Bucket, Meet Drop, or Why We Shouldn’t Tolerate Electoral Sunk Costs

I won’t say people had high hopes for President Obama’s student loan proposal, but its underwhelm does impress. By my understanding it does the two things:

(1)  Accelerates the IBR reforms to allow 2012 university grads to use the repayment plan. This means their interest rates will be 10 percent of their discretionary incomes instead of 15 percent, and their loans will be canceled after 20 years and not 25.

(2)  Allows consolidation of loans for hybrid borrowers (sounds sci-fi) who hold both guaranteed loans (FFELP) and Direct Loans into one massive Direct Loan with a 0.5 percent interest rate reduction. This well benefit up to 5.8 million borrowers.

Point one is good for two years’ worth of grads going forward, and point two helps prevent defaults and bail out FFELP lenders. Intuition tells me that the Democrats’ solution to the near-trillion dollars of student loan debt and the next trillion by 2020 is to put everyone on IBR and walk away. It’s not the worst outcome for student debtors, but for those already in default, those with private loans, or those not in school right now (Hint: December grads, you might want to stay in school for another semester), nothing’s changed.

Coincidentally, the White House responded to the “Forgive Student Loan Debt to Stimulate the Economy and Usher in a New Era of Innovation, Entrepreneurship and Prosperity” petition, which while noble, overreaches in its title. The response merely touts the President’s plan, and a quick read-through solidifies my opinion that the White House thinks IBR will save the day no matter how much universities overcharge or raise tuition. Why does it not see the gravity of the problem?

Not just sunk costs but electoral sunk costs. Allow me to illustrate.

Our Administration recognizes that higher education is a needed investment to compete for the jobs of the twenty-first century, but acknowledges the great financial burden that it places on many American students and families. As an Administration, we are committed to making college more affordable so that all Americans can gain access to an education that will enable them to succeed in a global economy increasingly based on knowledge and innovation.

As President Obama has explained, American students face a paradox: “at the very moment it’s never been more important to have a quality higher education, the cost of that kind of that kind of education has never been higher.” Over the past three decades college tuition has grown 10 times faster than a typical family’s income, making higher education unattainable for many; however, more than 60% of jobs in the next decade will require more than a high school diploma. It is more important than ever for Americans to get a good education to stay ahead in an increasingly global economy.

That’s not a paradox at all: the more everyone needs something, the more it costs. I’m told this is called supply and demand, but I’m just being a jerk.

From these block-quotes, we can infer a few things:

(1)  If the Republican Party wants to appear the party of small business entrepreneurs, the Democratic Party wants to be the party of Google. The working class just doesn’t exist here.

(2)  Democrats still believe “Globalization” means “college-educated people working flex time in Starbucks pushing digital paper,” and not, “massive trade deficits to developing countries due to an overvalued currency.”

Now, I believe the White House is right about the 60 percent higher ed figure, but here’s what the BLS says about job growth this decade. Of the 7,325,000 jobs created that’re listed, 4,878,000 (66.6 percent) do not require a college degree. 431,600 (5.9 percent) require only a post-secondary vocational award, 581,500 (7.9 percent) require an associate’s degree. The remaining 1,433,800 (19.6 percent) require a bachelor’s degree or more. Alternatively, the BLS’s Occupational Outlook Handbook also projects a lot numeric job growth (Table 2) in what I can best describe as jobs for “gammas” and “deltas” in Aldous Huxley’s Brave New World. 394,300 food service jobs? 374,700 retail salespeople? It’s as though the BLS would recommend the following for high school grads (if that): do menial work in the service sector, become a nurse, or get a B.S. in accounting. Smart folk will stay out of college and get an office job. Given the high cost of higher education, setting one’s sights low seems the most prosperous path. Notice, however, that none of these jobs have anything to do with “Globalization.”

Instead, here’s how far behind the curve the White House is:

Real GDP vs. Potential GDP:

The current account deficit as a percentage of GDP:

Private sector debt and net public debt as a percentage of GDP:

Home mortgage debt as a percentage of GDP:

Government holdings of nonrevolving debt (mostly Direct Loans), all other nonrevolving debt, and the total:

The civilian employment-population ratio:

Oh, and we’re short 12 million nonfarm payroll jobs.

If anything, this chart bomb indulgence should help sink in the notion that Bush years were an epic disaster of macroeconomic mismanagement. Few great countries have ever run themselves into the ground the way the U.S. has this century, though don’t ignore how the Rubin-era Clinton Administration set things up. Equally important, it instructs us that the White House lacks the political will to admit how bad the situation is. The paltry incrementalism of the “We Can’t Wait on Congress” plans makes the White House look naïve to anyone who’s informed.

This is what I mean by “electoral sunk costs”: it’s one thing to wake up one morning and realize you’re wedded to policies that sell jet-setting globalization but in reality force people to reduce their life expectations to McJobs. It’s another thing to go out and campaign on, “This country has been wrecked by kleptocrats. Time for the rich to ‘suffer’ painful reforms, and pay no attention to the fact that we just spent four years on hope and change and delivered neither.”

NYT Publishes More Shock Doctrine from Clifford Winston

Clifford Winston, “Are Law Schools and Bar Exams Necessary?New York Times

FOR decades the legal industry has operated as a monopoly, which has been made possible by its self-imposed rules and state licensing restrictions — namely, the requirements that lawyers must graduate from an American Bar Association-accredited law school and pass a state bar examination.

Winston did not do much research. For instance, would-be lawyers can attend cheaper, non-ABA law schools, such as in California, and obtain licenses in states that are not within the ABA’s monopoly. Are legal costs cheaper in California than elsewhere? Do those who attend correspondence schools charge less than those who attend ABA schools? What about the 15% of ABA grads who receive their degrees without student loans, do they charge less? Winston should have researched these questions before writing on them. The comparison is there.

In fact, the existing legal licensing system doesn’t even do a great job at protecting clients from exploitation. In 2009, the state disciplinary agencies that cover the roughly one million lawyers practicing in the United States received more than 125,000 complaints, according to an A.B.A. survey. But only 800 of those complaints — a mere 0.6 percent — resulted in disbarment.

Whoa! Did it occur to Winston that many of these 125,000 complaints are without merit, i.e. they’re false positives? What about those that were valid but did not result in disbarment, e.g. license suspensions? These two quotes alone make me distrust Winston’s good faith.

Legal costs would be reduced because non-lawyers, who have not had to make a costly investment in a three-year legal education, would compete with lawyers, who in many states are the only options for basic services like drafting wills. Because they will have incurred much lower costs to enter the field — like taking an online course or attending a vocational school — and can operate as solo practitioners with minimal overhead, these non-lawyers would force prices to fall.

Winston must demonstrate that lawyers pass the costs of legal education onto consumers. If this is the case, then he needs to explain why law firms don’t change their hiring practices to accommodate this. Why do they prefer costly Harvard grads to University of Maine ones? Why don’t they hire based on student debt levels? (There’s an interview question for you.) Do prestigious California firms prefer Stanford grads or do they aggressively recruit students from the state-accredited People’s Law School. I have yet to see any evidence that they do this, nor do I see evidence of debt-free solo practitioners thriving better than indebted ones. Do law firms feel more comfortable telling clients that their associates went to one of U.S. News’s top-ranked law schools than, “Oh, the new associate? Yeah, she got her law degree from the Northwestern California School of Law’s correspondence program.”?

The poor would benefit from the lower prices for non-criminal matters, and poor litigants, who might be unrepresented in criminal matters like hearings because they could not afford a lawyer and because of dwindling state legal aid, would be better off.

I think this “serving the poor” line is BS, even when the ABA spouts it. The problem isn’t that lawyer won’t lower prices to serve America’s poor. It’s that America’s poor are utterly destitute and can’t afford to pay for rent or food. They have no savings. Criminal defense attorneys have a problem of getting paid because if their clients go to jail, then they’re less motivated to pay their attorneys fees. This is why defense attorneys charge more up front. Perhaps Winston’s non-lawyers will find out the hard way that it’s not easy to recoup costs from someone who has no income, no savings, and is serving a fifteen year prison sentence. This is also a reason why we have public defenders and legal aid, but Winston appears to have ruled out increasing funding to public legal services.

At the same time, if corporations — and not just law firms, now structured as partnerships — could provide legal representation, their technological sophistication and economies of scale could offer much more affordable services than established law firms do. These firms, in turn, would have to reduce prices to compete.

Here’s the problem with corporations offering legal services: conflicts of interest. If the lawyer is paid by a conglomerate, his or her loyalty will flow towards the source of the bi-monthly direct deposits, not the client. This is why state bar authorities forbid ownership of firms by non-lawyers, not because they’re maliciously trying to enforce a monopoly.

Of course, lower legal prices would cause new law school graduates to be paid less, but more jobs would be available for such graduates because the demand for lawyers would increase.

??

Vast swaths of lawyers work in small firms and are not hauling in large salaries as it is. If Winston happens to be right, making them compete against corporations will likely force down their prices to the point that they’ll seek work in non-legal fields. That’s not a bad thing, but this won’t create more work for lawyers.

And new graduates would begin their careers with less law-school debt, because alternative providers of legal education would force law schools to reduce tuition.

The alternatives exist despite high ABA tuition! Law school debt is driven by a tuition bubble. The bubble is inflated by law schools seeking prestige by gaming U.S. News’s rankings and by claiming their graduates are being hired by large law firms and prestigious government and nonprofit entities. They then claim that their graduates’ median incomes are around $60,000 to $160,000 per year based on the handful of graduates who wrote that down in their surveys. Unless law firms actually started hiring from law schools that charge less, e.g. all three of Puerto Rico’s ABA law schools, and the government stopped lending law students unlimited amounts of money to attend, then law schools will continue to shift the costs of their prestige quest onto students in the form of tuition increases. Transparency will reduce but not eliminate this, and Kaplan’s online model will not come out ahead until this occurs.

One practical measure for more effectively regulating the field and lowering costs would be for third parties to compete to provide accurate and useful information about the quality of lawyers. Third-party providers of legal services information could do a service similar to that provided by Consumer Reports and Zagat Survey and effectively regulate the legal profession by monitoring the law firms’ performance and effectiveness.

Take that Vault! The other problem is that individuals seeking professional help (excluding corporate clients) mostly rely on acquaintances’ recommendations. Not that they won’t Google their lawyers before hiring them.

It is worth recalling that two of the finest lawyers and civil rights advocates our country has ever produced, Abraham Lincoln and Clarence Darrow, would not be allowed to practice law today under current rules.

Pre-1950, legal services were a lot simpler to provide, and Lincoln and Darrow did not have to worry about overhead issues like their Lexis accounts, malpractice insurance, and running afoul of the attorney grievance system.

Don’t get me wrong: legal education is a FEMA-worthy disaster, and bar exams test excessive amounts of archaic material, and the legal licensing system is anachronistic, but Clifford Winston’s efforts to use the legal academy’s pathologies as an excuse to enact his neoliberal agenda are neither fair nor fully researched. He is stymied by a few realities.

(1)  People seeking professional services are highly risk averse because the issues are high stakes, e.g. ensuring their children inherit their property or not getting executed for a crime they didn’t commit. Clients are much more willing to sacrifice cost for experience because buying legal services is not like buying toothpaste manufactured in China.

(2)  Much of the lawyer monopoly was not created to cheat the public. The bar does take conflicts of interest seriously (and if Winston cared, he would argue that the billable hour vitiates this point, but he doesn’t), and it lobbies for punishments for unlicensed practitioners to protect the public from people who con marginal communities such as immigrants.

(3)  The solution to ensuring access to legal services for the poor are: (a) eliminating poverty, and (b) expanding public legal aid services. These are not neoliberal beliefs because they require public sector expansion, which Winston refuses to contemplate.

Hopefully someone who does real research will be able to answer the question Winston asked in his article’s title.

Quick Links on Student Loan Bankruptcy Reform

There are two.

(1) Reuters, “Obama to announce help on housing, student loans,” in The Raw Story

Don’t bother clicking on the link. All it says is, “In Denver on Wednesday, he will announce a student loan initiative.” If I know my B. H. Obama, I predict the proposal will be underwhelming.

(2) Karina Frayter, “Bankruptcy Law Change Could Help Consumers Recover: Experts,” in CNBC

Looks like people are considering this as an option.

Dean Baker, co-director of the Center for Economic and Policy Research, agrees and says: “People can overplay the importance of debt relief, but it would certainly help if people could get out from under their burdens.”

Go Dean Baker.

But Joshua Shapiro, chief economist at MFR, doesn’t like the idea.

“In the longer-term it would diminish the availability of credit, as lenders balk at extending credit to borrowers who have easy means of shirking their debts,” says Shapiro.

Julia Coronado, chief economist for North America at BNP Paribas, agrees and says it punishes those who were prudent. “They may also be having hard times because of the tough job market but would not receive any assistance as they never took on debt they couldn’t afford.”

These two miss the point. (1) Extremely few people file bankruptcy capriciously. People are honest and want to pay their debts so long as they have the income to do so. (2) Bankruptcy isn’t a free lunch. It appears on your credit report, and you can’t file for again seven years after discharge. “Those who were prudent” do not lose out. They get the benefit of an economy in which people have more disposable income, which means jobs for them, raises, etc.

Some economists go even further and call for a “Debt Jubilee” to forgive excess mortgage, student loans and credit card debt for some borrowers.

Prominent economist Stephen Roach, who is also a non-executive chairman at Morgan Stanley Asia, is one of them.

“The American consumer is going nowhere,” Roach said in an August appearance on CNBC. “If we don’t address that, all the public policy aimed at the fiscal and monetary stimuli are going to be pushing on a string.”

I think this is the first economist of any stripe I know of who’s advocated debt forgiveness.

“Making existing contract invalid is not conducive to a healthy economy,” says [JPMorgan Chase chief US economist Michael] Feroli.

The right to contract is worthless without fair enforcement. The enforcer is going to be the government, and it’s going to want concessions from the parties, like protecting citizens from predatory lenders and allowing them to become debt-slaves. This means that lenders will have to take on the risk that people won’t repay their loans. If that’s a problem, charge a higher interest rate or lend to someone else. This is why “credit” is related to “credibility.” Those who have money will lend it to the most trustworthy people, and stripping bankruptcy protections makes all debtors equally trustworthy. Not how the system is supposed to work, unless you’re a communist, or a kleptocrat.

THE LAW SCHOOL DEBT BUBBLE: $53 Billion in New Law School Debt by 2020

So we know that in 2010, a majority of 44,245 law graduates took on $3.6 billion in student debt based on comparing Official Guide and U.S. News data. Without back issues of U.S. News, is it possible to figure out how much debt previous classes took on, and—*gasp*—project it into the future?

Yup.

The ABA provides a piffle of a PDF titled, “Average Amount Borrowed for Law School,” which begins with the 2001-2002 school year and ends with the 2009-2010 one. I’m guessing the law schools didn’t send the ABA 45,000 debt numbers but merely the average of their students’ debts, so what you see on the ABA’s PDF is not the average debt load of public and private law school graduates but is actually the average of law schools’ reported average graduate debt levels. To test the ABA’s version’s accuracy, let’s compare its numbers to the average of U.S. News’s law schools’ average debts for the 2009-2010 school year.

SOURCE PUBLIC AVERAGE PRIVATE AVERAGE
U.S. News $70,795 $107,182
ABA $68,827 $106,249

The average public law school’s average students’ debt differs by about 3%, private schools 1%. Clearly, we’re talking about the same stuff, so we can use the ABA’s numbers. Here’re graphs of graduate debt levels.

And yes, they track 3-year average tuition levels, at least for private law schools. For public law schools, I added one year of non-resident tuition to two years of resident tuition, and it falls a little short, which suggests that either a large proportion of people who go to public law schools move to different states and pay at least one year of resident tuition, or public law school students have been taking on more debt than before the turn of the century.

With the ABA data in hand, there are three more things we need to determine total law school debt: the number of graduates, the breakdown of graduates (public/private), and how many of them took on debt. The split between public and private law school grads in 2010 was 34%/66% according to the Official Guide, and roughly 84% of all public school grads took on debt as opposed to 83% of private grads according to U.S. News. Using these assumptions we can compare total graduate debt for the class of 2010 with the two methodologies.

SOURCE TOTAL PUBLIC GRADUATE DEBT TOTAL PRIVATE GRADUATE DEBT TOTAL GRADUATE DEBT
U.S. News $951,772,400 $2,668,868,422 $3,620,640,822
ABA $869,979,117 $2,497,898,010 $3,367,877,127

It appears the ABA data are more generous than the U.S. News ones are, placing total graduate debt at $3.368 billion rather than $3.62 billion.

Using the “public/private grad split” and “percent who take on debt” assumptions from above, we can calculate how much total law school debt law grads took on going back to the 2001-2002 school year. Although, we should note that only two of the sixteen law schools that received ABA accreditation between 2001 and 2009 were public schools (Irvine received accreditation in summer 2011), so these numbers likely underestimate the totals because the proportion of public law school graduates would have been greater at the beginning of the decade (say 37% tops) than now.

Since the debt levels are growing exponentially, here’s the projection for 2020 grads.

It appears legal education has been one of America’s winning industries for the last twenty years, posting an estimated 6.8% annualized growth rate in terms of debt revenue alone, though that’s a slight overestimate due to the relatively greater number of graduates between 2001 and 2009. In the future, total annual graduate law school debt will double by the end of the decade (~$6.8 billion/year), and this is a conservative estimate because many public law schools are rapidly “privatizing” by going off state subsidies. Continued high unemployment will encourage this process for those public law schools that aren’t leaving the state dole whole hog, such as Minnesota and Arizona State. Public law schools will supplement subsidy shortfalls with tuition increases and a handful of alumni donations. This will add $50.6 billion onto around 500,000 future law graduates’ shoulders. In 2010, the total average debt for graduates who took on debt was $90,959. At current graduation rates, in 2020, of 54,536 graduates, 45,625 will take on debt, and their total average debt will be $149,120 ($114,801 for public school grads; $173,161 for private grads).

$50.6 billion isn’t completely accurate because not everyone who starts law school finishes. The ABA kindly furnishes us with a PDF that tells us what law school attrition rates are by year (and if you do the math, you’ll find that about one entering student in eight drops out). It doesn’t tell us what the rates are by public or private law school (the Official Guide would), though I’d guess more are private than public. Nor does it tell us how many of them took on debt. I’ll use our previous assumptions anyway and add the following: (1) 1Ls paid 1.5/6ths of what they would’ve paid as 3Ls, 2Ls 4.5/6ths of what they would have paid as 3Ls, and 3Ls 5.5/6ths of what they would’ve paid had they not left. It’s crude, but fair. (2) Those who paid never came back, and (3) they all paid with debt. The attrition PDFs are all missing the 2008-2009 school year (stupid ABA), so I averaged the numbers from the previous and succeeding years to fill the gap. I’m omitting 4L attrition. They’re few in number, and I suspect many of them returned to complete their degrees later. Here’s what we get:

Attrition adds about 6% to the debt totals, increasing the numbers to $53.442 billion, an additional three billion dollars ED will disburse.

According to the Office of Management and Budget, the U.S. will issue $1,302 billion in Direct Loans by FY2020 (Table S-12). $53.4 billion of that will be new law school loans (4.1%), if these data are comparable. I don’t think anyone has an idea of how much existing student debt is for law school, but given what the ABA data already show and looking backwards, it’s probably between ten and thirty billion dollars. Knowing how anemic job growth has been for lawyers over the last few decades, it is clear that the federal government will waste a lot of money supporting the legal education system due to the impracticability of repayment under even 25-year repayment plans, leading to near-universal use of Income-Based Repayment.

I’m in favor of IBR, but endless law school tuition increases makes this a losing program for ED and taxpayers, unless the interest from everyone else repaying their loans covers forgiving billions of dollars in law school debt. However, I doubt the Congressional Budget Office, much less OMB, has projected IBR’s effects twenty-five years from now using fair-value accounting.

Meanwhile, doubling law school debt in ten years all but verifies that law schools are Winston Universities, claiming to ED and Congress that law students must spend billions of federal dollars on educations that in many instances are superfluous to the economy’s needs and are overpriced for the few that are. We can only hope Congress kills the Direct Loan Program and restores bankruptcy protection from student loans before this problem gets worse.

Sadly, the ABA was in the best position to ensure that law schools worked efficiently and were not over-enrolled, yet it stood by while law schools prioritized their own prestige over their students’ welfare. Beyond the cost to students and taxpayers is the immense shame the ABA and the legal profession will face.

Update on News in the Law School World

There were a bunch of articles I couldn’t get around to this past week, and they’re worth consolidating into one post.

(1)  Law School Lawsuits

New York Law School fights class-action suit over job rates,” Thompson Reuters.

NYLS’s attorney states:

“The allegations are not only baseless, but also belied by the plaintiffs’ own complaint, which demonstrates this case has nothing to do with New York Law School and everything to do with a crusade against the entire law school industry.”

The graduates’ attorney says:

“The fact remains that when our clients paid the annual tuition of over $40,000 to attend New York Law School, they did so based on New York Law School’s misleading representation that they had an over 90 percent chance of getting a job, and that those jobs paid certain salaries,” [Jesse] Strauss said. “That representation is demonstrably false.”

We’ll see how this plays out.

(2)  University of Baltimore Law School

Karen Sloan, “Following dean’s resignation, Baltimore relents on law school money,” National Law Journal.

Debra Cassens Weiss, “U of Baltimore Law School to Retain More Money After Outgoing Dean’s Protest,” ABA Journal.

Sam Favate, “Law Schools Recover Lost Cash, As Grads Seek Tuition Refunds,” Wall Street Journal.

A few months ago, U Baltimore asked Phillip Closius to resign after he blew the whistle on the university for allegedly over-taxing the law school to pay for other university programs.

“Under the new funding agreement, an estimated 90% of the funds generated by the law school will return to it, [Baltimore Law Professor] Meyerson said. The arrangement ensures that law student tuition will not increase next year. Students were informed by e-mail that the administration would try to minimize future tuition increases.”

A year without tuition increases is good, but whether they will occur is indisputable.

(3)  Irate Senators

Coburn, Boxer Call for Department of Education to Examine Questions of Law School Transparency,” Office of Senator Barbara Boxer.

Senators Barbara Boxer’s and Tom Coburn’s joint press release opens with, “To help better inform Congress as it prepares to reform the Higher Education Act…” Reform the HEA? What’s on the table here? This is the first I’ve heard of planned HEA reform. Returning to the lawsuits:

The New York Times found the same school [NYLS] is ranked in the bottom third of all law schools in the country and has tuition and fees set at $47,800 a year but reported to prospective students median starting salaries rivaling graduates of the best schools in the nation “even though most of its graduates, in fact, find work at less than half that amount.”

Ouch. Even if NYLS wins its motion to dismiss, it’ll still have to convince legislators that it’s not doing anything wrong.

Other reports question whether or not law schools are properly disclosing their graduation rates to prospective students.

Graduation rates? I’ve never heard of law schools concealing their graduation rates.

The senators then ask the Department of Education to provide them with the following things:

1. The current enrollments, as well as the historical growth of enrollments, at American law schools – in the aggregate, and also by sector (i.e., private, public, for-profit).

2. Current tuition and fee rates, as well as the historical growth of tuition and fees, at American law schools – in the aggregate, and also by sector (i.e., private, public, for-profit).

3. The percentage of law school revenue generated that is retained to administer legal education, operate law school facilities, and the percentage and dollar amount used for other, non-legal educational purposes by the broader university system. If possible, please provide specific examples of what activities and expenses law school revenues are being used to support if such revenue does not support legal education directly.

4. The amount of federal and private educational loan debt legal students carried upon graduation, again in the aggregate and across sectors.

5. The current bar passage rates and graduation rates of students at American law schools, again in the aggregate and across sectors.

6. The job placement rates of American law school graduates; indicating whether such jobs are full- or part-time positions, whether they require a law degree, and whether they were maintained a year after employment.

Enrollments and tuition are publicly available, though it may require dumpster-diving into paper editions of the Official Guide to go back ten years (1. & 2.). Revenue will be in universities’ hands (3.). I’ll publish federal and private debt data very soon (4.). Graduation and bar passage rates are mostly available in the Official Guide. I use “mostly” because bar exam data are published in calendar years while graduation rates are in school years, and not all graduates immediately take the bar exam (5.). Job placement rates? Good luck prying that from the law schools or NALP. The primary difficulty with legal education reform via self-reported employment data by law school is that it’s trying to gather the highest-hanging fruit to reform the system when BLS data already tell us there’s a structural overproduction of juris doctors (6.).

(4)  Can law schools save themselves?

Kyle McEntee & Patrick J. Lynch (“LST”), “Do law schools defraud students?New York Post.

Brian Tamanaha, “The Depth and Breadth of Misleading Employment Numbers by Law Schools (And How to Solve It),” Balkinization.

These two pieces bring up some subtle points worth my editorializing. First, the LST editorial refers to prospective law students as “consumers,” a term I dislike not because it hints of mindless consumerism, but because it tries to take a neutral view of the Direct Loan Program. For instance:

This year, ABA-approved law schools will get at least $4 billion in taxpayer support, thanks to the government’s decision in 2010 to directly lend to students. But when graduates can’t find jobs that allow full loan repayment, they either default or sign up for hardship programs. The taxpayers are on the hook for the lost interest income and unpaid loan principal.

So isn’t the Direct Loan Program the bigger problem rather than law school employment data? It’s not the law schools’ fault that the bank is knowingly loaning money to students whom it knows will not work as attorneys according to its own employment projections. Maybe the government shouldn’t nationalize credit markets and then guarantee the loans to itself.

There are a few more points I disagreed with in the editorial, but I didn’t start this blog to criticize transparency advocates when they’re not the ones profiting from the current system. The important line, though, is towards the end:

Whether tuition drops because consumers finally receive the real employment statistics, or because the government stops lending essentially unlimited amounts of money to students, schools will need to either reimagine the kind of education they provide or close down.

Okay, I give LST credit for putting Direct Loan reform on the table, but there are two false dilemmas in this passage. One, the choice is not between transparency and student debt reform. Both are necessary. Two, LST is offering the legal academy a Biblical ultimatum: Reform or close, which assumes there’s a face-saving option for law schools. There is none. Law schools will close, regardless of what reforms they choose to implement and especially if they essentially admit to the public that they are nonperforming institutions wasting Direct Loan dollars, or worse, wasting Direct Loan dollars and redirecting them to other university programs.

Contrast LST’s internal reform belief with Brian Tamanaha’s suggested transparency proposal:

The law school funny number problem is out of control. And it won’t stop on its own. Anyone who thinks the fix will come from the current ABA efforts to provide greater transparency is deluded.

There is only one possible solution in the short run. The deans at the top 20 law schools must sit together in a room, agree on the standards, and personally guarantee the veracity of what they report. All the other law schools will follow (or be embarrassed by continuing to post ridiculously implausible salary numbers). This must be done soon, before the next cycle of numbers comes around.

Tamanaha’s solution is realistic, but it comes with two costs. One, he knows full well that the transparency trickle-down effect will wipe out the unranked law schools because no one will take U.S. News’s rankings seriously if the Ivy League law schools all suddenly dropped into the middle hundred. Second, look at who’s in charge here. The most reputable law schools potentially have more power than the ABA Section of Legal Education, which is nominally superior to them. It would be quite a rebuke of the Section indeed.

Tamanaha’s proposal, though, is the limit of what some law schools can do to save themselves. Mandating or shaming law schools into disclosing that their graduates have poor career prospects is all but asking them to commit suicide as well as potentially open themselves up to more lawsuits.

Federal Student Loan Debt Will More Than Double by 2021; GDP, Not So Much

A few weeks ago I painstakingly projected where the federal government’s Direct Loan Program was going, and for the last several months I’ve been tracking growth in government holdings of nonrevolving debt as a proxy for the government’s Direct Loans balance to prove that. Here’s what I projected:

Then a reader directed me to the Office of Budget and Management’s (OMB) Mid-Session Review (MSR), which has been doing this all along. The following data come from the 2012, 2011, and 2010 MSRs. The 2009 MSR doesn’t have Direct Loan balances (but amusingly, it fails to predict the recession, which doesn’t bode well for OMB’s credibility).


What’s neat is that my projections were largely accurate. The Direct Loan Program will cause student debt to grow from 1% to 8% of GDP yet never crest it. The loan balance is growing linearly, thankfully. However, there are two potential flaws. One, the GDP growth the government is projecting may not come to pass. Sure, recovery will eventually come, but refusal on Congress’s part to increase spending and the Fed’s inaction suggest that we are taking the slowest, most painful path to recovery. Slow growth implies a higher debt-to-GDP ratio of Direct Loans.

Two, here’s a table of the numeric growth in Direct Loans:

YEAR DL NUMERIC GROWTH ($ Billions)
2009 293
2010 179
2011 110
2012 126
2013 173
2014 148
2015 138
2016 123
2017 107
2018 101
2019 96
2020 94
2021 96

The numeric growth includes a combination of newly originated loans less defaulted and repaid loans. Notice how the numeric growth declines below $100 billion per year by the end of the decade. Assumedly, this decline is due to loans originated now being repaid. Although, there’s good reason to suggest they won’t be. The government uses “accrual accounting” to determine the value of the loans, which excludes the actual market risk caused by a poor economy. If the economy is depressed, the government will receive a lower return on its loans due to defaults and Income-Based Repayment (IBR), which is effectively a twenty-five (and soon twenty)-year Chapter 13 bankruptcy plan. Student loans are the only type of consumer debt increasing in this depressed economy, and their nondischargeability reduces debtors’ purchasing power, which further hampers economic growth.

By contrast, we know that when we apply fair-value accounting rules to Direct Loans, the government loses money. Meanwhile, we don’t know if the government is taking tuition increases into account. There’s zero evidence that higher education will cost less in the future, so as tuition increases, so will debt loads, and by extension the amount the government is willing to give to ED to loan out.

Doubling the amount of debt on the government’s books makes sense if the gains materialize, i.e. the graduates’ educations transform them into more productive workers than had they not gone. This would be signaled—not proven—by significant growth in wages for college graduates, which we haven’t seen for many, many years. Whether college degrees alone actually transform students into better workers has not been established, and I believe it to be false.

Loaning a trillion dollars over a decade for higher education when the returns are doubtful is not something the private sector would do without loan guarantees. Thus, ending the guaranteed loan program in 2010 was a good idea as it was costly to the government, but doing so gave the federal government a pyrrhic victory because it’s now essentially guaranteeing the loans to itself. Ultimately, we will have to choose between letting the private sector finance higher education with some combination of fully dischargeable student loans and human capital contracts, or the government will have to pick up the tab and assume the risk of buying educations for people who may not use them productively.

Richard Vedder Thinks Student Loan Debtors Are Lucky Duckies

Are you an overpaid university administrator? A professor who works a couple dozen hours a week while receiving a six-figure salary for publishing unread journal articles? Feeling whispers of guilt as your students graduate into crippling debt and destitution? Fear no more, for Richard Vedder is here to put your conscience to rest. Turns out the real beneficiaries of our higher education financing policies are the students after all! Hooray!

The demonstrators say that selfish plutocrats are ruining our economy and creating an unjust society. Rather, a group of predominantly rather spoiled and coddled young persons, long favored and subsidized by the American taxpayer, are complaining that society has not given them enough — they want the taxpayer to foot the bill for their years of limited learning and heavy partying while in college. Hopefully, this burst of dimwittery should not pass muster even in our often dysfunctional Congress. -Richard Vedder, “Forgive Student Loans?” in the National Review.

There’s a lot to love in Vedder’s mispaupery, victim-blaming, and hatred of young people (older people have student loans too). My favorite part is that he seems to think the students–and not banks that received loan guarantees–lobbied for the policies that contributed to their “limited learning and heavy partying.”

A tribute to the versatile J.D. Reuben Bolling received from Harvard in the 80s.

My sarcasm aside, I agree with Vedder’s main criticisms of the student loan program: accrual accounting causes the government to underestimate market risk, student loans aren’t underwritten, they’ve contributed to tuition increases, and higher education is neither a right nor necessary for everyone. Beyond that, though, the rest of his article is his radical dogmatism dominating the second page, e.g. stimulating a depressed economy doesn’t work, Social Security is in peril, the national debt will kill us, and unfalsifiable bond vigilantes will backstab the U.S. Treasury.

Rather, now that student debt is crawling into mainstream politics, the public is tasting the ideological hostility it’ll witness. It will be all the bloodier because many of the people we’re talking about are young, and young people make excellent political scapegoats. Recognize that there are plenty of powerful Americans who couldn’t care less if the country mires in indefinite stagnation if it means we can use (or ignore) the levers of government to punish “bad people” who took on too much debt of whatever type. I lived in Japan ten to fifteen years after its real estate bubble burst. I’ve seen a society whipped by a government that opted for punitive stagnation, and now my life is like a Twilight Zone episode because it’s happening again.

In the United States, this decade will see a test between two political ideologies, one retributive and the other consequentialist. The only way forward is to do away with the former. Democracy means doing the most good for the most people, even if it means that people don’t have to pay back debt or that banks fail and academics lose their jobs. Yes, some people who made “bad choices” will come out ahead and others who “worked hard” won’t directly benefit, but don’t let appeals to “fairness” on the part of the “hard workers” fool you: Neither Vedder nor the National Review cares whether Americans suffer in permanent poverty due to policies sculpted to protect banks from taking risks.

Meanwhile, we need to recognize that the solution must be comprehensive. We cannot wipe out debt without preventing it from re-accumulating. If that means terminating the Direct Loan Program as Vedder advocates, fine. However, unlike Vedder, we can’t abandon existing debtors. The solution must come about either by restoring bankruptcy protections or canceling the debt. They lead to the same result, only one’s quicker and the other uses the judicial system, which I’m sure plenty of unemployed law school graduates will appreciate.

But Wait! There’s Good News!! Really! This made happy:

[The Fed] could move to deflate the debt that millions of households face from mortgages and student loans. This would mean following the path advocated by Ben Bernanke for Japan’s central bank when he was still a professor at Princeton; deliberately targeting a somewhat higher rate of inflation (e.g 4-6 percent). “David Brooks: Bard of the 1 Percent

This quote is the first time I’ve ever seen Dean Baker mention student loans. I credit Occupy Wall Street.

Follow

Get every new post delivered to your Inbox.

Join 137 other followers