How Many PSLF Deadbeats Are There?

Answer: Don’t Ask The Wall Street Journal.

According to Josh Mitchell’s, “U.S. Student-Loan Forgiveness Program Proves Costly,” 295,000 people are signed up for Public Service Loan Forgiveness, which cancels federal student loans after 10 years of payments with no tax liability afterwards, unlike other income-based repayment plans.

But before going further, a few compliments:

(1) The WSJ is correct that PSLF is a “forgiveness program,” in contrast to at least one past instance when the WSJ called IBR a “student-debt forgiveness program.” More accurately, IBR is a monthly-payment-reduction program.

(2) Moreover, I don’t think I’ve ever defended PSLF, so the WSJ’s examples of doctors taking advantage of the program, even though there’s a good chance they could repay their loans, are more believable than past reporting.

(3) Again, it’s nice to see the spotlight turned away from law grads.

However, the WSJ still doesn’t answer the question: How many of the 295,000 debtors (and projected 600,000 over the next decade) on PSLF will earn high enough incomes to compromise PSLF? Does the program work on net? If the IBR deadbeat is a myth, then shouldn’t we be just as critical of the PSLF deadbeat?

I don’t really have a dog in the PSLF fight, and it should be fairly easy to reform it to take the advantages away from the deadbeats, but the right questions still aren’t being asked. If the unfair beneficiaries are few in number, then they shouldn’t be sensationalized. (Amusingly, the New America Foundation argues that PSLF should be eliminated entirely because the WSJ made it look so bad that it could lead to further backlash against IBR, which, of course, the NAF has never engaged in.)

Speaking of asking the right questions: Is the problem PSLF, or is it the Grad PLUS Loan Program?

Saudi Arabia Channels the Gracchi Brothers

Facing a housing shortage of 1.5 million homes, Saudi Arabia’s Shoura Council approved a 2.5 percent tax on undeveloped land in urban areas, according to Bloomberg. King Salman has the final say, but he gave initial approval in March.

Coincidentally, shares for development companies have fallen. It could be causation, and if so, it shows that even talking about land taxes wipes out speculation.

The article offers more than one assertion that the goal is overwhelmingly stimulative and not directly revenue-related. Oil prices have fallen substantially, and Saudi Arabia has no income tax, so it’s not getting the revenue it once did. It’s almost as though the government is being defensive about the whole thing.

Another goal is increasing “middle-class homeownership” over renting. In short, Saudi Arabia is facing the same problems the Roman Republic did after the Punic Wars: restless landless citizens. The populares, led by Tiberias, and later, Gaius Gracchus, tried to force land reforms, but they were murdered by the optimates. The optimates resisted later “land for loyalty” policies, but Roman generals embraced them, hence the empire. Land-for-loyalty a good strategy so long as the majority is mollified: Promise future rents to as many—but not all, and not equally—people as possible, and you can keep your superior cut.

As for the revenue the Saudi government can expect from the scheme, as always, remember three things:

(1) Gross rent is the independent variable,

(2) Gross rent is the independent variable, and

(3) Gross rent is the independent variable.

…Which means that the final assessed land value itself is an ephemeral number. It melts away as you tax it. The gross rental value is a real, periodic quantity, e.g. per year. (And if you complain it’s an imputed sum, I offer to buy the right to that flow value from you for $1.00 until death or transfer.) Thus, a parcel that rents at $100,000 annually will have a different land value depending on how much of it is taxed. This is not to say that capitalized land values are fictitious numbers or can’t be calculated. Rather, it just means that when the Saudi government says it’ll tax these vacant parcels at a 2.5 percent rate, you need to think it through more than if it were a just 2.5 percent tax on their gross rents.

For example:

Current assessed land value: $2,000,000

Capitalization rate, no taxes: 5.0%

Therefore, current annual rent: $2,000,000 x 0.05 = $100,000.

Now let’s add a 2.5% tax on the land value:

New assessed land value: $100,000 gross rent / (0.05 + 0.025) = $1,333,333.33 land value.

NOT: 2,000,000 x 0.0725. That’s wrong!

Land-value tax revenue (which will come out of gross rent!): $1,333,333.33 x 0.025 = $33,333.33.

Tax rate on the gross rent: $33,333.33 / $100,000 = 33.33%

The $666,666.67 in capitalized land value melts away because of the tax.

Consequently, although it sounds trivial, a 2.5 percent LVT turns out to be a huge amount, depending on the capitalization rate. The lower it is, the higher the tax revenue. I’m sure the Shoura Council knows this.

The other benefit of this arithmetic exercise is answering the question: How much building is necessary to escape the tax? Answer: Trick question. The answer has little to do with the numbers; it comes up even in U.S. cities when people talk about taxing vacant parcels. The easiest way to evade the tax, onerous though it is, is to put a small, halal hot-dog stand on the property. Okay, maybe you want to put a little more on there, but if real-estate speculation is your thing, expect minimal effort.

This explains why I favor full LVT over partial measures. Even if Saudi Arabia adopts the tax and the phase-in isn’t too long, it might not alleviate the housing crisis. But it sure beats being toppled by Gaius Marius or Julius Caesar.

Government Finally Tells Private Law Schools to Slash Tuition, Faculty

…In Korea.

The country’s Ministry of Education wants people from poorer backgrounds to be able to practice law, so its solution is to demand law schools charge less and offer more need-based scholarships, according to The Korea Times.

Average private law school tuition is a scandalous $17,152 annually (it takes about five years, as I discussed last year). The plan calls for a 15 percent tuition cut at Korea’s fifteen private law schools, which would put it below $15,000. The article isn’t clear as to whether public law schools would be affected.

Just to show you that there’s nothing new under the sun, the law schools complained that they’re under financial strain already, with faculty taking up ~$24.0 million while tuition revenue is only $19.7 million. Using math against ABA data for the 2013-14 academic year, I get an average $10.6 million to private law schools (excl. Brigham Young, Pontifical Catholic, and Inter American) from full-time students paying full tuition. I doubt the total is more than $15 million.

The government’s response: “[T]hey can lower the tuition if they restructure their high-cost faculty system.”

Indeed, the faculty numbers the article gives are bizarre: The government’s standard is 312, but they have—and I think this is an average—537. That comes to 8,055 faculty for … 6,021 students at all 25 law schools, which implies a student/faculty ratio well below one. Again, for comparison, in the U.S., the average number of full-time faculty (current definition) at private law schools rose from 35.4 in 1999 to 43.2 in 2014 (peak 48.9 in 2012). We could also easily get by with fewer profs and fewer schools.

Maybe there’s something off in the reporting, and I’m not sure how the ministry can encourage the law schools to cut their tuition levels if they don’t want to. Nonetheless, it makes you wonder whether the law-school system fails wherever it’s tried.

Pew Research Center Discovers the Death of American Household Formation

The Pew Research Center announced that in 2014, the percentage of young women (18-34 years) living with their parents or other older relatives is at a record high level going back to 1940.

Pew Not Leaving the Nest

Oddly, Pew isn’t interested in the fact that young people in general appear to be living with family, especially since 2000. Why might that be? Perhaps widespread joblessness and low incomes for young people? Fifteen years later and this is still apparently a head-scratcher.

This topic—household formation—is important to me because it indicates the future direction of land rents. Single people rarely buy houses, so we’d expect land rents to stay flat. Flat land rents lead to flat construction, and hence, low growth.

At least, that’s my hypothesis. I discussed it earlier this year when the Congressional Budget Office assumed in its models that household formation would increase sharply because young people would suddenly find jobs and build families. Many of my Georgist peers by contrast stick with the 18-year land boom cycle, pioneered by Homer Hoyt’s One Hundred Years of Land Values in Chicago, which predicts a bust around 2026. I’m not so sure, but then again, I do see a lot of construction going on in Minneapolis. Maybe that’s regionally isolated.

The lurking comparison here is Japan: Fewer families lead to fewer children, which solidifies low expectations for future rent increases. None of this is to say that endlessly growing populations are a good thing, but if your definition of capitalism requires ransoming land rents to incumbent owners in exchange for future growth, then you might want to consider an alternative theory.

I will add two thoughts to the Pew Research Center’s findings.

One, It’s interesting that women are more likely to live with older relatives than men. Census Bureau data show that in fact men are more likely to live with their parents than women, so it appears many women don’t live with their parents but do live with other relatives.

Compare this with the above chart:

Census Living With Parents

Two, excluded from both these charts are college students. I’d really like to see what that looks like. A smaller proportion of young Americans were living on college campuses in 1940 than now, and college students would probably live with their parents if it weren’t for school. Consequently, the percentage of young Americans who are effectively dependent on their parents is probably higher than in past decades.

Given that, as the Pew Center finds, marriage rates have fallen, especially since 2000, these are not trends that bode well for the future happiness of young Americans.

A Simple Equation: Huge Debts + IBR = -(-(Default))

Simple, that is, for everyone but the letter-writers responding to the NYT editorial from two Sundays previous.

The objective of today’s outing isn’t to defend the Times as such but rather to draw attention to the sad rebuttals to it.

Argument #1: Law students are less likely to default on their student loans than undergrads.

Law students borrow more than undergrads, but most are able to repay, and do. The graduate student default rate is 7 percent versus 22 percent for undergrads.

[O]nly about 1.1 percent of alumni at Florida Coastal are in default.

[D]ata shows that law school graduates have lower default rates than other professional degree holders.

Response: It is true that the Times accused law schools of, “sticking taxpayers with the tab for their [students’] loan defaults,” but the line between “default” and “certain IBR/PAYE/REPAYE/PSLF loan cancelation” is hazy. Arithmetic tells us that with $130,000 of debt at current student loan interest rates, law-school debtors earning about $70,000 from day one cannot even dent their student loans’ principal. Because it’s unlikely these debtors will ever find high-paying jobs, it’s all but certain that large portions of their loans will be canceled.

It may not be default, but it’s only “repayment” in the technical sense. Better to call it “not-not-default.”

Argument #2: Thanks to scrupulous admissions practices, law school enrollments have declined.

Many law schools are downsizing to maintain standards. Since 2010, first-year enrollment has dropped from 52,500 to 37,900, a level last seen in 1973.

Since 2010, law schools have responded to the changed legal job market by dramatically cutting first-year enrollment by 28 percent.

Response: This is the most astonishing bit of revisionist law-school history I’ve seen. Remember five years ago (!) when Richard Matasar cited record law-school enrollments as evidence that applicants understood their job prospects? Well, surprise, surprise, surprise! Only 53,500 people applied to law school in 2015, down from 87,900 in 2010, and there’s evidence that fewer people applied in 2010 than the number of LSAT takers would’ve predicted. Law school admissions policies are not responsible for prospective applicants’ decision not to go to law school.

Applicants, Admitted Applicants, 1Ls

(Sources: LSAC, ABA)

Also, law schools are admitting higher proportions of their applicants since 2010.

Dispersion of Full-Time Law School Applicant Acceptance Rates

(Source: Official Guide, author’s calculations)

Argument #3: Declining interest in law school will [create a disastrous attorney shortage/equalize supply and demand for lawyers].

[Due to falling enrollments] the rule of law may begin to fray. Our country needs lawyers, prosecutors, defenders and judges, not only lawyers in big cities and big law firms.

[A] law degree continues to be a sound investment over the course of a career. … [Falling enrollments] will bring supply more into line with demand.

Response: I lump these arguments together because they entail the same prediction: Job outcomes and wages for law grads will improve in the near future. Testing this belief with NALP data, it’s clear that law grads are much more likely to find themselves in J.D.-advantage jobs than in the past. If the job market for lawyers tightens, we’ll see graduates shift from these jobs to lawyer jobs. Instead, while the number of unemployed grads fell in 2014, so did the number of grads in 2-10-lawyer firm jobs. Meanwhile J.D.-advantage jobs rose. This doesn’t speak highly to the value of law school.

No. Grads Employed by Status (Incl. FT-PT) (NALP)

Additionally, based on various measures, including those provided by the Bureau of Labor Statistics, there are hundreds of thousands more law grads than there are lawyers. Many of these people left law voluntarily, e.g. they didn’t like law practice or they moved on to post-law professional careers (like the judiciary). Alternatively, they didn’t have opportunities for careers at the bar at all. As more lawyer jobs open up, presumably many of these people would come out of the woodwork. However, there are few indicators that demand for lawyers—which is what really matters here—is improving. Moreover, graduates reporting full-time, long-term employment might not stay in the law for long due to the profession’s high attrition rate.

Also, one letter-writer asserted that a law degree is “a sound investment” and that declining enrollments will “bring supply more into line with demand.” These statements contradict each other, albeit mildly. Although it’s possible the 5,000 class of 2013 graduates who were reported as unemployed will embark on professional careers in the future, it can’t be to their advantage if they graduated when supply was higher than demand could absorb.

Argument #4: Capping federal loans restricts the profession to the wealthy.

Capping graduate federal loans as the editors suggest would fall hardest on students from modest circumstances who will not be able to attend law school or will need to resort to private loans, which are typically more expensive, and repayment is not income-contingent.

[C]utting federal loans will only narrow the pool of people who can pursue a legal career and decrease the availability of lawyers to serve this need.

Response: Even with unlimited federal loans the legal profession isn’t accessible to the poor, but supposing these consequences are true, state governments could just make it easier for people to become lawyers, e.g. by reducing law to an undergraduate major. We have had lawyers without law schools—good ones even, and we’ve had bad lawyers with law schools.

Argument #5:

[T]aking loan money from law students is both bad economics and bad policy.

Response: No evidence is given to support these claims, but the existence of not-not-defaults discussed above disproves them. Also, we had lawyers with fewer loans to law students and dischargeability for private loans. This isn’t the distant past; it’s pre-2005.

Argument #6: Florida Coastal School of Law’s graduates rocked the February bar exam.

In February 2015 we had a 75 percent first-time bar pass rate, third best out of 11 law schools in the state, and an institutional ultimate pass rate of 87 percent.

Response: Fewer people typically sit for the February bar exam than the July one, so we have a sample problem. Also, don’t let FCSL’s 509 report fool you: Its graduates may pass the Florida bar at about a 75 percent rate, but at least 30 percent of its students don’t report at all. Florida State’s non-report rate is about 15 percent; U of Florida’s is less than 10 percent. Both of those schools have higher pass rates too.

Paul Campos addressed some of the other arguments by Florida Coastal’s dean.

Argument #7: The editorial ignores improvements to legal education, like more clinical courses.

[Law schools have] sharpened academic programs to provide the training employers seek.

In recent years, many law schools have been overhauling their programs to provide more hands-on skills training. Clinics cost more than big lectures, but they prepare lawyers for practice and teach them about their professional responsibility to serve people unable to pay for services.


Better training does not create jobs.

Better training does not create jobs.

Better training does not create jobs (except for the trainers).

The one letter I’ll call out specifically is New York City Bar Association president Debra L. Raskin’s because … it leveled a coherent argument.


I’ll not exhaustively nitpick everything here, but by focusing on law school debt the Times editorial is bringing out the kinds of arguments we can expect to see from academics defending the subsidies that ultimately flow to them. Some of the points I read here are novel, so it’s not an opportunity to waste.

LSAT Tea-Leaf Reading: October 2015 Edition

Halloween happens this weekend and the LSAC is celebrating by giving us yet another increase in LSAT takers. Gaze upon your zombie apocalypse:

No. LSAT Takers, 4-Testing Period Moving Sum

33,229 people took the October LSAT this year, up 7.4 percent from September 2014. The four-period moving sum is up to 105,410 (2.2 percent), just higher than December 2013.

As I hypothesized in June, more people might be taking the LSAT because of the media coverage saying now is the best time ever to go to law school. I happen to think this is a silly position: There really are far more people going to law school than there are indefinite-duration professional jobs available, but at least some lucky people might get strong scholarship opportunities. The catch is that someone has to pay for those scholarships, and that might also be people who borrow hundreds of thousands of dollars believing now is the best time ever to go to law school.

Maybe the recent NYT editorial will have an impact for the future, but regardless, it appears prospective law school applicants are a fickle bunch, easily swayed by mainstream media articles leaning one way or the other.

On the other hand, interest in medical school is at an all-time high. We certainly need doctors more than we need JDs.