A question that needed to be asked.
Here’s some Felt:
A question that needed to be asked.
Here’s some Felt:
Editorial, “Reviewing Legal Education Reform,” Japan Times.
In the last decade, Japan went on a 74-law-school binge (!!) because too many people were failing its bar exam. The belief was that American-style law schools would better-train people to pass the test. Instead, the result is more law school graduates who’ve wasted a lot of money on a legal education that opens no doors to them. It’s an old, old story that I’ve written on before here and here.
So the Japan Times is back with another editorial on the topic. Now it appears that people have wised up to the Failing-Law-Schools-Japan-Edition, and they’re not applying. The result is that one law school shuttered its doors in March. The government’s current solutions are to drop its 3,000 annual bar passage rate target and consolidate some of the law schools. Kill the metric, not the messenger.
The Times believes the problem is that some law schools are just bad at teaching to the test, not the licensing system itself, so it argues:
The government, bar associations and law schools should redesign the system for nurturing legal professionals. They should think about how to increase [rural] job opportunities for novice lawyers and how to improve legal services for people even if the pace of reform slows.
Although the editorial may be right that the government isn’t willing to analyze “what went wrong,” it too still seems unwilling to admit that American-style legal education doesn’t in any way increase access to legal services or create jobs (except in the law schools). That’s the lesson that’s slowly being learned in the United States with no thanks to resistance from law schools and indifference by licensing authorities. Can someone direct me to the first Japanese law school scamblog?
I have a confession to make: I like reading appellate court opinions and thinking about the issues they discuss. Maybe I should’ve gone to law school or something. I don’t collect them like comic books, but it’s a rare perk of blogging that I get to read one every once in a while.
Today’s adventure is Krieger v. Education Credit Mgmt. Corp., (7th Cir. 2013) (No. 12-3592), a bankruptcy case appealed from federal district court. The district court reversed the bankruptcy court’s finding that denying discharge of plaintiff-appellant Susan Krieger’s student loans would constitute an “undue hardship.” In a compassionate move, the Seventh Circuit sided with Krieger, allowing her discharge.
The opinion was written by law and economics powerhouse Frank Easterbrook, who baldly opens with, “Susan Krieger is destitute.” There are other nuggets like when he echoes anti-neoliberal zealot Michael Hudson (somewhat uncharacteristic of a Chicago-school type):
[I]t is worth recollecting that Educational Credit concedes (as the bankruptcy judge found) that Krieger simply cannot pay. She is essentially out of the money economy and living a rural, subsistence life. She does not have assets or income and, the bankruptcy judge found, is not likely to acquire any. Krieger at 2.
Krieger (53), who lives with her 75-year-old mother, hasn’t held a job since 1986, and before then she’d only earned $12,000 in her lifetime. She owed $25,000 in student loan debt for a paralegal degree she obtained more than a decade ago, and she applied to 200 jobs since then to no avail.
Debts that cannot be repaid, will not be repaid.
This opinion exists because Congress never bothered to define the circumstances constituting an “undue hardship.” 11 U.S.C. § 523(a)(8) (2012). The pertinent statute reads:
(a) A discharge [in chapter 7, 11, 12, and 13 bankruptcy] does not discharge an individual debtor from any debt—
(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—
(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or
(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or
(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.
(8) for an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution, or for an obligation to repay funds received as an educational benefit, scholarship or stipend, unless -
(A) such loan, benefit, scholarship, or stipend overpayment first became due more than 7 years (exclusive of any applicable suspension of the repayment period) before the date of the filing of the petition; or
(B) excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor’s dependents.
In other words, one only needed to show an “undue hardship” if her loan had been in repayment for fewer than seven years before the petition date. After that, student debt was treated no differently than credit card debt. Note also that nonprofit institutions (e.g. Access Group) were also shielded from debtors well before private institutions received the same protection in 2005.
The 1998 amendment was passed with extraordinary bipartisan support (Ron Paul voted against it), which suggests that no one bothered to think about the consequences of permanent government-backed student loan debt. The primary such consequence is that for student debtors who wish to include their student loans in their bankruptcy petitions, their fates are basically in the hands of a federal bankruptcy judge. Or Article III federal judges, going up the line, as is the case here. The circuits have, I think, three different tests for determining an “undue hardship.” The circuit you live in could mean the difference between discharge and debt peonage.
Thus, in Krieger, the debtor pretty much threw herself at the mercy of the federal courts, and thankfully they ultimately sided with her. In the trial over the dischargeability of the debt, the bankruptcy judge wrote:
Never has the Court seen such utter futility be the result of a debtor’s job search efforts. Krieger at 5.
(How many times have you read comments on scamblogs, Above the Law, and elsewhere of people who’d sent out 700 or more resumes in a handful of years rather than 200 in ten years?)
I don’t want to dive too deeply into the minutiae of the “undue hardship” test that the Seventh Circuit uses, but its third prong requires the debtor to show that she has “made good faith efforts to repay the loan.” The district court believed the debtor didn’t meet this requirement.
So law school gunner, answer me this lest I Socratic cold-call you: Does the debtor’s decision not to sign on to Income-Based Repayment mean she has failed to meet the good faith requirement?
No, writes Easterbrook, who argues that logically IBR’s existence does not repeal § 523(a)(8).
[T]he judge concluded that good faith entails commitment to future efforts to repay [i.e. IBR]. Yet, if this is so, no educational loan ever could be discharged, because it is always possible to pay in the future should prospects improve. Section 523(a)(8) does not forbid discharge, however; an unpaid educational loan is not treated the same as a debt incurred through crime or fraud. The statutory language is that a discharge is possible when payment would cause an “undue hardship”. It is important not to allow judicial glosses, [like the "undue hardship" test], to supersede the statute itself. Krieger at 4. [Emphasis original]
But what makes Krieger an even bigger bellwether over IBR is the concurrence by Judge Daniel Anthony Manion. It’s really only a concurrence in the loosest sense: He agrees with the bankruptcy judge’s determination that the loan is dischargeable only because the standard of review the Seventh Circuit is using requires a showing that the bankruptcy court’s decision was “clearly erroneous,” which Manion happens to believe is not the case.
Otherwise, Manion warns that a successful discharge of $25,000 by someone who is in good health “should be labeled as an extreme exception and an outlier” because with student debt growing to “crisis” (his words) levels, he’s afraid that debtors will flock to the bankruptcy courts instead of signing on to IBR. Krieger at 9.
What I don’t get is if Manion thinks people who are in good health and are IBR-eligible at $0 per month shouldn’t be able to discharge their loans, then why did he not find the bankruptcy court’s ruling “clearly erroneous”? How is Krieger an exception? Why is this not a dissent?
While I don’t think this is the first time a student loan bankruptcy case has encountered IBR, I’m pretty sure it’s the highest-profile example, so I’m going to call it Bankruptcy 1, IBR 0. Although it’s still a factual matter left to the mercy of bankruptcy judges, they have more leeway to side with a debtor than if the debtor were seriously injured but ineligible for an administrative hardship discharge by the Department of Education. Destitution is enough.
Meta Brown and Sydnee Caldwell, “Young Student Loan Borrowers Retreat From Housing and Auto Markets,” Federal Reserve Bank of New York
At last, a New York Fed research paper that doesn’t promote perpetual debt-financed education. In seriousness, this article is quite well done, so I don’t have too much to say about it. The only line I object to is the beginning when it states:
Student loans have soared in popularity over the past decade, with the aggregate student loan balance, as measured in the FRBNY Consumer Credit Panel, reaching $966 billion at the end of 2012.
“Popular” isn’t the word I’d use to characterize student loan debt.
The paper principally finds that young people without student loans are buying houses and cars—and they have better credit scores—than those with student loan debt, a stunning (if you didn’t stop to think about it) reversal from several years ago. The authors state two possible reasons: (1) Young debtors expect lower future incomes, which hampers their spending, and (2) Lenders will no longer loan money to people with high debt-to-income ratios. You can guess which one I think is more prevalent.
The only other observation I’ll note is that the average 25-year-old has less overall debt than several years ago, but more if it is student loan debt. This is a big deal because if the educations they purchased (if they completed them) increased their productivity, then there isn’t a lot to worry about. If we correct a few imbalances in the economy, we will expect them to be good drones.
On the other hand, if the debt did very little for their productivity, then it’s no worse than borrowing nondischargeable money to buy a large amount of lottery tickets.
In other news, the hawk-eyed TaxProf refers us to a New York Times blog post informing us that President Obama’s proposed budget would remove the tax obligation accompanying canceled loans on IBR. So what’s the call debtors? A tax break potentially worth hundreds of thousands of dollars, or a cut to your Social Security checks that will amount to 12 percent in 40 years thanks to the wonders of chained CPI?
Or can you?
Catherine Groux, “Law School Students Use Passion and Flexibility in Struggling Job Market,” U.S. News University Directory.
The U.S. Bureau of Labor Statistics states that [the reason the NALP says the employment rate for 2012 law school graduates hit its lowest point since 1994] is largely due to the fact that accounting firms and paralegals now handle many of the tasks once reserved for lawyers.
No, that is not what the BLS said. Its reference to paralegals and accounting firms was a future projection:
[G]rowth in demand for lawyers will be constrained as businesses increasingly use large accounting firms and paralegals to do some of the same tasks that lawyers do.
The BLS said that some amount of the current law graduate underemployment is due to there being too many law schools:
Competition should continue to be strong because more students are graduating from law school each year than there are jobs available.
The important words being “should continue” because it’s been going on before. The other reason the 2012 grads couldn’t find jobs is that the currency isn’t circulating, i.e. the economy is in a depression.
Yes, rich people are loaning the government money at a loss.
But that’s just par for the course. The substance of the article is much more entertaining:
According to a new survey by Kaplan Test Prep, half of pre-law students say they plan to use their JD in a non-traditional legal field, largely because of the current job market for lawyers. Approximately 43% of these individuals said they hope to use their legal degree to work in the business sector.
Oh God, half of pre-law students are sold on the juris doctor’s versatility?
Although the legal industry is struggling, many students say they want to earn a JD because they are passionate about law. About 71% of pre-law students said the main reason they are applying to law school is to “go into a career [they] are passionate about,” while only 5% said their primary motivator was the potential for a high salary.
Passion won’t make those bondholders sell their inflation-protected Treasuries and invest in real goods and services.
According to the Kaplan survey, 43% of pre-law students said they would be likely to postpone or alter their law school plans if they did not receive enough financial aid.
Except we all know they will receive enough financial aid—as much as they can spend really.
In other news…
Tom Brennan, “The Looming Threat for South Korean Law Grads? Unemployment,” The Asian Lawyer.
The large expansion in the number of law graduates stems from the introduction of U.S.–style postgraduate law schools in 2009. Before then, the law was only open to 1,000 students a year who passed a notoriously hard bar exam and then trained at the government’s Judicial Research and Training Institute. Unemployment was practically unheard of in this elite group. But the 25 new law schools pumped out about 1,900 graduates from their first classes last year.
I wrote a while ago on how Japan did the same thing: Adopt the defective U.S. legal education model right as it alienates just about everyone outside the law schools.
And finally, you should watch this:
Scott Waldman, “Standard & Poor’s Downgrades Albany Law School,” Times Union.
From the folks who rated mortgage-backed securities as AAA and have been downgrading sovereign debts denominated in their own currencies, S&P now thinks Albany Law School’s bonds aren’t as safe as they used to be. (Hey, it might not be credible in some things while retaining credibility in others.)
The report suggested that Albany Law is more vulnerable to the national trend of enrollment decline because it is not connected to a larger university. Law schools that are part of a larger university or university system were better able to absorb losses of the last few years. Schools tied to a university also can better attract students amid the shrinking market in the future because they are more able to offer bigger financial aid packages.
Standard & Poor’s believes enrollment will eventually stabilize at a lower level than where it is today and schools will adjust accordingly.
I opened an account with S&P, and while it doesn’t list ALS’s rating, I did manage to find Cooley’s, which is BBB – stable, where ALS now finds itself.
“We believe that over the outlook’s two-year period, Albany Law School will likely maintain its financial resources at current levels, continue to generate surpluses on a full-accrual basis, and stabilize student enrollment,” Standard & Poor’s credit analyst Emily Avila said in a statement.
The real question is how many of ALS’s students are paying full tuition.
The answer: About two-thirds. The median grant for both years was $20,000, which puts it in an 11-way tie for the 20th highest median grant to full-time students at a private law school. Remember: The nucleus of every law school enrollment body consist of people willing to pay whatever the law school tells them to.
Also, don’t forget that the schools can do whatever they want and no individual will ever be held personally liable for any of their debts. Student debtors, on the other hand, aren’t so fortunate.
Ethan Bronner, “No Lawyers for Miles, So One Rural State Offers Pay,” New York Times.
Before I start ranting, let me first say that South Dakota’s plan to subsidize legal services for rural communities is the exact type of thing I’ve supported for a while now, much more so than subsidizing law schools, even cheap public ones in western states.
Now I start:
Rural Americans are increasingly without lawyers even as law school graduates are increasingly without jobs. Just 2 percent of small law practices are in rural areas, where nearly a fifth of the country lives, recent data show.
[South Dakota's law] follow[s] a growing call for legal education to model itself on medical training to increase practical skills and employability. They also come amid intense debate on the future of the legal profession, and concerns about a possible glut of lawyers. In the past two years, only about 55 percent of law school graduates, many with large student loans to repay, have found full-time jobs as lawyers.
“In some areas we probably do have an oversupply of lawyers, but in others we have a chronic undersupply, and that problem is getting worse,” said David B. Wilkins, who directs a program on the legal profession at Harvard Law School. “In the 1970s, lawyers spent about half their time serving individuals and half on corporations. By the 1990s, it was two-thirds for corporations. So there has been a skewing toward urban business practice and neglect of many other legal needs.”
In other words, law graduates don’t move to rural communities because they aren’t trained to serve individuals instead of corporations. The law schools corrupted the profession, so moving those underemployed, indebted law graduates to a rural community would be like laboratory animals perishing in the wild after eco-terrorists liberate them. The fact that such a large percentage of lawyers live in urban areas supports this.
I’m dubious of this theory. One, as the big daddy of lawyer-per-capita calculations, I can tell you that the land need not be blanketed with a minimum number of lawyers per person. Demand for lawyers’ services is what counts. Two, human lawyers are a little more resilient than cutie-wootie fluffy bunnies in some cocaine addiction experiment at the U. For example, the rural lawyer the Times interviewed started working in 1949 and claims there were five or so other lawyers in Bennett County, SD at the time. Now he’s the last, and he’s surprised about it. Here’re a few questions the Times could’ve asked if it cared about the causes of rural legal deserts:
(1) Why didn’t anyone replace the other lawyers as they retired since 1949? It’s not like there haven’t been any recessions that produced underemployed, indebted law graduates since then.
(2) Did the lawyer interviewed by the Times, much less his former peers, ever hire any associates if the work was as plentiful as he claims?
(3) What income does operating a small practice in rural America provide? Is it greater than what one could get in non-legal service sector jobs in a city?
(4) What differences were there between rural and urban America in 1949 as opposed to 2013? What differences are there in law practice?
(5) What are the employment outcomes of lawyers graduating from the University of South Dakota?
As you can imagine, my intuition on questions (1)-(4) suggest that there’s more going on than simply law school graduates being programmed only for corporate work. It’s unlikely that all the previous lawyers there retired since 2005, so if law school graduates from decades past didn’t want to practice there, why should we expect current law graduates to want to? If the last-lawyer-in-town says there’s work to be done, why didn’t he try to hire anyone to help him do it? Isn’t he loaded down with currency from his free monopoly?
The obvious source of replacement candidates would be South Dakota’s law school, and a quick analysis of its graduates’ outcomes suggests the question isn’t “Why won’t they open small practices?” but is instead, “Why won’t they open their small practices in Bennett County?
The article gives a possible answer:
Thomas C. Barnett Jr., executive director of the State Bar of South Dakota, said … that in contrast to an earlier era, law graduates seemed increasingly drawn to urban life for the better shopping and dining as well as job opportunities for their spouses. In addition, he said, young graduates need mentors.
Another thought is that perhaps a lot of law school graduates, including those from South Dakota, are unmarried and aren’t too keen on their romantic prospects in a county with a population of 3,400, 35 percent of which is below the poverty line.
I suspect that today’s new lawyers aren’t much different from the medical professionals in the National Health Service Corps (who aren’t shamed by boomers into living in places they otherwise don’t want to live in). Like most people in their twenties, they prefer urban life. If that means they’d rather work at Wal-Mart (or Wall Drug) than open a small practice, that’s their right. If you don’t like that, then do as South Dakota is doing and pay!