a labor intensive process.
10:33: Oh heaven forfend that someone should consider Harvard University and its $30 billion dollar endowment (built from contributions that are 100% tax deductible) a business!ReplyDelete
Any time some academic starts burbling about how education isn't a business it's time to check for your wallet.
That isn't what the article says.ReplyDelete
Career services people in law schools are, ironically, failed law grads, who were themselves victims of the law school scam. Most of them at my school were JD's from lower ranked schools, who took the bar and couldn't find a job. No one ever asks if these people are even the best people to have for such advice. They are essentially otherwise unemployed seat-warmers.ReplyDelete
Most of the admin staff at the law school I went to are former JD's, who couldn't find a job elsewhere. Now THAT would be a LIVING HELL to have to work in the same building where I took all those damn tests with that ExamSoft software. In the meantime, it would be sick to work with the same people who, consciously or unconsciously, contributed to the scam of ripping me off. If I were one of those people, I would be copying shit left and right...and sending it out to blogger and the like. (hint...hint)ReplyDelete
A good post from Brian Tamanaha today:ReplyDelete
There is a 99% picture I can get behind! I would only say that this particular law student got off relatively light with only 60k of debt. What a perverse world where 60k is considered a light burden. I think my parents' house in flyover country costs about as much as my debt load.
Tamanaha says that a cullinary school wouldn't count a fry cook at McDonalds as a graduate who had a job, yet law schools do that all the time. Take Hofstra, one of the schools that is supposed to be sued. It says that 9% of its 2010 grads are employed in the academic field. How many of those do you think are actually teaching? My guess would be none. Secretaries at law schools are not academically employed. Neither are people who reshelve books in the library or work at the library desk. Neither are those who the law school employees just to keep up its US News rating.ReplyDelete
Thanks for the Tamanaha link. It was well worth a click.ReplyDelete
I think I'm dumber for having read Tamanaha's article. You need a minimum of $86K to manage a $92.5K debt load? The monthly payment would be about $650 per month. Providing a generous allowance for taxes that's like making $72K per year without the loans.ReplyDelete
Look at this latest example of ABA statistical fraud.
The ABA is proposing a rule that will force law schools to publish their student loan "default rate." However their definition of "default rate" is misleading and does not represent the true number of students who are not making their payments. Students who go on deferment or IBR will not count as defaulters under the ABA's definition, even though the graduate is not making his or her requirement payment.
Can you please organize a campaign to write the ABA on the above rules change? There is no rational, logical or sensible reason to avoid counting deferments and IBR in the "default" statistic that the ABA seeks to publish. If schools have to publish their IBR/deferment rates then you will quickly see which schools are worth the money. But if they only have to publish default then you will have yet another nonrepresentative and misleading statistic. No rational person who could avail themselves of IBR/deferments would default. The only people who would default today are either graduates from pre-2007 who couldn't go on IBR, or an inexplicably irresponsible graduate who couldn't be bothered to fill out a few forms.
This is especially a problem because the ABA can immunize law schools from allegations of fraud, as was shown by the NYLS and Cooley motions to dismiss.
As shown in the PDF link, comments are due by Nov. 15 and should be sent to Becky.Stretch@americanbar.org.
Please organize something. We don't need the ABA stealthily approving more misleading numbers.
Thanks, a concerned reader.
@fat guy: your math is wrong. First, taxes will eat up about 30% of that salary which leaves about 60K. Second, payments on 92K of debt are way more than 650, more like 1200/month. So you have about 5k of income - 1200 loan payments. That's about 1/4 of your money which is considered to be unreasonable by most standards.ReplyDelete
That being said, I am not saying its not possible. I make about 3500 clean and pay about 1500/month to service my debt. Its shit but the other alternative is 25 years of indentured servitude.
My math regarding taxes was only to compare how much pretax income one would have with student loans vs. without student loans. This of course relies on my monthly payment below being accurate.
I'm running the payments on a mortgage calculator again and I'm still coming up with about $650 per month on $92.5K over a 25 year term with 7% interest.
100K @ 7%:ReplyDelete
10 year payment: ($1,161.08)
20 year payment: ($775.30)
Approx 12$ per month for every $1000 loaned for 10 year repayment.
Approx 7.75$ per month for every 1000 loaned for 20 year repayment.
Yeah, so for 25 years it's about $650 a month or $7,800 a year which is approximately $11K of pretax income. So according to Brian T, it's barely possible to live on $75K of pretax income (86K base - 11K loan payments + tax).ReplyDelete
I completely agree that law school budgets could (and would) be slashed dramatically if the federal gov't implemented a $10K per year cap on federally-backed student loans. And I agree that this is something that needs to be done.ReplyDelete
However, I don't think that simply comparing operating expenses 30 years ago to those today is a completely apples-to-apples comparison.
For starters, health care costs have skyrocketed over that time period. I suspect that that line item alone is a major game-changer from a budgetary perspective.
Second, technology infrastructure costs have also increased, both with respect to maintaining networks as well as paying for Lexis and WestLaw access. Admittedly, some of that is offset by decreased costs for library purchases of hard copy resources, but to what extent I haven't a clue.
Third, while I agree that a lot of the administrative personnel is overpaid and unnecessary, students do expect and demand some services in this regard that I doubt were as central to a law school's function 30 years ago. For instance, I'm willing to bet that most law schools did not employ nearly as many career services officers in 1980 as they do today. That's not to argue that this is a major cost driver, or that these offices are particularly effective, but in the current economic climate they nevertheless are an area that a school could not cut absent serious student backlash.
All that having been said, I reiterate that I agree with the premise here generally. There is a lot of fat that could be cut from law school budgets if push came to shove. But I don't think that comparisons to 1980 budget levels are necessarily your strongest support, given the myriad of changes over that time period.
CSOs are probably the most hated departments among students. They are universally regarded as wasteful, useless, and only marginally effective for those who were guaranteed good jobs by virtue of grades/law review.ReplyDelete
Sure, but what kind of message would it send to studens to shut that office down in this economy? Even if they are useless, at least they offer the appearance of trying.ReplyDelete
Wait a minute. 9% of Hofstra's 2010 graduates are in academic fields. Does this mean that Hofstra is employing almost 1 out of 10 of its 2010 graduates? Wow, what a scam.ReplyDelete
"Anyway, if public money for tuition were limited to $10,000 per year, does anyone seriously doubt that dozens and dozens of law schools would soon discover that it was possible to operate with precisely that annual tuition?"ReplyDelete
No, this would only force more students to take out private loans with higher interest.
A) better information about employment after law school, so that students can make better decisions about whether it's a good investment.
B)Better jobs overall, so that students with a liberal arts degree have more career prospects then just "oh I guess I'll go to law school".
What kind of "better" jobs exactly do you think your liberal arts degree qualifies you to do?ReplyDelete
Liberal arts graduates from good schools often go on to work for corporations. When the economy is in good shape, they come to colleges to recruit. They were on campuses this fall, but not hiring so much as before because the American (world) economy is presently in terrible shape. A recent survey of businesses showed that they complained about the quality of students who majored in business in college because their writing abilities were poor. Again, the present situation is horrible because of the economy, a student who does well in school and has good writing and coummunication skills can get a job even if they have a liberal arts degree-- which includes, by the way,subjects like economics, history and math.ReplyDelete
Are you suggesting that people from the same school with a liberal arts degree are better positioned (more likely to be hired) than people with a business degree?ReplyDelete
I was talking about undergraduate business majors. It depends on the school and what their grades are like. Except for Wharton at UPenn, what good liberal arts schools have undergraduate business degrees?ReplyDelete
Speaking of wasted federal loan money,ReplyDelete
I assumed you were talking about undergrad programs. I'm sure there are people at good schools (I assume from the U Penn reference you're talking about top schools) in all majors that do well. Most people go to average schools though and whether a liberal arts education makes one a better writer or not, it is seriously lacking in certain practical skills (accounting, finance, etc.) that are critical in business. B-school has a practical skills oriented focus that most liberal arts programs just don't have.ReplyDelete
With all due respect to those who believe in the absolute need for modern and magnificent facilities, I believe that quality of education in such buildings is no better than it was 40 years ago. On Friday I will attend the Law College Class of '71 reunion. That class produced two United States Supreme Court law clerks and a large number of highly successful private and public lawyers. My law school just spent $21 million on a "renovation" that is beautiful but I seriously doubt that the quality of the legal education in this new facility is much better than it was in 1971. I am certain that it is not $21 million better!ReplyDelete
2011 grad with first payments due in 3 weeks here......So a response to a few issues brought up in previous comments. I was SBA President and sit on the alumni board of my Tier 4. I watched a presentation by the Dean lauding the fact that the law school revenue retention rate was increasing from 26 - 28% over the next few years allowing administration to lower total incoming class size by about a dozen people. My school is attached to a small private university and I am sure the situation for every school is unique, but still the school is a cash cow. Also I believe one of the librarians said that the unlimited West subscription runs between 35-40k for the school.ReplyDelete
More professors and academics talking about the need for structural change to the law school institution:ReplyDelete
And of course Orin Kerr has to chime in to say that no, there isn't actually a problem its all just a market downturn. Seriously, fuck that guy
@ 6:59-- This (The Law School Review) has the potential for being a great forum because it has the advantage of presenting a number of different voices on the question.ReplyDelete
Except that the academic mindset is that talking about a problem = solving a problem.ReplyDelete
That's not always true. I've seen law schools make changes in curricula and structure.ReplyDelete
I think I corresponded with lawprof a few months ago about the disconnect between Bureau of Labor Statistics data and reported law graduate salaries. My e-mail is below. However, while I think the whole student loan system was a mistake - reforming it runs into the problem of the asking the countryman for directions "if you wanted to go there I would not have started from here." I disagree with the $10,000 ceiling but I would suggest another metric - one based on the BLS median income for a profession - student loans should be capped at some function (say1 year) of the BLS median income level for the profession that the degree at issue qualifies the student for:ReplyDelete
I read your article with considerable interest, but I did feel there was a data set that you did not consider. I recall being consistently being hectored to “think like a lawyer” combined with the infamous misquote of Mandy Rice Davies “well he would say that wouldn’t he” - as a suggestion to look for a disinterested source of information. Neither the data in USNWR (as you explained) or NALP data is disinterested.
At least as far as lawyers salaries such a source does exist in the United States – the Bureau of Labor Statistics. Admittedly there is a time lag – so that the data currently available is for 2009 – though I suspect that you could get some early release data for 2010. Now looking at an interesting example – Georgetown Law School, from which I graduated in 1992 – it claims a median starting salary of $160,000 for its graduates. Leaving aside the suspiciously round number – the actual amount strains credulity. First, median annual wages for a private sector lawyer in the District of Columbia was $156,750 – taking into account many lawyers with decades of experience – yet Georgetown claims all of its new graduates are somehow “above average.” Moreover, $160,000 is what the largest national firms are paying – but at almost all law-schools only a minority of graduates join such firms on graduation, so how can they all be winning a paycheck associated with jobs that hire only from the top 1/10-1/4 of a class?
I did out of curiosity run the same data for the University of Colorado at Boulder Law School and found that the data was fairer – according to USNWR starting salary $95,000 – average attorney salary for Boulder Colorado $111,840. It is considerably more though than the bottom quarter of salaries – at about $77k. The BLS seems to me to be a very reliable source of data, since it is a disinterested reporter. It is unusual for a law school to report salary information that is less than the BLS annual median for the location of that law school, even though to an experienced lawyer, the idea that most new law graduate would earn even the median is surprising. Actually, I would expect the bulk of new graduates to be at about the lower 25% line for most law schools.
Therein lies an interesting question – and one I admit to not having the time to study – how many law schools in USNWR are reporting starting salaries that exceed either (a) the reported median and 25% level for their location, (b) the reported median and 25% for the US as a whole, and (c) the reported median and 25% for a few top paying areas, e.g., New York City, Washington DC, Chicago and San Francisco. Are all new legal graduates in the US above average?
I know people who work in the admissions office at American and Georgetown. These numbers don't reflect all of the graduates. The ironic thing is that the schools conveniently only use those people in Big Law to come up with their starting salary figures, but then attempt to use ANY conceivable job to come up with the figures for employment data.ReplyDelete
This is outright fraud and this institutions will fail in a number of years. Their campus plans all involve and anticipate enrollment from overseas students from the burgeoning Asian economies. They KNOW exactly what they are doing and seemingly live a care-free life, lackadaisically walking across the street to the Tenleytown Starbucks off of Massachusetts Avenue in DC.
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