Department of Education to the Rescue? Proposed CFR Changes to account for “Program Integrity” and “Gainful Employment”

 

The lesson I took from this exercise is that Uncle Sam has no neck.

 

Jerry Kowalski alerted me to a proposed change to the Code of Federal Regulations, (34 CFR Part 668) that just might kill the law school tuition bubble if adopted.  I’d read about the rule change elsewhere, and thought it applied exclusively to for-profit higher education institutions, including a handful of law schools that are at least provisionally ABA-accredited: (Florida Coastal School of Law, Phoenix School of Law, Charlotte School of Law, and John Marshall Law School (the Atlanta, GA one)).[i] From reading the document, it’s unclear as to whether the rule change applies to only for-profit schools or could be interpreted to apply to all law schools.

The DoE’s suspicion of for-profit education is justified, for if you think law schools are scams, wait til you see the outrageous multi-million dollar salaries CEOs of these schools make.  Whether the ones at for-profit law schools make that kind of money, I know not.  Unfortunately, according to the New York Times, resistance to the rule is strong, and I doubt conventional law schools would go along with it.

Aside from for-profit institutions, the proposed rule also refers to “recognized occupations,” specifically:

The proposed regulations are intended to address growing concerns about unaffordable levels of loan debt for students attending postsecondary programs that presumptively provide training that leads to gainful employment in a recognized occupation. (43619, left column)

It confuses me from here:

For public and private nonprofit institutions, a program that does not lead to a degree would be subject to the eligibility requirement that the program lead to gainful employment in a recognized occupation, while a program leading to a degree, including a two-academic-year program fully transferable to a baccalaureate degree, would not be subject to this eligibility requirement. (43634, left column) [My emphasis]

The actual text of the proposed rule-change, however, states:

§ 668.7 Gainful employment in a recognized occupation. (a) Gainful employment—(1) Debt thresholds. A program is considered to provide training that leads to gainful employment in a recognized occupation if…

(2)(i) A program refers to any educational program offered by the institution under § 668.8(c)(3) or (d). (43638, middle column) [Underline mine]

The rule as it is defines a “program” as:

§ 668.8(c)(3) Institution of higher education. An eligible program provided by an institution of higher education must (1) Lead to an associate, bachelor’s, professional, or graduate degree; (2) Be at least a two-academic-year program that is acceptable for full credit toward a bachelor’s degree; or (3) Be at least a one-academic-year training program that leads to a certificate, degree, or other recognized educational credential and that prepares a student for gainful employment in a recognized occupation.

So by reckoning, a juris doctor, being a professional degree, is covered by the rule.  Readers are welcome to trudge through the Title 34 of the CFR (or the Higher Education Act (HEA) for that matter), dash my hopes and prove me wrong.  The DoE very obliquely refers to professional schools in a footnote (and somewhere in the appendix):

For professional degrees, the known debt levels at public and nonprofit institutions could be problematic if earnings are not sufficient. (43622, footnote 3)

Translation: THE DEPARTMENT OF EDUCATION HAS NO IDEA HOW MALIGNANT THE LAW SCHOOL TUITION BUBBLE IS. Scary, huh?

Now you ask, what does the proposed rule do?

It creates two tests programs must pass to receive Title IV federal student loan funding, a debt-to-income test, and a repayment rate test.

The DoE describes the debt-to-income test as follows:

[P]rograms whose completers typically have annual debt service payments that are 8 percent or less of average annual earnings or 20 percent or less of discretionary income would continue to qualify, without restrictions, for title IV, HEA program funds. Programs whose completers typically face annual debt service payments that exceed 12 percent of average annual earnings and 30 percent of discretionary income may become ineligible.[ii] (43618, middle column)

For someone paying $1,000/month ($12,000/year) in repayments on a $150,000 law school loan (excluding all other debt), 8% of annual income equals $150,000 per year.  Compared to more common starting salaries, the same debt load on $50,000 annual income is 24% of total average annual income.  Remember though, law pays bi-modally.  Before the crash, about a quarter of graduates were making $150,000 annually, while around half were making b’ween $30,000-65,000.  The averages meet in the low $70k’s, a salary few graduates were actually making.  I’m not sure if the repayment rate test would protect graduates from earning too little nonetheless.

That test, goes like this:

Programs whose former students have a loan repayment of at least 45 percent will continue to be eligible [for Title IV loans]. Programs whose former students have loan repayment rates below 45 percent but at least 35 percent may be placed on restricted status. Programs whose former students have loan repayment rates below 35 percent may become ineligible. (43618, right column)

I find this test more problematic because if someone’s relatives (or taxpayers) are paying the loans or if the person’s paying out of savings, the program might appear sounder than it is.  How do the tests combine?

A program that does not satisfy either the debt-to-income ratio or the 45 percent rate but has a loan repayment rate of at least 35 percent would be subject to restrictions and additional oversight by the Department.

The proposed regulations also would require an institution whose program does not have a loan repayment rate of at least 45 percent and an annual loan payment that is either 20 percent or less of discretionary income or 8 percent or less of average annual income, to alert current and prospective students that they may have difficulty repaying their loans. (43618, right column, my emphasis)

Remember when Heather Diersen ad JDs Rising wrote, “I cannot blame the schools for failing to put a warning label on their applications stating: ‘Likely to cause debt and unemployment.’”?

More comprehensive than Diersen’s Surgeon General’s warning, the DoE proposes that the programs requiring a debt warning disclosure place prominent warnings on, “[I]ts promotional, enrollment, registration, and in all other materials, including those on its Web site, and in all admissions meetings with prospective students, that is designed and intended to alert prospective and currently enrolled students that they may have difficulty repaying loans obtained for attending that program.” (43639, middle column)

If a program falls into restricted status, it’ll have to provide, “Documentation from employers not affiliated with the institution affirming that the curriculum…aligns with recognized occupations at those employers’ businesses, and that there are projected job vacancies or expected demand for those occupations at those businesses.”  If this applies to law schools, how many law firms, government agencies, municipalities, and corporations, law schools (ha!), and lobbying firms are going to say they have demand for attorneys?

The documentation requirement is a great step but I can think of two ways law schools could complain or game it:

(1)  Claim that their students could become self-employed solo-practitioners.  They’d add that anyone who’s doing contract work is technically a solo-practitioner.

 

Hate on law schools all you want, but if they tried something like this the deans’d definitely go to prison.

 

(2)  Increase graduate employment in law schools.  I referred to this as cannibalism a while back, but law schools could just start employing other schools’ graduates, increase current students’ tuition to pay for it, and hope the economy recovers.  An amusing Ponzi scheme, it wouldn’t work.

Aside from whether the rule would apply to the majority of nonprofit private and public law schools, the other question is who’d have standing to sue for enforcement.  Current law students?  Would they want to?  Prospective students would have to argue that a reduced opportunity to attend is in their interests, so the litigant (even the class representative in a class action suit) would have to argue that he or she would have a high likelihood of acceptance after the rule was applied to law schools.  I doubt any graduates (recent or elder) would be able to make an oversupply argument to gain standing.  Something to think about.

 

Yes dearie, that's the idea.

 

Even if the proposed rule doesn’t apply to law schools, there’s always the Apocalypse Option: lobby Congress against renewing the existing chunk of Title IV of the Higher Education Act that authorizes federal student loans when it expires in 2013.


[i] List courtesy of Chuck Newton

 

[ii] I’m curious how the gender gap would affect this test.  Women tend to earn less than men in law.  Even if a law school passes debt-to-income test, it may conceal the fact that the long term debt would still disproportionately burden potential female students.

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7 Responses

  1. Here is something else you might find of interest. Sen Tom Harkins is trying to convene senate hearings on the whole issue of trade schools and for-profit schools. He is meeting with tremendous pushback by an armada of lawyers and the Republican opposition: http://www.law.com/jsp/article.jsp?id=1202472558876&src=EMC-Email&et=editorial&bu=Law.com&pt=Law.com%20Newswire%20Update&cn=LAWCOM_NewswireUpdate_20100927&kw=As%20Senate%20Scrutiny%20Increases%2C%20For-Profit%20Schools%20Turn%20to%20Prominent%20Attorneys%2C%20Lobbyists%20for%20Help

    An interesting question that ocurred to me is that since Republicans are genetically opposed to lawyers, perhaps he could co-opt some Republican support by issuing to law schools the same data requested from trade schools.

    Think about starting a small email campaign to Sen. Harkins on the subject.

  2. One more thing, Matt — I just re-read your posting. I don’t know your source for determining “average” law school graduate salaries come from, since there is precious such data out there. The one datum I found was that in 2008, the best year ever for law school graduates landing at Biglaw, there were approximately 6,500 graduates who wound up at Biglaw with $150K starting salaries. Of course, by the time we got to where we are today, Employment for 2008 graduates has been completely decimated. NALP’s reports of starting salaries is incredibly opaque. Rather than reporting on “average” salary figures, NALP has used either a “mean” or “median” figure, using a unique method in arriiving at its conclusions, as I wrote about in http://kowalskiandassociatesblog.com/2010/07/25/what-if-they-built-a-new-law-school-and-nobody-came/

    One of the critical flaws in the NALP calculations of both “mean” or “median” salaries, is that those earning $0 are not included in the calculus.

    The only report I have seen from any law school regarding “average” compensation was from seton Hall, which reported that nearly 100% of its graduates were employed 9 months after graduation. The average salary: $38,000.

  3. It doesn’t surprise me that the hacks in the Dept. of Education do not recognize the extent of this problem. I would attribute it more to willful ignorance. After all, many of their children are taking out student loans to attend college and graduate school.

  4. I’ll let Nando from Third Tier Reality know about the Harkin hearings, both because he’s from Iowa and he has a far greater readership than I. The problem, as the article points out, is that the hearings won’t continue if the Republicans win the Senate this year. Although, I agree Republicans would enjoy an opportunity to destroy the legal education system because they loathe both academics and lawyers.

    NALP publishes images of the salary distribution curve. It’s been bi-modal, but as you said, it’s really tri-modal, ignoring completely unemployed attorneys. The most recent one includes the “Adjusted Mean” you wrote about. I can’t find it, but somewhere out there was an image of the 1991 salary distribution that was a left-leaning bell-curve. Much changed in 20 years.

    DoE got 91,000 comments against its proposed rule? Interestingly, none of the schools in that article are for-profit law schools. Even Phoenix School of Law received full ABA accreditation in June. I’d still like to know what part of the proposed rule excludes nonprofit institutions. Maybe I’ll just have to call the DoE and ask.

  5. This graph shows the more unimodal salary distributions of the 1990s.

    http://www.adamsmithesq.com/archives/2008/07/the_bimodal_starting_sala.html

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