LSAT Tea-Leaf Reading: December 2017 Edition

The number of December LSAT takers rose to 40,096 (+27.9 percent) from 31,340 last year. It is the sixth administration in a row to show positive test-taker growth. Here is what it looks like in perspective.

This is quite the acceleration, one of the fastest ever.

The four-period moving sum, which is identical to the calendar-year total, rose to 126,248 (+7.5 percent). Comparable administrations are September/October 2009 (+6.5 percent), September/October 2001 (+7.9 percent, the record), and December 1988 (+7.0 percent). The last time the four-period moving sum was this high was June 2012 (128,336).

Two months ago I (idly) predicted this surge would diminish over the next year. That doesn’t appear to be where the trend is heading. Disturbingly, two of the aforementioned comparison administrations, fall 2009 and fall 2001, were recession periods, which indicates the kind of moment LSATs are in. I’ll repeat the same points for as long as this phenomenon continues: There is no reason to believe the legal profession will have more jobs compared to the rate of LSAT growth. Most of these potential applicants—let’s call them Sessions’ 0Ls—are badly misguided.

Since we’re on the topic of LSAC data, as of week 3, 2018, the number of applicants for this fall stands at 29,287. Week 3 was roughly the halfway mark for last year, so we may have about 61,000 applicants by August. This final applicant count has been falling in recent weeks, which I think is typical.

More tea leaves to read after February.

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2016: Full-Time Students Paying Full Tuition Fell by 2.4 Percentage Points

Discussions of law-school costs are incomplete if they do not include discounts some students receive, usually as merit scholarships paid for by their full-tuition-paying classmates. The topic is salient today because Congress is considering limiting the amount law students can borrow from the federal government. If the PROSPER Act passes, then it’s likely law schools would need to reorganize their cost structures—notably by reducing scholarships and their full price tags. To analyze the phenomenon of discounting, I focus on the ABA’s 509 information reports’ scholarship data. This information lags the academic year by one year, so as of the 2017-18 academic year, we now have data on 2016-17. One new drawback this year is that law schools that closed or stopped accepting new students before 2017 did not provide scholarship data for 2016, so the picture is slightly distorted.

In 2016, the proportion of full-time students paying full tuition fell by 2.4 percentage points from 28.1 percent to 25.7 percent at the average law school not in Puerto Rico. At the median law school less than one-quarter of students pay full tuition.

The proportion of students paying full tuition has fallen considerably over the years. At the turn of the century, more than half of students paid full cost; now about a quarter do.

At the average private law school, which don’t price discriminate in favor of resident students, the number of students receiving grants ranging between half tuition and full tuition now exceeds the number paying full tuition. Many more receive a grant worth less-than-half tuition.

One advantage of knowing how many full-time students pay full tuition is that we can estimate the total revenue they generate for private law schools, except Brigham Young University, which charges LDS students less.

Since 2011, the peak year, inflation-adjusted revenue from full-tuition-paying full-time students has fallen 55 percent. Since 2001, the last year for which data are available, the drop is 35 percent. In 2016, the median private law school’s full-tuition revenue was $3.8 million, down from $12.2 million in 2011. In 2001, the median was $9 million. This is quite a precipitous decline.

So how substantially are private law schools discounting? The best way to answer that question is by treating the sticker price at private law schools as the independent variable, and treating as the dependent variable their tuition after subtracting their median grant (median-discounted tuition “MDT”). First I divide private law schools into full tuition quintiles and give their mean averages. Then I take mean of the MDTs within each quintile.

We find that the MDT at the most expensive law schools is about as much as full tuition at the cheapest private law schools. Meanwhile, schools in the fourth quintile now discount to the level that third quintile law schools do. This indicates pretty fierce competition for students. MDTs at the bottom four-fifths of law schools are converging with one another while diverging from the most expensive schools.

That’s all for now.

Information on this topic from previous years:

It’s 2018. Where’s My ‘Hyperinflationary Great Depression’?

[The following post first appeared on this site on January 1, 2012. What it said then still applies today, mutatis mutandis. Thanks for reading the blog and have a prosperous 2018!]

Behold, the curse of a long memory. Last January [2011], Google Alerts sent me an e-mail informing me that the National Inflation Association (“Preparing Americans for Hyperinflation”) issued a press release predicting that the higher ed bubble was “set to burst beginning in mid-2011. This bursting bubble will have effects that are even more far-reaching than the bursting of the Real Estate bubble in 2006.” The NIA press release then digressed into legal education (I’m guessing they’d just read David Segal’s first NYT piece a few days earlier), how evil lawyers are, how they produce nothing for society, and how 60 percent of the Senate and 37 percent of the House are lawyers who rig the economy to make jobs for lawyers. It editorializes:

“While everybody went to school to become a lawyer [really?], nobody went to school to become a farmer because Americans didn’t see any money in farming. With prices of nearly all agricultural commodities soaring through the roof in 2010 and with NIA expecting this trend to continue throughout 2011, the few new farmers out there are going to become rich while lawyers are standing at street corners with cups begging for money.”

The NIA would’ve been more helpful if it explained how lawyers could be a drain on society yet remain vulnerable to market forces. Also, one would think unemployed lawyers would try to find non-lawyer jobs instead of begging, but I think it’s important to note that agricultural prices weren’t “soaring through the roof” in 2010. They were growing, yes, but although the NIA was right that they continued to do so in 2011, (a) it’s stalled recently, and (b) they’re no worse than they were in the 1980s and early 1990s.

Oh well. The NIA sternly concluded:

“We must work hard to educate America to the truth if our country is going to have the wherewithal to survive the upcoming bursting college bubble and Hyperinflationary Great Depression.”

Whoa.

I can’t say I’m quite as disappointed as the NIA undoubtedly is that we’re not seeing much inflation these days, and in mid-2011 I didn’t see many colleges cutting their tuition, laying off faculty, closing programs, or trying to retrench themselves. I also remain unconvinced that $1 trillion in student debt can be worse than $8 trillion in mortgage debt. True, student debt is not dischargeable (unlike mortgage deficiencies) absent a showing of an undue hardship, and it’s hampering the recovery and ruining lives, but it’s not worse in quantity than the housing bubble. As for the NIA’s paranoid ranting about lawyers, all economic evidence I’ve seen indicates that legal services have all but stagnated for much of the last two decades. Apparently, those 60 percent of lawyer-senators aren’t very good at creating work for themselves. I suppose the NIA should express appreciation.

Anyway, if anything, inflation would be a boon to underwater homeowners and student debtors because it erodes the real value of their debts, which grew significantly in the 2000s. Here’s household debt to GDP:

Importantly, I’m no macroeconomist but I’ve never heard of a “hyperinflationary depression.” The terms contradict each other. Depressions occur when people take on excessive debt and begin paying it down simultaneously instead of spending money on other things. This is deflationary because new credit isn’t being created, even by the government. By contrast, hyperinflation has only occurred in unusual circumstances, like when a government owes debts to foreigners in a different currency. Weimar Germany, for example, owed gold-dominated war reparations to the Allied powers, and to purchase the gold, it printed money, causing hyperinflation. Zimbabwe isn’t a good comparison either because it’s a small, HIV-ridden landlocked state with an undiversified, oligopolistic agrarian economy while the U.S. is a wealthy, continent-spanning super-state.

As for inflation fears generally, maybe it’s the fact that I have no memory of high inflation, but why isn’t there a “National Personal Income Association” (NPIA) that regularly celebrates increases in Americans’ per capita personal income?

“Per capita personal income has quadrupled since 1980! Prices didn’t even triple! Hooray! We’re rich! Fiat currency forever and ever! ‘You shall not crucify mankind upon a cross of gold!'”

I’m sure the NPIA wouldn’t’ve been too thrilled with 2008-09, but personal income is increasing again. The problem has just been that over the decades those gains haven’t been distributed equally. This isn’t a problem of inflation but one of wages and taxation.

Intuition tells me the NIA won’t spend early 2012 carefully discussing why the higher ed bubble didn’t burst in mid-2011 as it predicted, nor will it take the time to explain why Americans—many of whom are net debtors—should be concerned about inflation. Instead it will prophecy even more hyperinflation later. But here’s hoping the National Inflation Association won’t provide me entertainment come January 1, 2013. Such is the curse of a long memory.

2017: Full-Time Private Law School Tuition Up 3.2 Percent

Full-time tuition costs at private law schools rose an average 3.2 percent before adjusting for inflation. The rate is about half a point higher than last year’s increase, but it’s still well below the typical 5 percent rate before the Great Recession. For comparison, 2012 and 2013 saw increases of 3.7 percent and 3.6 percent, respectively. I focus on private law-school tuition because public law schools receive varying degrees of state subsidies, so they do not reflect the already distorted legal-education market’s prices.

Here’s what the dispersion of full-time private and full-time public (residential) tuition looks like going back to 1996:

Last year I pondered whether the public law school at the 25th percentile would begin charging more than the Stafford Loan limit of $20,500. It’s still one thousand dollars shy of it—in fact, it fell by $200 after adjusting for inflation. As of now, 10 percent of private law schools (12) charge more than $60,000, with the maximum at $67,564 (Columbia). It was only back in 2012 that the top 10 percent charged over $50,000 in nominal dollars, +$10,000 in five years.

In 2017, the median private law school charged $47,071 (between Pace and Suffolk); the mean was $46,843.

Unusually, costs grew consistently among private law schools. If we separate the law schools into quintiles, here’re the increases at the mean of each quintile.

From 2014-16, the tuition increases were stacked towards the high end, which was consistent with the prediction that the cheaper law schools were so fiscally crunched that they couldn’t afford to raise their costs any more. 2017 clearly breaks that trend, and along with its moderate mean increase the growth is distributed fairly evenly among private law schools.

The following private law schools raised their tuition charges by more than 5 percent:

  • Widener (Delaware) (+12.0%)
  • Liberty (+10.8%)
  • La Verne (+10.2%)
  • Elon (+10.0%)
  • Brooklyn (+9.8%)
  • Belmont (+8.9%)
  • John Marshall (Atlanta) (+5.9%)
  • Mississippi College (+5.6%)
  • Mitchell|Hamline (+5.5%)
  • Capital (+5.4%)

I would be cruel to ignore private law schools that cut their full tuition, so here’s that meager list:

  • University of Tulsa (-33.6%)
  • Howard University (-10.4%)
  • Santa Clara University (-3.4%)
  • Whittier Law School (-2.2%)
  • Arizona Summit (-0.3%)

Yes, Tulsa’s one-third slash is the largest nominal tuition cut I can find going back to 1996. It beat Indiana Tech’s (-31.1 percent) last year (fat lot of good that did) and Ohio Northern’s (-26.4 percent) in 2014. Howard’s is fairly significant as well, particularly because in 2016 it raised tuition by 10.9 percent. Big raspberries go to Elon University which extended its students a -12.1 percent cut in 2015 only to mostly reverse it with a 10 percent hike this year.

Nine private law schools kept their full-tuition tags flat (Golden Gate, University of the Pacific, Western State, Ave Maria, St. Thomas (FL), Mercer, Illinois Institute of Technology, Western New England, and Vermont). Barry increased its costs by … $1.

Here are public law schools that cut their costs to resident students:

  • University of Illinois (-7.8%)
  • University of D.C. (-5.6%)
  • University of New Mexico (-5.3%)
  • Texas Tech University (-1.1%)

I note that D.C. and New Mexico both increased their costs last year by more than these decreases.

Overall, the size and character of the increases at private law schools was the same as last year, they were just distributed more evenly among law schools. The phenomenon of nominal tuition cuts is still marginal, and some schools appear to reverse their cuts shortly after instituting them.

Going forward, the thing to look out for is if Congress passes the PROSPER Act, which would cap federal loans to law students at $28,500 and fix a lifetime cap of $150,000 per student. If it does, then I predict that law schools will respond by serious restructuring: eliminating merit scholarships, slashing tuition to $28,500 plus whatever private lenders are willing to lend out, and getting rid of many faculty and their perks. I’m also sure many central universities will use the PROSPER Act as an opportunity to shut down their money-losing law schools.

Of course, this all assumes that the Bennett hypothesis is true, but AccessLex-funded research falsified it, so we all know law schools will raise their prices forever.

Full-time tuition costs don’t necessarily indicate what students are actually charged, but they do show how much rent law schools can extract from the government’s loan programs.

Information on this topic from prior years:

2017: Full-Time Applications Plummet

…Because the ABA’s standard 509 information reports no longer track them, which reminds me of the outrage directed at the ABA last summer for rubber-stamping one law professor’s vision for collecting and displaying employment data to the masses. For those into the cloak-and-dagger stuff, the Data Policy and Collection Committee was folded into the Standards Review Committee earlier this year, and it “reevaluated” the annual questionnaire it sends to law schools. You can read about it here (docx).

One of the bigger changes is eliminating the distinction between part-time and full-time law students wherever it could be found except in tuition costs (thankfully) and scholarship awards. This means that law schools that admit large numbers of part-time students, who tend not to do so well on the LSAT, can see their average LSAT scores nosedive. Also, instead of tracking calendar-year applications, offers, and matriculants, the reports now only measure October-October applications, offers, and … enrollees? Makes them sound like participants in unethical science experiments, but at least spellchecker can tolerate them.

Naturally, as someone who tracks ABA law-school data longitudinally going back to the Clinton administration, I think these changes are monumentally stupid, especially eliminating the full-time/part-time distinction. However, the ABA rarely announces these decisions openly and doesn’t have some kind of RSS feed for those of who care to track it. That’s probably an even dumber mistake.

So, going forward, when it comes to my first annual 509 post on law school … enrollees, I will use data for all law students. I’ve been able to reassemble the data going back to calendar-year 2011, but obviously the change in the data-collection year from “calendar year” to “admissions cycle” will distort the results somewhat (I doubt there are too many October-December enrollees). Too bad. Yell at the ABA.

By October 2017, there were 35,381 enrollees at 200 ABA-accredited law schools not in Puerto Rico, which probably didn’t have any enrollees left by October anyway. This is down 1,212 (-3.3 percent) from 36,593 in December 2016. Some of this is due to two law schools closing and one ceasing admissions. Charlotte (-343), Whittier (-132), and Indiana Tech (-41) together account for about 43 percent of the 1,212-enrollee drop.

In other words, aside from thinning the law-school herd, 2017 isn’t that different from 2016.

Application acceptance rates are a little lower. The median law school saw about 1.7 percent more applications than last year.

Sorry this isn’t as complete as in past years. I can’t spend a whole weekend hand-coding Official Guide info going back another twelve years.

Applicants showed trivially more interest in more law schools this year, according to my modified Lorenz curve. The overall Gini coefficient is down trivially this year to 0.427. (You can read about what that means here.)

A Lorenz curve measures the cumulative distribution of a quantity in order from the recipient of the smallest amount to the largest. Usually researchers use the distribution of income among households. I’ve modified the Lorenz curve according to the U.S. News and World Report rankings for the previous year because the rankings are an independent measurement of law-school eliteness as seen by LSAT takers and applicants roughly at the time that they apply. Here is what I could cobble together going back to 2011.

Given that applications were mostly flat this year, it’s unsurprising that there hasn’t been much change in the distribution of applications.

Next year, thanks to His Emolumence’s perfidy, we’ll have a kind of natural experiment of what happens when applications rise after everyone’s been told that law school is a bad idea. Will unheralded law schools benefit from the bump, or will our idealists apply strategically to top law schools? Will Grad PLUS loans go the way of the full-time matriculants? Find out next year.

This post consolidates information from multiple posts over previous years. You can read prior coverage at the following links.

What Recovery? Legal Services Industry Grows 0.2 Percent in 2016

Last year I celebrated a full 2.0 percent growth in the legal-services industry, according to Bureau of Economic Analysis reports. Alas, this year it’s all been dashed away and revised. Instead of 2.0 percent growth, we have 0.2 percent growth, and the figure for 2015 has been revised downward to 0.4 percent. Sad trombone.

The whole economy grew 1.5 percent to the legal sector’s 0.4 percent.

(Source: Bureau of Economic Analysis (BEA))

Since 2008, the legal sector has contracted by a cumulative 23 percent. It is about the same size as in 1995.

As for the composition of the legal sector’s value added, it’s mostly attributable to … taxes (+0.4 percent). The gross operating surplus, i.e. what goes to firm owners, was down 0.1 percent, and total compensation has been flat two years in a row. Since 2008, compensation of employees has contributed -7.5 percent to the legal sector. The gross operating surplus added -15.5 percent, and taxes contributed nothing.

Finally, consistent with flat growth in the legal sector, household consumption of legal services fell by 1 percent, but it at least grew by 2 percent in 2015. Since its peak year, 2003, spending on legal services has dropped by 12.5 percent.

Households consume about as much in legal services of their total consumption as they did in 1982.

Last year I wrote that the legal-services sector can’t shrink forever, but sustained growth is still nowhere to be found. Looking at how much it’s fallen behind the rest of the economy, it’s surreal to think about how much growth would be needed for it to catch up.

How to Falsify the Bennett Hypothesis

The Bennett hypothesis asserts that colleges and universities absorb increases in federal student aid and pass them back onto students as higher tuition charges. Put differently, the hypothesis states that the quantity of higher education is inelastic (insensitive) to its price, so higher-education institutions collect subsidies to students as rents instead of expanding enrollments. Importantly, the hypothesis does not in itself explain why colleges and universities absorb federal student aid (contrary to what its namesake might have believed); it merely offers the mechanism. I regularly cite the hypothesis as a guide to understanding the relationship between the federal-student-loan program and law school costs and debt.

As stated, the Bennett hypothesis is easy to falsify: Find examples where increases in federal student aid did not correspond to higher tuition charges, or show that those subsequent higher charges were due not to the government’s intervention but other factors. Time sequence, correlation, and non-spuriousness. There is a contentious literature on this topic.

Via TaxProf, I see that a research paper, “An Empirical Examination of the Bennett Hypothesis in Law School Prices” (“Empirical Examination”), attempts to test the Bennett hypothesis on private law-school tuition costs. The paper’s author, Robert Kelchen of Seton Hall University (not the law school), argues that he finds no empirical evidence of the Bennett hypothesis’ effects. I believe “Empirical Examination” arrives at unsound conclusions because it mischaracterizes the Bennett hypothesis, and it insufficiently addresses the dynamic history of legal-education financing since 2005.

(I note that “Empirical Examination” is published via AccessLex, which is related to Access Group, the erstwhile private student-lending organization that financed many law students’ legal educations before the advent of Grad PLUS loans.)

Mischaracterizing the Bennett Hypothesis

“Empirical Examination” poses two research questions that mischaracterize the Bennett hypothesis:

(1) Did tuition/fees or living expenses for law school students increase at a faster rate following the creation of the Grad PLUS program in 2006 and the expansion of income-driven repayment in 2007?

(2) Did the student debt burden of law school graduates increase at a faster rate following the creation of the Grad PLUS program in 2006 and the expansion of income-driven repayment in 2007?

These questions appear to assume that the Bennett hypothesis is disproven by discovering a lower rate of increase in law-school costs and student borrowing, as though law-school cost growth can go on indefinitely. This is unscientific. “Empirical Examination” cites no formulation of the Bennett hypothesis discussing growth rates in costs and borrowing, I know of none, and I don’t think any would be correct.

Rather, the way to test the hypothesis empirically is to take away Grad PLUS loans from students at some law schools and not others. If costs and borrowing stay the same at the Grad PLUS-less law schools, then that tends to discredit the hypothesis. In fact, “Empirical Examination” cites a study that conducted a similar test of for-profit colleges and found “some support” for the Bennett hypothesis. For law schools, the closest test case is Charlotte Law School, which lost its access to federal loans earlier this year. There is no Charlotte Law School anymore, and while this may or may not be related to federal loans, it is congruent with the Bennett Hypothesis.

The History of Law-School Lending Is Consistent With the Bennett Hypothesis

“Empirical Examination” understands correctly that around 2004, law students could borrow money from the federal government and private lenders. However, thanks to a rapid series of changes, law students could borrow all of their cost of attendance plus living expenses from the government without any private lenders (whose loans became mostly nondischargeable).

A theoretical examination of Grad PLUS loans with regard to the Bennett hypothesis would compare these changes to a hypothetical baseline without them. For example, one could try to find similar situations today in which a lender would offer an unsecured consumer loan of around $100,000 at 7 percent interest for three years. I lack the finance background to perform such an estimate, but intuition suggests the answer is not good for skeptics of the Bennett hypothesis.

To illustrate, in 2005, Seton Hall University School of Law charged $32,620 for full tuition to full-time students, and law students could borrow only up to $18,500 in federal loans, leaving them to generate the extra $14,120 (43 percent of the cost). Last year, Seton Hall charged $52,022 to full-time students. Under the pre-Grad PLUS loan system, law students would need to cover $33,522 (64 percent of the cost). I doubt private lenders would be so willing to cover more than $100,000 in unsecured loans after three years of legal education, especially given law students’ repayment prospects.

Other Weaknesses in ‘Empirical Evidence’

There are other problems with how “Empirical Examination” explores the Bennett hypothesis and legal education. For one, its focus on the increase in the rate of charging and lending ignores the fact that demand in legal education has plummeted. Last year, Seton Hall received only 1,387 full-time applications, about half as many as in 2007 (2,638). The Bennett hypothesis addresses the supply-side of education, assuming demand is constant, but when demand falls on its own, then you have law schools teetering financially. As a result, assuming demand for legal education had been constant for the last decade, it’s possible that the rate of increase in cost and debt would have continued at their pre-Grad PLUS loan pace nonetheless.

“Empirical Evidence” also discusses how many law schools funnel their revenue to parent universities. This phenomenon, certainly greatly diminished today, is also consistent with the Bennett hypothesis. If law schools were not absorbing tuition as rents, then these transfers would be unsustainable—again, assuming demand is constant. Similar arguments can be made for zero-sum tuition discounting and the dysfunctions in the law-student transfer market.

*****

To conclude, “Empirical Examination” does not challenge the Bennett hypothesis as it applies to law schools. It mischaracterizes the hypothesis as predicting an increased growth rate in costs and borrowing, which implicitly assumes that growth in those measures is natural when they should reach a limit at some point. “Empirical Examination” does not address facts in the history of legal-education finance tending to show the Bennett hypothesis is correct.