Month: September 2011

At Least the Strib Didn’t Call It a “Golden Ticket”

“Law school is no longer a sure bet. Would-be students are noticing.” Jenna Ross, “Slump in law school applicants,” Star Tribune (Minneapolis, MN)

Progress perhaps? *Sigh*

The swell of students applying to law school — despite growing debt and contracting job prospects — has slowed.

?? “Despite” growing debt and contracting job prospects? Not “Because of”? Okay I’m just being a nitpickity editor.

One thing that hasn’t changed in reporting on declining law school applications is the self-congratulatory response from the administrators.

“Frankly, for many years, there were many students who went to law school because they didn’t know what to do,” said Cari Haaland, assistant dean of admissions for the University of St. Thomas School of Law. “Now, prospective students are thinking more critically about the decision.”

The University of Minnesota is similarly sanguine:

“The ones that do apply really want to be there,” said Nick Wallace, the U’s admissions director. “They’re not just applying on a whim or as an escape route from the real world.”

Bear in mind the former statement comes from an official at a law school that’s only existed since 1999, although Haaland may’ve been in the admissions business before St. Thomas reopened its doors after closing in the 1930s. That said, this response isn’t new, and readers may recall Washington University’s Dean Kent Syverud referring to it as “the froth in the applicant pool.” Of course, as with all things prospective law student-related, applicants can be whatever you want them to be, from stupid, self-destructive lemmings to honest, bright, hard-working, lawyers of the future who’ve done the math and know why they want to be there. The same goes for unsurveyable non-applicants, who according to law school administrators are greedy, opportunistic, unsophisticated, and dishonest about their reasons for wanting to practice law. One wonders why law school admissions people haven’t found a way to filter these types out, or why they accept more people when applications increase. If they were so concerned about greedy applicants, why do so many of them claim so many of their graduates make six-figure salaries? I guess law school is where “last clear chance” went to die.

It never occurs to them that perhaps scam bloggers have deterred bright minds who recognized that the legal profession could not guarantee much of a place for them, or that some of the people who go to law school for less-than-noble reasons can still be excellent lawyers under better economic circumstances. It’s black and white to administrators.

New law students say they’re aware of the data, but are sure of their abilities and hopeful the market will have improved by the time they graduate. Several said that their goal has never been to nab a high-paying job at one of the big law firms, which perhaps have been hardest hit by the recession.

Still, “it is discouraging,” said [name omitted], a “1L” at William Mitchell College of Law. “Everything on the Internet is ‘Don’t go to law school.’ But I have to be confident that this is right for me, and that there are lots of people and alumni who want to help.”

I don’t know the extent of Ross’s information; I presume it’s only from interviews, but unlike her interviewee I find it discouraging. One, new law students stubbornly buy into the bottleneck argument and believe the legal profession’s problems are wholly cyclical and not structural. Obviously Minnesota’s law students are not aware of the data as Ross conveys. If they were, they’d look at the Minnesota Department of Employment and Economic Development’s Web site and find that the state government projects 5,893 total lawyer job openings between 2009 and 2019. They could then compare this with the number of graduates from Minnesota’s law schools courtesy of the Official Guide. In 2010, 937 people graduated from Minnesota’s law schools, down from 962 in 2009. With these numbers in mind, we can calculate a 63% surplus of law grads in Minnesota by 2019.

I don’t make this stuff up; I get it from government agencies. It means that no amount of self-confidence and help from alumni can create jobs when there was never any demand for them.

Two, I agree that many if not most law students aren’t interested in Biglaw jobs. The question is, why should we loan them money to spend three years out of the workforce (stagnation aside) in law school if they won’t be more productive than had they not gone or end up unable to use their law degrees at all?

For those who think that Minnestoa’s 63% surplus graduates (on top of those who are underemployed or could relocate there from other states) can be translated into non-lawyer jobs because of the law degree’s versatility, St. Thomas is your new friend.

This summer, before first-year classes even began, the University of St. Thomas offered a workshop for admitted students called, “What can I do with a law degree?” Students drew a lesser-known profession or area of law, quickly researched it and presented it to their classmates.

HAHAHAHAHAHA! The law school doesn’t even have to convince students that the juris doctor is versatile in its sales pitch. They’re willing to buy the degree, and the university will then make them sell it to one another. You can’t make this up.

But permit me to quarrel with the Strib instead.

During the recession, more people applied to law school, according to the Law School Admission Council. But then for fall 2011, the number of applications nationwide dropped 9.9 percent, according to the council, to the lowest total number in at least nine years. The number of people taking the LSAT also took a dive. [LSTB: Link here]

Statements such as this, along with the article’s title, “Slump in law school applicants,” don’t really do justice to what’s happened over the decade. More accurately, 2011 has seen a law school applicant nosedive. It looks like this.

If we adjust for population—and I admit that perhaps using a smaller age cohort such as 20-25 year-old college graduates would be better—the number of applicants per 10,000 residents has fallen to 2.53 according to the LSAC’s preliminary data, a record low as far as we know. However, only the preliminary estimates are in (actual applicant numbers are in the charts except for 2011), and they’re usually revised upwards. Notice also that despite the precipitous drop in jobs, the “froth” wasn’t nearly as high as it was after the Dot-com bubble popped. The Strib article understates this.

On the whole, the four Minnesota law schools saw the same surge in applications, then a similar fall. Applications to the University of Minnesota, the best-ranked of the bunch, rose substantially through 2010-11, then dropped by about 8 percent for this fall, compared with last year. Applications to St. Thomas spiked in 2010, then dropped 29 percent for this fall.

This is what the Strib’s surges and spikes look like, according to Official Guide archives and what’s stated in the paragraph above.

Note also that when we began this discussion Cari Haaland stated, “Frankly, for many years, there were many students who went to law school because they didn’t know what to do,” which I guess means that St. Thomas doesn’t have a high opinion of three out of every ten of its applicants. On the bright side, the University of Minnesota’s Nick Wallace apparently thinks that the 800 more applicants than in 2008 are people who “are not just applying on a whim or as an escape route from the real world.” Personally, I think the admissions people are just happy that they don’t have to slog through so many applications.

Despite having way more applicants above the trend, the U of M still enrolled fewer students and touts their high LSAT and GPA scores in the article, which we’d expect. As the number of applicants drops, so too does the number of high-caliber applicants, leaving them to be even more quickly snatched up by prestigious law schools. Retrenching classes helps law schools maintain their positions in the U.S. News rankings while the St. Thomas’s of the system see significant applicant drops. It’ll be interesting to see if the LSAC’s volume data verify this when they become available.

ED Data Tell Us Why Researchers Shouldn’t Lump Law Degrees with Other Professional Degrees

If you read large scale studies on higher education that include law degrees—such as the Pew Center’s “Is College Worth It?” and Georgetown University’s Center on Education and the Workforce’s “The College Payoff”—you’ll find that researchers tend to lump law degrees in with all other first professional degrees. In doing so, they commit an ecological fallacy: “Professional degree-holders make millions of dollars more than had they not gone, law degrees are professional degrees, therefore law degree-holders make millions of dollars more than had they not gone.” Q.E.D., except not. Alternatively, they equivocate holding a law degree and employment as an attorney. Oh, and don’t you dare get me started again on Cooley’s Report One, which uses lawyer unemployment rates as a proxy for law graduate unemployment rates.

Thanks to new juicy, juicy higher education data ED has been tracking for us, we can make a better comparison of professional degrees’ values and hopefully provide insight where Pew and Georgetown do not.

Behold: the Digest of Education Statistics: 2010. Table 290 compares the number of dental, medical, and law degrees conferred for the better part of the last sixty years. It also counts all universities that are eligible for Title IV funding, so, for example, the number of law schools it counts differs from the number that are ABA-accredited.

I’m guessing most law schools “Seeking ABA Accreditation” are probably already eligible for Title IV funding. Beyond that, those concerned that ED’s number of law graduates differs from the ABA’s can rest easy. They are close to identical.

I think it’s safe to assume that Table 290 is just as accurate for medical and dental degrees, though it doesn’t include the 25 osteopathic medical schools operating in the U.S. yet Table 291 has the number of recent D.O. degrees conferred. Table 348 gives us average tuition for most professional programs going back to 1988, and with the Bureau of Labor Statistic’s (BLS) CPI calculator, I’ve recalculated the tuitions in 2010 dollars.

We can have fun with these two tables, for if ED thinks it’s okay to put these three professions together, so do I.

First, to directly refute the researchers, here’s what the BLS’s Occupational Outlook Handbook says about these three professions’ job prospects:


About as fast as the average employment growth is projected, but job competition is expected to be keen.

Job prospects. Competition for job openings should continue to be keen because of the large number of students graduating from law school each year. Graduates with superior academic records from highly regarded law schools will have the best job opportunities. Perhaps as a result of competition for attorney positions, lawyers are increasingly finding work in less traditional areas for which legal training is an asset, but not normally a requirement—for example, administrative, managerial, and business positions in banks, insurance firms, real estate companies, government agencies, and other organizations. Employment opportunities are expected to continue to arise in these organizations at a growing rate.

As in the past, some graduates may have to accept positions outside of their field of interest or for which they feel overqualified.

Physicians and Surgeons:

Employment is expected to grow much faster than the average for all occupations. Job opportunities should be very good, particularly in rural and low-income areas.

Job prospects. Opportunities for individuals interested in becoming physicians and surgeons are expected to be very good. In addition to job openings from employment growth, openings will result from the need to replace the relatively high number of physicians and surgeons expected to retire over the 2008-18 decade.

Job prospects should be particularly good for physicians willing to practice in rural and low-income areas because these medically underserved areas typically have difficulty attracting these workers. Job prospects will also be especially good for physicians in specialties that afflict the rapidly growing elderly population. Examples of such specialties are cardiology and radiology because the risks for heart disease and cancer increase as people age.


Employment is projected to grow faster than the average. Job prospects should be good, reflecting the need to replace the large number of dentists expected to retire.

Job prospects. As an increasing number of dentists from the baby-boom generation reach retirement age, many of them will retire or work fewer hours and stop taking on new patients. Furthermore, the number of applicants to, and graduates from, dental schools has increased in recent years. Job prospects should be good, because younger dentists will be able to take over the work of older dentists who retire or cut back on hours, as well as provide dental services to accommodate the growing demand.

Do the ED tables give us insight as to how we ended up here? I think so. First, we don’t know if there’s been solid demand for doctors and dentists, if not a shortage, going back to the 1950s, nor do we know if there was some idyllic time when anyone who graduated law school could at the very least open his own practice and represent clients with minimum competition and the benefits of now-illegal fee schedules. That said, with lower tuition, far fewer student loans, dischargeability, a growing legal sector, and a growing economy for those who couldn’t flourish, the legal profession of the 1950s probably resembled the high-status career-spanning profession that medicine or dentistry remain today.

Let’s begin.

(1)  For whatever reason, there have always been more law schools than the other types, and while they’ve all declined relative to the population, law schools have leveled off in the last two decades.

(2)  More importantly, the number of degrees conferred at Title-IV-eligible law schools more than tripled between the early 60s and the mid-1970s, despite a disruption likely due to the Vietnam-era draft. In the same time frame, medical degrees grew by about 60% and dental degrees by about 45%. You can also clearly see how the number of law degrees ticks upwards about three years after a recession.

(3)  Even in the last twenty years, the number of law grads has grown. Assuming a 35-year career span for professional degree-holders indicates the profession’s overall growth rate, the legal profession continues to expand in the 21st century while the other two professions do not. Indeed, the rate at which universities have conferred law degrees is higher than that of the other two professions.

The Wayback Machine tells us the BLS’s Occupation Outlook Handbook’s number of employed professionals, including self-employed ones, between 1994 and 2008.[1] Mapping this against the 35-year professional degrees rate suggests that far more people went to law school than necessary in the last few decades.

(4)  Medical school and dental school are both more expensive than law school, both public and private.

Because law school is only three years and not four like the other two professions, its students frequently pay less.

However, law school tuition is the fastest growing of the three, though private dental schools are close behind private law schools.

(5)  Law school tuition is growing faster than the other types of professional education and even all 4-year undergraduate degrees, according to Table 348.

Public Tuition 2008-2009 ($2010) Public Tuition Growth Since 1988 Private Tuition 2008-2009 ($2010) Private Tuition Growth Since 1988
4-Year Undergrad $6,393 +141% $24,951 +75%
Law $18,697 +267% $36,077 +98%
Medicine $23,252 +123% $41,817 +45%
Dentistry $25,104 +158% $55,474 +87%
Osteopathic Medicine $21,165 +83% $37,178 +49%

So let’s compare the three professions qualitatively:

Per Capita Professional School Growth 1955-2008 -16% -10.8% -28.58%
Per Capita Professional Degree Growth 1955-2008 +189.12% +27.3% -11.37%
Real Total Public Tuition 2008 Grads $53,471 $89,607 $92,081
Real Total Private Tuition 2008 Grads $105,425 $163,840 $214,050
Real Public Tuition Growth Since 1988 +267% +123% +158%
Real Private Tuition Growth Since 1988 +98% +45% +87%
Undergraduate Course Requirements None “Pre-med” Science Courses Required “Pre-dental” Science Courses Required
Projected Job Openings by 2018 240,400 260,500 61,500
Projected Grads by 2018 440,045 196,520 (Includes D.O.s) 49,180
Job Outlook 18.3 Grads per 10 Jobs 7.5 Grads per 10 Jobs 8 Grads per 10 Jobs

One could research this more thoroughly than I just did, but I think this comparison demonstrates that the law school expansion of the 1960s and 1970s contributed to the situation we have today. Lacking undergraduate course requirements didn’t help much either. That said, we should not view medicine or dentistry as models for legal education reform. Deliberately maintaining a shortage of practitioners drives up medical costs, which is especially irresponsible for a country that lacks a public health care system. Legal education reform should take a more innovative path that disserves neither consumers of legal services nor lawyers.

To editorialize some: What also surprises me is that despite these two labor cartels, public criticism is directed at law schools’ pathologies to promote a deregulation agenda for legal services. Why aren’t the Clifford Winstons and Robert Crandalls of the world demanding that we strip the American Medical Association and American Dental Association of their accreditation authority? Or allow people to practice medicine without taking specific undergraduate courses, attending school for four years, working as residents for several more years, and taking boards? Why aren’t they demanding that nurses be allowed to sign prescriptions, or dental hygienists to pull teeth? These appear to be bigger problems than the cost of high-end legal services, which J-Dog points out aren’t fungible no matter how much we deregulate them.

Returning to the topic, the fact that the two other professions didn’t grow beyond economic need helps explain why they can maintain such rigid requirements, charge so much, yet not proliferate dental school scam blogs. This is not an opinion of their curricula, nor is my point to reduce the reform movement to a sociological phenomenon. Rather, this comparison shows that law schools’ problems are the result of choices made by the profession. Choices that will result in a humiliating contraction. The only remaining question is who will bring this about.

Oh, and where are the business school scam blogs?

[1] Here are links to archived OOH reports.

Lawyers: 1994, 1996, 1998, 2000, 2002, 2004, 2006.

Doctors and Physicians: 1994, 1996, 1998, 2000, 2002, 2004, 2006.

Dentists: 1994, 1996, 1998, 2000, 2002, 2004, 2006.

Direct Loans One Year On: Government-Held Nonrevolving Debt Grows 66%; GDP, 3.7%

In March 2010, President Obama signed the Health Care and Education Reconciliation Act. One of its provisions terminated the infamous Federal Family Education Loan Program (FFELP), leaving the Department of Education as the sole originator of all federal student loans via the Federal Direct Loan Program, which has existed since 1993. Starting July 1, 2010, all new federal student loans would be Direct Loans, and this is a good thing, at least because the FFELP was monumentally wasteful. It allowed banks to play middlemen over nondischargeable student debt, grossed ED an average $1.22 on every $1.00 for every defaulted loan, and fueled the Student Loan Asset Backed Securities (SLABS) trade. Direct Loans alone, the thinking went, would solve these problems once and for all. As I’ve written elsewhere, the government is making two crucial errors. One, its accounting system doesn’t measure student loans’ full market risk; two, it doesn’t hold higher education accountable, sitting by while universities capture student loans’ value and increase tuition above inflation regardless of job availability (Gainful Employment Rule aside).

One year after switching to Direct Loans exclusively, looking at the Federal Reserve’s G.19 Release and the Bureau of Economic Analysis’s nominal GDP values, we find that the Direct Loan Program’s sole result is… increasing student loan debt. Government-held nonrevolving debt grew 66%, GDP only 3.7%. In numeric terms, during the 2010-2011 academic year (second quarter-to-second quarter), government nonrevolving debt grew $147.5 billion ($222.6 billion to $370.1 billion), GDP, $529 billion.

How do we know that government-held nonrevolving debt is mainly student debt? According to the Office of Budget and Management, in FY 2010 (October 2009 – September 2010), ED lent $74.709 billion in Federal Direct Loans, bought $56.909 in student loans off the market ($131.618 billion) and spent the final $42.141 billion in FFELP loans. In FY 2011 (October 2010 – September 2011), it calculates that it will have lent out $133.507 billion in Federal Direct Loans, and in FY 2012 it will increase that to $145.129. So these numbers mostly line up, but it’s important not to confuse Federal Direct Loans and government-held nonrevolving debt.

To give you a better idea of how bad 2010-2011 was for Direct Loans, here’s what nonrevolving debt has looked like over the past decade (second quarter-to-second quarter).

And here’s its ratio to GDP:

From 2008 to 2010, total nonrevolving debt fell by $26.1 billion, yet government-held nonrevolving debt grew by $118 billion due to more universities switching to the Federal Direct Loan Program and the federal government buying up FFELP loans, doubling the government’s holdings of nonrevolving debt.

So in the 2010-2011 school year private sector holdings of nonrevolving debt contracted by $81.3 billion, yet the government’s increased by $147.5 billion. Government-held nonrevolving debt is the only kind of consumer debt that is increasing during a time of excess private sector debt and low GDP growth. That’s bad, and it would be decreasing if student debt were dischargeable in bankruptcy. By comparison, revolving debt (credit cards) has fallen to 5.26% of GDP, the lowest this century.

(These are end-of-year data and not Q2-to-Q2; 2011 projections are my own; additional source: 1.54 Release (mortgage debt: 2009-2011, archives 2004-2008 (the February updates show the data from five years earlier))

Naturally, education is something we expect to provide value in the future rather than in the present by creating more productive workers, so ED wants the public to believe that once the economy recovers all this debt will be paid down and the debt-to-GDP ratio will fall. This outlook assumes that higher education is reasonably priced and provides the value it claims to—two points that are likely false and are certainly unsubstantiated.


To illustrate the implications of the current policies, it’s worthwhile to predict what will happen if they continue, so let’s assume that the 2010-2011 school year is indicative of the future; in other words ignore the FY 2012 increase in Direct Loans. Basing the future on the recent past isn’t implausible. As far as I’m concerned, if Krugman thinks the Congressional Budget Office is fantasizing a recovery in 2015, I’m convinced too, so we’ll assume the nominal GDP growth rate is the same over this decade as in the past school year. I’ll also assume that others’ holdings of nonrevolving debt will contract at the same rate as in 2010-2011 (it’s not really relevant beyond the $700 billion of remaining FFELP loans and another $100-200 billion in private student loans). The one place I’ll break is with the government’s holdings. If we believe that it’ll grow at 66% indefinitely, then we’ll have $35 trillion dollars of government-held debt by 2020, and that, frankly, is absurd. Given the budget data from above, the government is willing to lend out roughly $135 billion every year, so I’ll increase government-held nonrevolving debt linearly rather than exponentially like everything else. We get this:

And the ratio to GDP:

That’s $1.6976 trillion in government-held nonrevolving debt (from $370.1 billion after Q2 2011), and a debt-to-GDP ratio of 8.19% (up from 2.47%). Although I’d trust the accuracy of this projection through, say, 2014, in my opinion the crude result appears right: government-held student debt will approach 10% of GDP. The only things that could shift this are better macroeconomic management (e.g. a Newer Deal), the Asian Import Fairy, a Euro breakup (which would worsen the situation), and the Gainful Employment Rule forcing for-profit colleges into private sector student loans—not that it’d help the overall situation, but it would change the debt composition. What happens to the remaining several hundred billion dollars of FFELP loans and private student debt is anyone’s guess.

What does this mean?

The good news about the student debt bubble: The U.S. government is NOT Lehman Brothers. It can NEVER go bankrupt. Lehman failed because it couldn’t pay its creditors with its earnings. The United States is not a bank. It has the power to tax, and all its debts to bondholders are denominated in its own currency. It may end up raising taxes or minting a pile of platinum coins if bondholders get scared, but it will not go belly up due to Federal Direct Loan defaults.

Speaking of which: Yes, student loan defaults will continue to increase. The chart ED issued recently probably conceals many more defaults beyond the two-year cohort it normally tracks. Yes, IBR/ICR will leave ED holding the bag. Yes, legislators will realize this is a severe problem. Whether they simply decide to terminate the student loan programs and leave current debtors to suffer or instead cancel the outstanding student debt is debatable. The latter, whether by direct cancellation or bankruptcy reform, is the preferable and responsible solution as the government should realize it will not get its money back and that there’s an inherent moral conflict between shepherding the public fisc and playing for-profit bank. If the government opts to force student loan repayments in the name of austerity, debtors will respond with a mass default and tax resistance as well. Note that we’re still only talking about Direct Loans, and the outstanding FFELP and private student loans will require additional government action.

While it’s not going to be as significant a financial collapse as the eight trillion dollar housing bubble, the student debt bubble will re-teach the American elite that democracy fails when people believe their government no longer represents them. Americans revolted over taxation without representation; how will they respond to outright peonage to their stubborn government?

Petitions and Protests

Here’re a few things for you activists to keep an eye on: two petitions and a protest.

There’s one petition going around the Internet asking the House of Representatives to pass a resolution favoring forgiving student loan debt per Michigan representative Hansen Clarke’s proposal (H. Res. 365). It’s close to getting the 90,000 signatures it’s asking for, but there’s room for more.

LawProf of Inside the Law School Scam has started his own petition. While it accepts signatures from all law students and graduates, it’s targeting law faculty and asking them to demand the ABA to require the law schools to provide transparent employment data. LawProf will submit it when one hundred faculty members sign it.

For those of you not into petitions or transparency and prefer direct action, a protest is in pipeline. On October 8, 2011, Dan, a 2009 law grad who operates Highest Education, will be leading a protest against excessive tuition and student loan debt. The venue is Thomas Jefferson School of Law (TJSL) in San Diego, California, because it’s the defendant in 2008 graduate Anna Alaburda’s lawsuit. Alaburda claims TJSL defrauded her, and she’s seeking class action certification. Here’s the link to Dan’s Facebook page, “Rally against The Education Industrial Complex.”

Consumer Credit Update (2011 September)

It’s the fifth business day of the month, which means the Federal Reserve has updated its G.19 Release, its estimate of outstanding consumer credit. One problem the U.S. economy faces is that consumer credit is growing faster than the economy. While the G.19 Release doesn’t quantify how much nonrevolving debt is student debt, it is very likely that most increases in that category are attributable to the Direct Loan Program’s student loans because of high tuition and the near impossibility of discharging student debt in bankruptcy. All figures are billions of dollars, and all percentages are annualized. Link here for my ongoing analysis of increasing nonrevolving debt relative to GDP.

This month, the Fed revised the second quarter 2011 numbers. These are seasonally adjusted.

2011 Q1 r 2011 Q2 p 2011 Q2 r
Total 2,421.5 2.2% 2,446.1 bln 4.3% 2,442.5 3.5%
Revolving 792.8 -3.7% 798.3 bln 3.9% 795.9 1.6%
Nonrevolving 1,628.6 5.1% 1,647.8 bln 4.6% 1,646.6 4.4%

It appears the amount of consumer debt didn’t grow as much in Q2 as originally thought. Here’s what we get in July.

2011 Q1 r 2011 July preliminary
Total 2,442.5 3.5% 2,454.5 5.9%
Revolving 795.5 1.6% 792.5 -5.2%
Nonrevolving 1,646.6 4.4% 1,662.0 11.2%

So in July nonrevolving credit increased rapidly while revolving credit contracted again.

As for holdings of nonrevolving debt, government holdings account for nearly all the growth of nonrevolving credit as well as the largest annualized increase. These numbers are not seasonally adjusted and do not sum together; annualized increases are mine.

June (revised) July (preliminary) Numeric Change Annualized Increase
Total NRV 1,636.1 1,652.6 16.5 12.8%
Government 370.1 385.7 15.6 64.1%
Commercial Banks 490.5 491.2 0.7 1.7%
Finance Companies 430.8 432.7 1.9 5.4%
Credit Unions 185.1 186.7 1.6 10.9%
Savings Institutions 36.7 37.0 0.3 10.3%
Nonfinancial Business 44.8 44.7 -0.1 -2.6%
Pools of Securitized Assets 78.2 74.5 -3.7 -44.1%

Increase in government holdings of nonrevolving credit accelerated significantly from June, when it grew at an 18.5% annualized rate. According to the BEA, real economic output grew at a 0.4% in Q1 2011 and 1.3% in Q2.

A Hypothetical Class of 2014 Law Student’s Journey into Debt

[UPDATE: Unpaid interest on IBR does not capitalize onto loan principal. Calculations below are, regrettably, mistaken.]

Recently, Inside the Law School Scam’s LawProf discussed the amount of law school debt a student may expect to take on and provided NALP figures of starting salaries as a comparison. LawProf used some research I provided, and I’m grateful for his linkback to the LSTB. Unfortunately, some of what I sent him was inaccurate due to my own error (esp. how much Stafford Loan borrowing is possible), so I’ve decided to create a detailed hypothetical of law school loan repayment based on current, applicable law. To that end, I taught myself the dark art of loan amortization—something they should teach in junior high school, not that I blame mine. This post will show us how much law school debt a class of 2014 student might reasonably take on given a few assumptions. They are:

  1. No undergraduate debt (ha!)
  2. No scholarships
  3. No savings, job, income, work-study, family connections, etc.
  4. Full-time status maintained throughout law school and graduation within three years
  5. Eligibility for all relevant loans
  6. Attendance at New York Law School. Why? Not to beat up on it, but because its tuition guarantee program removes the tuition increase variable from the calculation. Indeed, I freely admit that NYLS’s unusually high price tag and high cost of living skew the results towards significantly more debt than a typical 1L will start taking on this year. That said, accuracy is important to this project, and as you’ll soon see, the interest and repayment rates are so high that it doesn’t really matter.
  7. Interest accrues monthly, which in reality is not true. Interest on student loans actually accrues daily, but it won’t cause too much inaccuracy in the hypothetical.
  8. …And every other common sense assumption required to make this work.

Law students are eligible for three types of loans: Subsidized Stafford Loans, Unsubsidized Stafford Loans, and Grad PLUS Loans (for professional students). Subsidized Stafford Loans are limited to $8,500 per year, though this will change next year when provisions of the Debt Ceiling Bill go into effect and make law students ineligible for Subsidized Stafford Loans. Unsubsidized Stafford Loans cover an additional $12,000 of tuition, up to $20,500 total. Both types of loans have an annual interest rate of 6.8% and a fee of 1.0%, which is taken out of the loan at the time of origination. Interest does not accrue on Subsidized Stafford Loans while the student is enrolled at least part-time. Unsubsidized Stafford Loans accrue interest immediately. Both loans can be deferred until graduation, after which they are eligible for a six-month grace period during which interest accrues but payments are not demanded. The grace period means that from the time of the last set of disbursements (we’ll assume in August before the 3L year begins and graduation is in May) until repayment first occurs, fifteen months will transpire. This means the grace period ends in the November after graduation, and the first payment will be due in December.

Grad PLUS loans are similar to Unsubsidized Stafford Loans except their annual interest rate is 7.9% and the origination fee is 4.0%. Grad PLUS loans now make it possible for law students to finance not only their full law school tuition minus available Stafford Loans but also to provide for living expenses. The government’s rationale behind this is that professional education is rigorous, so students shouldn’t have to work outside of class. Its heart is in the right place but the results are grotesque.

Because there’s a limit to the amount one can borrow in Stafford Loans each year ($20,500), we’ll go through three scenarios of Grad PLUS Loan borrowing based on how much the student borrows for living expenses: living alone, with family, and not using Grad PLUS loans for living expenses at all. I’ll also include repayment plans except the graduated repayment plan (10 years) and the extended graduate repayment plan (25 years) because I have no idea how to calculate them. You can use ED’s website for that if you are interested. Student debtors are ineligible for extended repayment plans (fixed or graduated) if the principal on their debts is below $30,000, which will pose a problem for the Subsidized Stafford Loans in our example.

I will also give two examples for each scenario placing our graduate on Income-Based Repayment (IBR). IBR calculates a monthly payment based on gross income, family size, total loan principal, their average interest rate, and cost of living. I do not know when the repayment rate is calculated or recalculated each year. After 25 years, the government cancels the loans, leaving the student debtor to pay income tax on the forgiven sum. Thanks to the Health Care and Education Reconciliation Act of 2010, new borrowers in 2014 will have their loans forgiven after only 20 years. I interpret this to mean that people who begin borrowing in 2014 will have the shorter IBR time frame. The government covers interest on subsidized loans for the first three years of repayment if the graduate’s monthly repayment rate does not. I am fairly sure this applies to three years of payments and excludes the grace period. While the monthly payment is partly determined by the average interest rate of all the loans, I believe the payments are distributed among the loans in proportion to the loans’ share of the total remaining principal, and interest on the loans accrues according to their listed rates, not the average.

In the first sub-scenario, our hero will live alone, earn the mythical Biglaw $160,000 starting salary at month zero, and live within the continental United States for cost of living purposes. In the second sub-scenario, our hero will be married to a spouse with no IBR-eligible debt, file jointly, have two children, earn a combined gross income of $70,000 to start, and also live within the continental United States. Yes, I’m assuming the kids will live with their parents for at least 25 years (unless our hero had some combination of two kids and parents living under the same roof over that time period). It won’t save them a whole lot of money, but it is a perverse incentive to keep kids at home just to have cheaper IBR payments.

I will not use IBR’s complementary program, Income Contingent Repayment, which cancels loans after 10 years for graduates who work in the public interest (though income tax on the forgiveness isn’t required). In normal economic times, incomes grow, so I will give our hero a two percent raise every year.

Here’s an outline of what happens to our hero.

I. Grad PLUS Goes to Living Expenses (Alone)

A. Standard Repayment Plan: 10 Years

B. Extended Repayment Plan (Fixed): 25 Years


1. Biglaw ($160,000)

2. Middle Income ($70,000)

II. Grad PLUS Goes to Living Expenses (w/ Family)

A. Standard Repayment Plan: 10 Years

B. Extended Repayment Plan (Fixed): 25 Years


1. Biglaw ($160,000)

2. Middle Income ($70,000)

III. Grad PLUS Goes to Tuition Only

A. Standard Repayment Plan: 10 Years

B. Extended Repayment Plan (Fixed): 25 Years


1. Biglaw ($160,000)

2. Middle Income ($70,000)

IV. Conclusion

I. Grad PLUS Goes to Living Expenses (Alone)

$47,800 1L $8,415.00 $11,880.00 $27,505.00 $23,323.00 $48,794.88
$47,800 2L $8,415.00 $32,982.84 $27,505.00 >$23,323.00 >$101,444.56
$47,800 3L $8,415.00 $55,520.67 $27,505.00 >$23,323.00 >$158,253.56
GRACE $8,705.19 $60,431.80 >$174,622.22


1L $69,089.88
2L >$142,842.40
3L >$222,189.23
GRACE >$243,759.22

A. Standard Repayment Plan: 10 Years

SUB’D STAFFORD $8,705.19 6.8% $100.18 $3,316.35 $12,021.54
UNSUB’D STAFFORD $60,431.80 6.8% $695.45 $23,022.40 $83,454.20
GRAD PLUS $174,622.22 7.9% $2,109.43 $78,510.04 $253,132.26
GRAND TOTAL → $243,759.22 $2,905.06 $104,848.78 $348,608.00

B. Extended Repayment Plan (Fixed): 25 Years

SUB’D STAFFORD $8,705.19 6.8% $100.18 $3,316.35 $12,021.54
UNSUB’D STAFFORD $60,431.80 6.8% $419.44 $65,400.42 $125,832.23
GRAD PLUS $174,622.22 7.9% $1,336.22 $226,239.37 $400,861.59
GRAND TOTAL → $243,759.22 $1,855.84 $294,956.14 $538,715.36


1. Biglaw ($160,000)

Here, our hero’s income grows to the point that after nine years of IBR, he or she is kicked into a standard repayment plan. Moreover, the original minimum payment, $1,795, covers the interest on the Subsidized Stafford Loans for the first three years, meaning our hero does not benefit from the government’s IBR interest subsidy.

$243,759.22 7.35% $1,795.00 – $2,173.03 $233,502.37 $229,099.26 $472,858.47

2. Middle Income ($70,000)

In this scenario, our hero’s family’s income never grows to the point of kicking them off IBR. Consequently, the government saves $1,212.26 by subsidizing the interest on Subsidized Stafford Loan for three years. Nevertheless, the Department of Education stands to lose more than a million dollars by financing our hero’s legal education and living expenses. The term for this? “Negative amortization.”

$243,759.22 7.35% $455 – $995 $115,170.51 $211,380.00 $211,380.00


$1,212.26 $27,074.69 ($31,174.55) $2,887.60 $1,063,628.12 $1,064,840.39

II. Grad PLUS Goes to Living Expenses (w/ Family)

$47,800 1L $8,415.00 $11,880.00 $27,505.00 $10,474.00 $36,459.84
$47,800 2L $8,415.00 $32,982.84 $27,505.00 >$10,474.00 >$75,800.01
$47,800 3L $8,415.00 $55,520.67 $27,505.00 >$10,474.00 >$118,248.05
GRACE $8,705.19 $60,431.80 >$130,478.82


1L $56,754.84
2L >$117,197.85
3L >$182,183.72
GRACE >$199,615.81

A. Standard Repayment Plan: 10 Years

SUB’D STAFFORD $8,705.19 6.8% $100.18 $3,316.35 $12,021.54
UNSUB’D STAFFORD $60,431.80 6.8% $695.45 $23,022.40 $83,454.20
GRAD PLUS $130,478.82 7.9% $1,576.18 $58,663.15 $189,141.96
GRAND TOTAL → $199,615.81 $2,371.81 $85,001.90 $284,617.70

B. Extended Repayment Plan (Fixed): 25 Years

SUB’D STAFFORD $8,705.19 6.8% $100.18 $3,316.35 $12,021.54
UNSUB’D STAFFORD $60,431.80 6.8% $419.44 $65,400.42 $125,832.23
GRAD PLUS $130,478.82 7.9% $998.43 $169,048.72 $299,527.53
GRAND TOTAL → $199,615.81 $1,518.05 $437,381.30 $237,765.49


1. Biglaw ($160,000)

Same results as I.C.1., except this time, our hero’s lower starting debt level means that he or she will be kicked off IBR after only four years.

$199,615.81 7.35% $1,795.00 – $1,973.63 $211,299.27 $126,412.61 $326,028.42

2. Middle Income ($70,000)

Readers will note that our hero pays the exact same amount living with family as living alone, though the government still loses three quarters of a million dollars.

$199,615.81 7.35% $455 – $995 $115,170.51 $211,380.00 $211,380.00


$1,081.86 $24,168.33 ($27,445.98) $2,195.79 $753,381.79 $754,463.64

III. Grad PLUS Goes to Tuition Only

$47,800 1L $8,415.00 $11,880.00 $27,505.00 $0.00 $28,651.04
$47,800 2L $8,415.00 $32,982.84 $27,505.00 $0.00 >$59,565.52
$47,800 3L $8,415.00 $55,520.67 $27,505.00 $0.00 >$92,922.23
GRACE $8,705.19 $60,431.80 >$102,533.47


1L $48,946.04
2L >$100,963.36
3L >$156,857.91
GRACE >$171,670.47

A. Standard Repayment Plan: 10 Years

SUB’D STAFFORD $8,705.19 6.8% $100.18 $3,316.35 $12,021.54
UNSUB’D STAFFORD $60,431.80 6.8% $695.45 $23,022.40 $83,454.20
GRAD PLUS $102,533.47 7.9% $1,238.60 $46,099.02 $148,632.49
GRAND TOTAL → $171,640.47 $2,034.23 $72,437.77 $244,108.23

B. Extended Repayment Plan (Fixed): 25 Years

SUB’D STAFFORD $8,705.19 6.8% $100.18 $3,316.35 $12,021.54
UNSUB’D STAFFORD $60,431.80 6.8% $419.44 $65,400.42 $125,823.23
GRAD PLUS $102,533.47 7.9% $784.59 $132,843.24 $235,376.71
GRAND TOTAL → $171,640.47 $1,304.21 $201,560.01 $373,230.48


1. Biglaw ($160,000)

By using Grad PLUS loans for tuition only, our hero is kicked off IBR after only two years.

$171,640.47 7.35% $1,795.00 – $1,807.50 $203,020.87 $88,649.12 $260,319.58

2. Middle Income ($70,000)

Readers should take note of this scenario because in better economic times and less severe law graduate oversupply, it would probably be the one most similar to graduates from $45k/year law schools on IBR. Again, the graduate pays the exact same amount as if he or she had borrowed the full amount of Grad PLUS Loans. Despite our law graduate’s frugality, the Department of Education will lose more than half a million dollars after 25 years.

$171,640.47 7.35% $455 – $995 $115,170.51 $211,380.00 $211,380.00


$962.80 $21,441.58  ($24,049.84) $1,645.45 $558,587.96 $559,550.76

IV. Conclusion

I have five points:

(1) Much rending of garments and gnashing of teeth accompanies the notion of 21 year-olds taking on law school debts without understanding their implications. Although law students have only one set of circumstances on which to base their repayment decisions rather than the twelve the hypothetical depicted, I found this particular project unusually difficult, and this comes from a guy who enjoyed doing integration by parts problems in his high school calculus class. In other words, calculating loan repayment plans, total interest, types of loans available, interest on loans in school or after a grace period, subsidized interest for three years on IBR, projected income increases, etc. to within one month of repayment is hard even for adults who don’t blush at math and spreadsheets. At least with cars or mortgages, borrowers already have an income and know what they can afford (to say nothing of at least some bankruptcy protections). However, as I’ve written on several occasions in the past, even if law graduates were required to be implanted with graduate employment tracking chips in the bases of their skulls to receive their diplomas, there is still almost no way a prospective law student can know ex ante what his or her income will be starting out, much less over the course of a law career—except that it’s certain to be far less than what’s necessary to cover a monthly payment on a Standard Repayment Plan. Additionally, the fact that Congress can and does capriciously change the terms of student loans throws a wrench into current students’ borrowing plans.

(2) There is nothing remotely standard about the Standard Repayment Plan. In all three scenarios, our hero was paying at least $2,000 per month. That’s $24,000 per year and would require at least $160,000 in income to constitute only 15% of his or her gross income. Congress and the Department of Education must know that most law graduates do not make this kind of money, yet they allow the lending to go on. How can university administrators not know either? It shocks my conscience. Even without using Grad PLUS loans for living expenses, an NYLS 1L can expect to cough up $1,304.21 each month (15% of a $104,338.40 salary) for 25 years on an extended repayment plan, which at least will be somewhat eroded with 25 years of inflation.

(3) It occurred to me that Grad PLUS loans are the government’s way of trying to help grad and professional students avoid taking on private loans. The changes to the bankruptcy law made private student loans death traps in 2005, and Grad PLUS loans came into being soon afterwards. It may’ve been part of the BAPCPA too, but it only just now occurred to me. As you can see with green blobs on the graphs, Grad PLUS loans were by far the largest component of law school debt. Not as bad as private loans, but certainly not as good as the lower interest Staffords.

(4) The most surprising thing I found is that unless a law graduate gets a Biglaw starting salary—which I believe will soon deflate rapidly—how much they borrow ultimately won’t matter. Once a fledging lawyer’s initial salary fails to produce a payment that covers the monthly interest, he or she might as well have borrowed as much money from the government as possible and spent it. That’s not to say I condone it, and I absolutely discourage people from taking on this kind of debt just because IBR exists. Not only does Congress flip-flop on student lending laws, but borrowing that kind of money is simply irresponsible for those who know better. The moral hazard IBR creates is even worse than I imagined.

(5) Speaking of which, don’t get me wrong, IBR is far better than loan repayment without it. Although, once a lawyer fails to make Biglaw or a Biglaw salary, the government has already made a bad loan. What does all this mean exactly? Not that the government literally spends an extra million dollars on high-cost law degrees when it cancels their debts but that it could’ve spent that money on something more practical. Under the current system, the Department of Education stands to lose roughly one billion dollars per 1,000 to 2,000 law students who attend law schools charging $45,000 in tuition per graduating class when the loans are canceled. As I wrote at the beginning, using NYLS’s tuition guarantee program does mean using a law school whose tuition is unusually high, just outside the first standard deviation of average private law school tuition, so in hindsight it’s not the best case for broad analysis, even if the purpose of the hypothetical is accuracy. However, the tuition bubble pauses for no one, even when incoming enrollments are dropping, and today’s second standard deviation will be the average in four years according to my projections. As a footnote, law schools charging what is now below average private school tuition, $35,000 per year, cost the government one billion dollars in “middle income” IBR cancellations per 4,500 to 5,000 students per graduating class, and yes, the law graduate will still pay the same $211,380 as everyone else.

While these analysis didn’t account for inflation and increased income tax revenue from lawyers, if any, legal education will cost the republic tens of billions of dollars for far less value than it provides.

The Economist Has Never Heard of the Bureau of Labor Statistics

The Neoliberal paper of record, The Economist, torments humanity again with a brazenly titled editorial, “Not Enough Lawyers? Lawyers keep their numbers carefully pruned, pushing up costs.”

“Carefully pruned,” eh? I sure hope The Economist doesn’t imply that the ABA maintains an artificial attorney shortage through the law school accreditation system operated by the Section of Legal Education, which operates independently from the ABA. Otherwise I’ll have to link to the Bureau of Labor Statistics again and repost that graph comparing the number of JD-holders, active and resident attorneys, and employed attorneys.

The editorial praises the arguments from the authors of last week’s Wall Street Journal editorial, “Time to Deregulate the Practice of Law,” by Brookings Institute fellows Clifford Winston and Robert Crandall, who wrote a book with University of Houston economics professor Vikram Maheshri on the subject. The Economist summarizes:

[B]arriers to entry have kept the number of lawyers artificially low for decades. This—combined with an economy over-regulated by lawyers who go on to politics—results in an unearned premium on legal wages.

Apparently, lawyers now co-opt the system by subverting legislatures into passing laws that benefit themselves. Truly nefarious indeed. Okay, there is a grain of truth to this: state legislatures will listen to bar authorities before masses of poor people, but casting normally hapless bar associations as organized crime syndicates is silly.

I don’t like to be utterly dismissive of writings on the legal profession I disagree with, so to The Economist’s credit, the editorial does a far better job organizing the entry barriers than Winston’s and Crandall’s Wall Street Journal editorial did. They are: (1) The ABA’s accreditation authority (with mention of California’s deregulated system), (2) bar exams, and (3) barriers to ownership and management of law firms, and the practice of law by nonlawyers.

(1)  The ABA’s accreditation authority

As I wrote before, for the ABA’s accreditation authority to result in “an unearned premium on legal wages,” the costs of legal education must be transferred to grudging clients. I’ve seen no direct evidence this is the case, and indeed if purchasers of legal services believed it and wanted them cheaper, they’d pressure law schools to cut tuition or hire JD-holders from cheaper law schools. Mentioning the California system prompts the question: Why aren’t California firms conducting OCI at The People’s Law School instead of Stanford? Why isn’t the national market for legal services shifting resources to California to take advantage of its cheaper degrees? Why aren’t Massachusetts firms paying its paralegals to attend ABA-renegade Massachusetts School of Law instead of slobbering over Harvard or BU grads?

The obvious answer is that firms are risk averse, valuing credentials over their cost. They’re cautious because their clients are. If clients believed they were overpaying for private school law grads, they’d demand firms hire from public schools, or they’d stop paying new associates’ exorbitant salaries. Oh wait, they’ve been claiming to do just that. If the legal labor market were this cartelized, no one would care about U.S. News’ rankings, and grads would have jobs at graduation, even in a period of high unemployment.

(2)  Bar Exams

The second hurdle for a would-be lawyer is the bar exam itself. Proponents say it acts as a useful quality control. Opponents say it is a gruelling but useless ritual … Today students pay thousands of dollars to study for their bar exams, even after they have finished law school … Mr Winston says that oversight would be a much better method than restrictions on supply. Many clever people are bad at taking tests, or are not able to spend $150,000 on law school.

Useless exams indeed! Again, proponents of deregulation must show that the bar exam’s costs are shifted to legal services consumers. In fact, some firms do pay for their associates’ bar prep courses, except here’s the thing: those courses wholly optional. Case in point: me. I passed the New York bar (on the first try even) without taking a bar prep course. There’s no regulation that requires law grads to pay off BarBri or Kaplan. If this were the case, we’d be discussing deregulating bar prep, not the bar exam itself. Also, if bar exams were so costly, why haven’t firms moved to Wisconsin and plucked up the UW and Marquette grads who receive diploma privilege in lieu of taking the state bar exam? At all times, consumers of legal services have been free to demand that they not pay for bar prep courses or go to firms that don’t engage in that practice.

As to “restrictions on supply,” neither Winston nor The Economist provide any evidence of an attorney shortage. We can answer this by—*sigh*—looking at Bureau of Labor Statistics data. Well, there’s your link, so here’s the graph too.

To The Economist, this is a “carefully pruned” profession that restricts the supply of practitioners. The idea that growth has been stagnant for decades is out of the question.

(3)  Barriers to ownership, management, and practice of nonlawyers in law firms

Messrs Winston, Crandall and Maheshri think that—in a more sensible world—banks, consultancies, accountancies and others could hire lawyers and offer a full range of services, including legal ones. And those without the bar exam or law school under their belt could still, with training and experience, dispense routine guidance and offer legal services, such as drafting wills and arranging simple divorces, to poorer clients. Doing so today risks getting a false “lawyer” sent to prison.

Defenders of the legal labor cartel point out that in The Economist’s “more sensible world,” restriction on practice are designed to protect clients, especially from conflicts of interest. The bar believes that lawyers should be loyal to clients and not to banks or consultancies that pays their salaries. Personally, I think the bar makes this argument in good faith, not that law firms’ interests and clients’ don’t come into conflict over things like hourly billing rates. Additionally, states criminalize unlicensed law practice because “lawyers” take clients’ money without performing any services, i.e. they’re con artists. Now, these laws may be redundant to criminal fraud statutes, but they don’t come about because bar authority gangsters want to imprison people who muscle their turf. Rather, they’re trying to protect immigrants who don’t speak any English from getting scammed. Hopefully, Winston, Crandall, and Maheshri’s book discusses professional ethics and the ramifications of malpractice by nonprofessionals beyond “oversight.”

As to the latter half of the claim—that JD-holders who didn’t pass the bar should still be able to practice limited law—I think the solution is to either do away with the exam entirely or come up with a better bar exam and certify lawyers along practice lines. Winston is right that bar exams test too much and unnecessary material, demonstrating that passers are good at memorization and taking long tests. If criminal lawyers had to take a criminal law bar, civil litigators a civil law bar, patent lawyers a patent bar (oh wait, they already do), etc., it’d be an easier test that’s more relevant to what lawyers do. It would also require less doctrinal legal education than exists today.

In 2000 the average American law-firm lawyer made $191,000. Exactly comparable numbers are scarce, but the average salary for all lawyers in Canada in 2002 was just $64,000; in Australia in 2000 it was $90,000. American lawyers are clearly reaping some kind of premium.

Oh God. First, does their definition of “law-firm lawyer” include solo practitioners? Does their average account for the multi-modal salary distribution? Also, Canada and Australia have far more tightly regulated legal professions than the U.S. does, where graduates must complete articling positions to obtain a license. Articling remarkably restricts entry into the profession, and there’s even a shortage of positions in Canada. Law schools can calibrate their enrollments to ensure there isn’t an attorney surplus. Why is it that the more highly regulated systems produce lower attorney salaries than the less deregulated ones?

I should remind readers that The Law School Tuition Bubble’s official position is that the barriers to legal labor market entry are simultaneously too low and too high in the wrong ways. Too low in that the bloated legal education system enrolls far more students than are necessary to serve the economy, and too high by taking much too long, overcharging them, and providing them with an overgeneralized education irrelevant to 21st century practice. Specializing the profession along practice lines would do a lot of good towards improving service. However, it won’t make a $399 uncontested divorce or contingency fee case any cheaper. The high costs of legal services are due less to ABA accreditation requirements and more to hourly billing practices, poor price signaling, and risk aversion by purchasers of legal services.

To conclude, I still think Winston, Crandall, and Maheshri are shock doctrining the legal profession by using the legal education system’s failings to further an ideological deregulation agenda. Cementing that opinion is how the American Medical Association and the American Dental Association do promote a shortage of doctors and dentists in even worse ways than Winston, Crandall, and Maheshri accuse the ABA. The hordes of ABA Journal readers have a point:

Lawyers promptly filled the American Bar Association’s website with sarcastic comments about the study, musing about extending their practices into surgery and mortgage lending.

Why is The Economist so excited to deregulate legal services before other professions? Probably because it’s isolated and unpopular, not because its rent-seeking is significantly more egregious than other professions’.