Prepare for the Return of Private Law School Loans

That’s what you should be inferring from Charles Lane’s WaPo op-ed, “How student loans help keep expensive schools in business.”

Lane argues that Grad PLUS loans are, “a de facto bailout, enabling many law schools to maintain capacity and delay reforms, or settle for modest ones, while continuing to charge more or less the same high tuition.” The author’s position, to say nothing of his article’s title, largely resembles my early forays into the subject, especially, “How Grad PLUS Loans Sustain Zombie Law Schools.” It’s always nice to see mainstream sources arrive at my conclusions.

It’s not so nice when they don’t fully understand the implications. If Congress gets rid of Grad PLUS loans, or scales graduate lending back dramatically, then some law schools will demand their students substitute the tuition difference with private loans. These loans won’t be easily discharged in bankruptcy, so it will be a strong reason to stay clear of law school, even more prestigious ones.

Before I go, I just wanted to editorialize on Lane’s opening: “Income inequality bedevils the United States, as does debt, of the public and private varieties.”

This is bad writing. One, “income inequality” doesn’t play any role in the editorial, so a good editor would’ve axed it. Two, public debt doesn’t bedevil the U.S. at all. Currently, 10-year treasuries are trading at 2.18%.

10-Year Treasuries

(Source: FRED)

Yes, I’m not the first to recognize that WaPo caters to people who insist public debt is the second evilest thing in the history of evil (no. 1 is inflation), but eliminating Grad PLUS loans won’t close the deficit. Does Lane write editorials against corporate welfare?

Still, there are many correct points in the article, and it suggests that our East Coast media elite are finally beginning to turn on student loans instead of debtors—but not totally.

WSJ More Afraid of IBR Than Student Loan Defaults

I woke up early today—and found that Google Alerts punked me!

Google Alert

Yep. People aren’t signing on to IBR … and they’re “surging” on to IBR.

Okay, the most charitable interpretation is that yes, the WSJ is right that big numerators over small denominators give you big percentages, and at the same time, MainStreet is correct that many more people who are eligible for IBR aren’t on it. MainStreet is referring to the large number of borrowers who are delinquent on their loans. In fact, the New York Fed tells us that as of mid-2015 the 90+-day delinquency rate hasn’t gone down since the age of delinquency began in 2013.

2015-08-21 Percent Balance 90+ Days Delinquent

So when the WSJ writes in its article’s subheader, “Taxpayers face risk of covering loans,” it needn’t scare its readers so much: It’s already happening.

WSJ: Grad Debts That Can’t Be Repaid … Can Be?

Josh Mitchell of The Wall Street Journal does some good reporting in, “Grad-School Loan Binge Fans Debt Worries.” There are, as one should expect, some errors.

One, after interviewing a handful of professionals with high incomes and unpayable debts, he writes:

But a number of recent studies show the benefits [of IBR] are largely going to people who need them the least—doctors and many lawyers who will end up making six-figure salaries. The benefits are less meaningful for undergraduate borrowers, because their average debt burden is roughly $30,000 and income-based repayment plans aren’t likely to lower their bills by much.

This is not true. There is no study that estimates the number of IBR freeloaders out there, otherwise the WSJ would’ve named it and cited the statistic. At best all we have is fear-mongering by the New America Foundation. Nor is there a study that estimates the total number of Grad PLUS loan debtors by course of study, median income, and proportion on an income-sensitive repayment plan. Such a study would probably find that the handful of people gaming the system are outweighed by professionals who aren’t earning much. This is the point of IBR.


Of the 5,686 hospitals in the U.S., 73% are nonprofits or government owned, according to the American Hospital Association, thus qualifying their employees to have loan balances forgiven after 10 years.

Do we have freeloading doctors? Response: No! It’s not their fault there are so few for-profit hospitals. If you want them to pay, charge them less. (By the way, one reason I like this article is that it doesn’t obsess over the handful of law grads who have spectacular earnings coming out of law school; it’s nice to beat up on the M.D.s for a change.)

I’ll close:

The collection of incentives—passed in separate measures over several years—weren’t intended to work together to help so many grad borrowers.

Very true, but the issue is what the harm is and where it’s coming from. IBR and its like are not the cause, Grad PLUS loans are. Without IBR, there would’ve been widespread graduate debtor defaults (or at best hardship deferments). This is how the WSJ can find real people who can’t repay their loans without IBR but then say there are studies somewhere out there finding that debtors are making cash sacks.

Or, to butcher Michael Hudson: Debts that can’t be repaid, can be.

Where People Aren’t Taking the LSAT


Cumulative Percent Decline in LSAT Takers by State

Courtesy of LSAC. These are permanent residents, by the way, not administration locations. It would be more interesting to compare this to 2007 rather than 2010. Although, it is notable that Minnesota is number one, given that two of its law schools are merging.

The LSAC also has a table of test takers by country of administration, which doesn’t consider residency. Presumably some non-Americans who would’ve otherwise applied to a U.S. law school are choosing not to.

Law Grad Jobs Unequal Like Income in Corrupt Countries

Readers might recall several months back when I crafted a modified Lorenz curve of full-time law school applications against the U.S. News rankings. It occurred to me that I could expand my use of this rankings-adjusted Lorenz curve to law school employment outcomes for the class of 2014. Now, I’ve finally made the time to do it.

As a refresher, a Lorenz curve plots the distribution of two variables cumulatively, most commonly cumulative income against cumulative population, starting with the individuals with the lowest incomes. Such an analysis would be able to allow you to claim, for example, that the bottom 50 percent of households earn only 10 percent of the income. Because the dependent variable is rarely distributed equally, the Lorenz Curve isn’t a triangle, and the more concave the curve, the more unequal the distribution.

Furthermore, if you subtract the area under the Lorenz curve from the total area of the triangle representing perfect equality, and then divide that by the same triangle’s area, you get the Gini coefficient. ((Triangle – Area) / Triangle)

Normally, a Lorenz curve of each category of law school outcomes should be sorted with the smallest contributors first, but I want a commonly understood, “neutral” independent variable that allows comparisons among employment outcomes. As a result, the Lorenz curves below squiggle and deviate quite a bit. They also come out convex for some outcomes.

Here are the four major employment statuses that people care about, less school-funded jobs (to show the “real” demand for graduates’ labor) and excluding the three Puerto Rico law schools.

Major Employment Status Outcomes Lorenz Curve

This doesn’t look too bad. Unemployment is a tad convex, and full-time, long-term bar-passage-required jobs are fairly evenly distributed. JD-advantage jobs look very evenly distributed.

Digging deeper into employment types, we find that jobs aren’t doled out evenly at all. Private practice jobs in particular are given out directly according to ranking.

Private Practice Outcomes Lorenz Curve

The same goes for public interest jobs and federal clerkships.

Employment Type Outcomes Lorenz Curve

I’ve also calculated the Gini coefficients for these outcomes irrespective of the U.S. News rankings. My idea was to see how some of these outcomes compare to income inequality in various countries, since that’s something people might be familiar with.

Employed – Bar Passage Required FTLT 0.31 25,344 / 43,195
Employed – JD Advantage FTLT 0.36 4,774 / 43,195
Employed – Profession Position FTLT 0.53 1,371 / 43,195
Employed – Non Profession Position FTLT 0.72 200 / 43,195
Employed – Undeterminable 0.93 21 / 43,195
Employed – Pursuing Graduate Degree 0.44 693 / 43,195
Unemployed – Start Date Deferred 0.64 313 / 43,195
Unemployed – Not Seeking 0.54 553 / 43,195
Unemployed – Seeking 0.43 4,103 / 43,195
Employment Status Unknown 0.67 841 / 43,195
Solo-FTLT 0.53 803 / 43,195
2-10-FTLT 0.33 6,695 / 43,195
11-25-FTLT 0.38 1,796 / 43,195
26-50-FTLT 0.42 990 / 43,195
51-100-FTLT 0.46 771 / 43,195
101-250-FTLT 0.51 1,057 / 43,195
251-500-FTLT 0.66 1,068 / 43,195
501-FTLT 0.79 3,934 / 43,195
Unknown-FTLT 0.83 186 / 43,195
Business/Industry-FTLT 0.36 5,274 / 43,195
Government-FTLT 0.32 4,569 / 43,195
Public Interest-FTLT 0.52 1,744 / 43,195
Federal Clerkship-FTLT 0.68 1,247 / 43,195
State Local Clerkship-FTLT 0.57 1,982 / 43,195
Other-FTLT 0.96 26 / 43,195
Academia-FTLT 0.50 451 / 43,195
Unknown Employer Type-FTLT 0.88 51 / 43,195

At 0.31 full-time, long-term bar-passage-required jobs are pretty nicely distributed, more so than JD-advantaged jobs (0.36). This means that the rankings make JD-advantage jobs appear much more equally doled out than they really are, which is probably not a good thing for that employment status.

Likewise the convex curve and 0.43 Gini coefficient for unemployed-seeking grads means they’re very much shifted to low-ranked schools. Generally, convexity corresponds to undesirable employment outcomes.

Taking the cake are the high-Gini-coefficient, concave curves. Half of all public interest jobs went to schools ranked in the top 60; half of all federal clerkships went to grads from the top 20; and half of all 501+-lawyer firm jobs went to grads in the top 14. In fact, at 0.79, the Gini coefficient for 501+-lawyer firm jobs are distributed worse than income Namibia, which in 2010 had a Gini coefficient of 0.597.

If you’re wondering why I used this year’s rankings as the independent variable, even though they obviously could not have had any effect on the previous year’s graduates’ employment outcomes, it’s because I wanted to illustrate just how rigid employers’ regard for law school prestige is. It’s so persistent that you can see the relationship when temporally there shouldn’t be one.

To put it differently: In 2014, the distribution of quality law jobs was as bad as or worse than income in kleptocratic, HIV-riddled states. You might think that’s an unfair comparison, but it certainly resonates for me.

ABA Task Force Dodges Student Debt Reform

Oh you knew I would not ignore the results of the ABA Task Force on the Financing of Legal Education. It was a long time in coming, but it required a careful read. My review is at The American Lawyer.

I would’ve told y’all sooner, but I just got back from vacation, which got an extension thanks to a thunderstorm in New York grounding planes in Chicago. Grr.

Office of Management and Budget: +$1.4 Trillion in Direct Loans by 2025

Projected Direct Loan Balances (OMB, Billions Current $)

(Source: OMB FY2016 Mid-Session Review (pdf))

…But we all knew it was going to say that. Also, that number includes other loan programs that aren’t student loans, but those aren’t nearly as big.

The good news, though, is that the actual amount of direct loans keeps coming in below the projections. Here’re the estimates from the mid-session reviews since FY2010 against the actual.

Direct Loan Balance Projections (OMB Billions Current $)

The FY2010 estimate was $161 billion more for 2014 than turned out to be the case. This variance implies that the government is overestimating future direct lending. It isn’t much, but it’s something to keep track of.

I should add that in general the OMB predicts that direct loan debt will even out at about 9 percent of GDP.