The Links by Numbers—Bankruptcy, ROI-Based Rankings, the Tuition Bubble, and the Uniform Bar Exam

Four late summer links:

(1) Leigh Anne Faugust, “Changes on the Horizon for Student Loans in Bankruptcy?” in Leesburg Bankruptcy (Law Office of Robert Weed)

A lot of investors saw student loans as a sure bet because the students would not be able to get relief under any but the most extreme circumstances.

Of interest is the graph at the top of her post:

Wow.

Given that we know student debt is now at $850 billion and rising, I suspect this chart is the volume of loans issued per year and not total volume.

Although the Dept. of Education should’ve put more year markers along the X-axis, the upward bend begins roughly in the late 1990s—when Congress first inserted the undue hardship exception into the bankruptcy code for federal student loans.

The House bill is slowly moving through committee.  Too bad Congress doesn’t realize the moral hazard the undue hardship exception created still imperils all public student loans, which are the majority of those in the system.

(2) Debra Cassens Weiss, “Forbes Will Rank Law Schools Based on Job Results, Northwestern Reveals,” in the ABA Journal

Citing TaxProf Blog on Forbes’ college rankings, Forbes will look at law grads’ salaries one year and five years after graduation to generate a set of law school rankings based on return-on-investment.  Looking over its college rankings (and its “objective” methodology), I get the impression that Forbes is looking at salaries, and not at interest on debt, nor at whatever the discount rate is (very high these days).  In other words, Forbes’ definition of ROI is heavy on the R but light on the OI, unless we’re talking about a national military academy.[i] It also fails to test whether higher education between $150,000-$200,000 over at least four years plus interest is preferable to moving up the management chain at the local department store.

It’s now within the realm of possibility that a 17-year-old planning to go to a private college and then law school can expect to “responsibly” accumulate a quarter million dollars of non-dischargeable student debt.  And that’s just the principal!  Given that Herwig Schlunk calculated the break-even annual starting salary for most private law schools at well over $150,000 (excluding prior student debt), it’s hard for me to believe that Forbes’ rankings will tell us anything practical.  It certainly won’t be very helpful to rank law schools based on employment statistics during a period of mass unemployment.

Remember: Any higher education ranking must include the other option: Not going at all.

(3) Elie Mystal, “Citi Sells Student Loan Division: Can’t You Hear the Bubble Bursting?” in Above the Law

Contrasting to Faugust’s investors seeing student loans as a “sure bet” and Forbes’ novel definition of ROI:

Tuition is out of control.  Lenders lend without considering whether these kids will be able to pay the money back, and the American job market is in the tank.  Is this really the time you want to be in the business of originating student loans?

Apparently Citi has elected not to be in that business anymore.

(4) Martha Neil, “ABA Group Backs Uniform Bar Exam,” in ABA Journal

Yes, the UBE is a good idea.  Telecommunications and the ease of research mean state boundaries hinder legal professionals, and the costs of the testing complex are ultimately borne by clients.  If one of the commenters is right, that is, the UBE merely includes the Multistate Bar Exam, the Multistate Essay Exam, and the Multistate Performance Test, then the issue is the exam’s contents.  Bear in mind that the MBE tests generic common law where state laws often differ, especially criminal law.  Federal law beyond constitutional law doesn’t appear at all, especially bankruptcy.  Law schools are often criticized for their archaic curricula, but the easiest way for a law school to measure its performance is by teaching the local bar exam.  Of course, licensing authorities need only care about their definition of “competence,” and they have no incentive to worry about rising tuition, over-supply, or skill-sets.  The tuition bubble broadly exists because decision-making power has been diffused to multiple institutions with minimal cause to worry about the overall state of the profession.  Harmonizing these institutions would hopefully resolve the problems.


[i] Clearly the flaw in the methodology is that it studies salaries longitudinally, assuming current graduates will have the same earning potential of those thirty years ago.  The 30% of the score assigned to “Postgraduate Success” relies on three factors: alumni salaries on Payscale.com, alumni listings in Who’s Who in America, and amusingly “Alumni in Forbes/CCAP Corporate Officers List” (only 5% though).  Undoubtedly, late boomers and early gen-Xers, if they’re still employed, went to college when it was a no-brainer investment.  The longitudinal prospects of 2011 graduates and beyond are not good given that tuitions have risen faster than inflation.

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