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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.

Next:

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

Everywhere:

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.

EMPLOYMENT STATUS GINI COEFFICIENT PROPORTION OF TOTAL GRADS
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
EMPLOYMENT TYPE GINI COEFFICIENT PROPORTION OF TOTAL GRADS
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.

LSTB Site Update: Blog Inversion

Sometime this spring The Law School Tuition Bubble concluded its fifth year. (I’m not going to bother looking up when exactly.) I started the site in 2010 to keep my mostly unemployed mind from atrophying into a Tetris and music-addled pulp.

And wow did I succeed!

I’m certain that I learned more in the four years after I began writing than in the four years I spent in law school and grad school. Yet, despite what I say about the “human capital” or “signaling” models of higher education, I acknowledge that those former years did set the foundation for my personal intellectual journey.

But back in 2010 I didn’t believe it would become a moral journey as well, notably my discovery of Henry George and similar thinkers who envision a society that promises true freedom without the sacrifices everyone else says are necessary.

Consequently, my writing has outgrown law school tuition per the site’s title, but I think moving the whole show to a new blog would disserve my readers, to say nothing of everyone who has graciously linked to or cited my work here. Additionally, it’s well known that the best way to maintain a constant Web presence is to never ever change a single URL.

To those ends—and to cleave to the themes I write on—I think it would be best to invert this site. Just as U.S. corporations avoid our deadweight income taxes by merging into foreign companies, going forward The Law School Tuition Bubble will “host” my new blog, The Last Gen X American, which is inspired by the “Late Gen X Nostalgia” tag I use with usually off-topic posts. I am also taking the domain lastgenxamerican.wordpress.com, which will link back here to both redirect confused readers and symbolize the land hoarding that George excoriated.

As for the topics I will cover, they will be largely the same. The only difference is that I will feel less out of position blogging about Georgism, music, Vox‘s armchair comparative politics, or even horse racing. I will, naturally, continue writing about law school and student debt, since I know that stuff cold.

All you, cherished reader, need to do is stick around, listen to my music recommendations, artfully disagree with my weak points, and laugh at my jokes. Peace be with you and take care.

-Matt Leichter

Steel Links

Haven’t done a links post in a while, but there are a few things worth writing about in brief.

Allison Schrager, “Becoming a Doctor or Lawyer Is Still Worth It,” Quartz, July 14, 2015.

Of course, that doesn’t mean going to law school is still worth it because, of course, the article carefully points out that not all law school graduates work in high-paying professional jobs and lawyers have a notably high attrition rate.

Wait, it didn’t point that out? Oops. Then maybe we shouldn’t be saying that the return to law school is so high. (I should add that the underlying paper at least discusses this.)

Molly Hensley-Clancy, “LegalZoom Wants to Be ‘The Good Guys’ in the Shady World of Student Debt Relief,” BuzzFeed, July 6, 2015.

Fun fact: BuzzFeed does investigative reporting. I’m happy to serve it a compliment. What it found is that everyone’s favorite legal disruptive innovator is making money by … charging federal student loan debtors $700 to sign them on to income-sensitive repayment plans. Which they can do for free on their own. LegalZoom swears it’s informing borrowers of that fact, but that’s not what happened when BuzzFeed‘s reporter called in posing as a debtor. (Yes, really. This is what journalists are supposed to do.)

Did I mention that a couple weeks ago New York’s Student Protection Unit shut down a financial services company for charging student debtors money for signing them onto IBR plans without telling them they could do so for free? Did I also mention it paid a $10,000 fine? Does anyone call these companies legal disruptive innovators?

Now, to editorialize: If you couldn’t tell, I think LegalZoom’s impact is hyped, UPL or not. It’s quite possible that it makes money by (a) offering services lawyers wouldn’t charge for, as in the above case, or (b) serving clients for legal issues they might not bother going to a lawyer for anyway, e.g. a no-income, no-asset, few creditors, chapter 7 bankruptcy filing. Neither of these activities takes business from traditional lawyers.

In fact, in 2014 30 percent of LegalZoom’s revenue came from subscription fees, meaning it wasn’t selling actual legal services. Also, one of its biggest sources of revenue appears to be incorporation documents for California businesses. Perhaps it offers needed services, but consumer regulators need to catch up with it.

Gainful Employment Rule Post

Yeah, this link is for me. Because readers forwarded around my post applying the Gainful Employment rule to all law schools, I went back and updated it so that the table showed only the results from the total income test. I figure in case researchers want to cite it or replicate my results, they’ll have an easier time understanding what I was doing. I realized that the results of both tests produce the equivalent number, so even if a law schools’ graduates’ discretionary incomes are lower, the table now shows the equivalent income graduates would need to be making. I didn’t update the post’s text, so bear that in mind.

Expert Institute’s Best Legal Blog Contest

A generous reader has nominated the LSTB for the Expert Institute’s Best Legal Blog Contest. You can read about it here. As ever, I am grateful to you, my readers, for your support.