Which Law Schools Are Like Whittier?

Whittier Law School announced it will no longer enroll 1L classes but will graduate the students it has. It is the first fully accredited law school that is straight up closing, i.e. it isn’t merging with another school or finding some other way out of its problems. It’s going for good.

Whittier is not the school I would’ve predicted to be the first to close. Certainly it was in a high-risk category, but I thought others were in direr straits, and Whittier isn’t even freestanding. Charlotte lost its federal loan funding. The ABA censured Valparaiso (pdf), put Arizona Summit on probation (pdf), and told Ave Maria it was out of compliance with its standards (pdf). La Verne lost its provisional accreditation once, and the fates of (un)merged Camden and Penn-State Dickinson appear sealed. Indiana Tech immolated on the launch pad. These days the ABA Section of Legal Education and Admissions to the Bar’s Web site looks more like an academic police blotter than an accrediting body’s homepage.

The question all this raises is: What law schools might be in situations similar to Whittier’s?

We can answer by comparing Whittier to other law schools on various dimensions, particularly debt, employment outcomes, and estimated revenue from full-time students paying full tuition. (Others have already done most of the work on bar-passage rates.)

This past year, U.S. News ranked Whittier as number two for average disbursed graduate debt, $179,056, but its figure was 20 percent higher than last year. It’s a volatile measure, but this year some of its notable nearest neighbors were Thomas Jefferson, San Francisco, American, Golden Gate, John Marshall (Chicago), and Florida Coastal. Most of these law schools featured prominently on debt rankings in previous years.

A couple years ago, I applied the Department of Education’s “gainful employment” rule to all law schools—not just for-profits—and found that Whittier’s 2014 graduates would need to earn more than $80,000 to avoid a failing grade. Four years of failing would mean losing access to federal funding, and nearly a quarter of Whittier’s graduates were totally unemployed after graduating. That figure hasn’t improved since (~23 percent for class of 2015 grads). We’ll soon learn how bad the class of 2016 is doing, but Whittier’s full-time, long-term, bar-passage-required employment rate has been so abysmal that it ranks near the three law schools in Puerto Rico. (Yes, bar-passage rates feed into this outcome.)

The one metric where Whittier wasn’t doing as badly as many other (private) law schools was its cumulative losses in tuition revenue from full-time students. In 2015-16, it took in nearly $6 million, but in 2011-12 it received $13.5 million. The 56 percent drop puts it at number 64 among private law schools (though the top schools, Vermont, Brooklyn, WMU Cooley, and California Western, reported more students receiving grants than they had full-time students, which would probably bump Whittier up a few notches). 56 percent is rough, but a bunch of private law schools lost even larger shares of money—and some took in only a few hundred thousand dollars in full-time tuition revenue last year.

Here’s what the situation looks like for all private law schools, sorted by the percent decline. Note that for once, I am including the two private law schools in Puerto Rico because I feel their performance is indicative of the worst. These figures are adjusted for inflation.

REVENUE FROM FULL-TIME STUDENTS PAYING FULL-TUITION
#	SCHOOL	2011	2015	CUMULATIVE LOSS	PERCENT CHANGE
1.	Vermont	10,860,119	-5,422,079	-16,282,198	-149.9%
2.	Brooklyn	10,782,779	-3,509,376	-14,292,155	-132.5%
3.	WMU Cooley	1,557,772	-478,900	-2,036,672	-130.7%
4.	California Western	25,045,967	-897,940	-25,943,907	-103.6%
5.	St. Thomas (MN)	5,743,284	37,941	-5,705,343	-99.3%
6.	Appalachian	9,093,131	125,300	-8,967,831	-98.6%
7.	Washington and Lee	6,903,362	185,988	-6,717,374	-97.3%
8.	Tulsa	4,599,211	142,116	-4,457,095	-96.9%
9.	DePaul	14,469,813	681,750	-13,788,063	-95.3%
10.	Albany	19,114,661	1,952,910	-17,161,751	-89.8%
11.	Widener (Commonwealth)	9,036,506	965,862	-8,070,644	-89.3%
12.	New York Law School	41,803,974	4,530,080	-37,273,894	-89.2%
13.	Northeastern	4,283,568	511,720	-3,771,848	-88.1%
14.	Syracuse	8,186,463	1,132,272	-7,054,191	-86.2%
15.	Florida Coastal	33,851,726	4,908,200	-28,943,526	-85.5%
16.	Duquesne	12,035,146	1,749,704	-10,285,442	-85.5%
17.	Ohio Northern	8,637,468	1,301,500	-7,335,968	-84.9%
18.	Pacific, McGeorge	11,571,986	1,786,138	-9,785,848	-84.6%
19.	Campbell	15,454,205	2,407,975	-13,046,230	-84.4%
20.	Regent	2,904,848	453,570	-2,451,278	-84.4%
21.	Mercer	15,437,642	2,719,980	-12,717,662	-82.4%
22.	Lewis and Clark	8,873,433	1,611,792	-7,261,641	-81.8%
23.	Case Western Reserve	8,801,033	1,705,620	-7,095,413	-80.6%
24.	St. Louis	18,241,963	3,605,940	-14,636,023	-80.2%
25.	Southern California	15,531,071	3,075,166	-12,455,905	-80.2%
26.	Charleston	10,513,451	2,206,380	-8,307,071	-79.0%
27.	Faulkner	7,911,732	1,822,600	-6,089,132	-77.0%
28.	Seton Hall	13,687,741	3,163,116	-10,524,625	-76.9%
29.	Southern Methodist	6,211,571	1,448,898	-4,762,673	-76.7%
30.	Charlotte	35,712,406	8,517,688	-27,194,718	-76.1%
31.	Catholic	10,588,407	2,528,010	-8,060,397	-76.1%
32.	Dayton	8,333,640	1,997,240	-6,336,400	-76.0%
33.	Wake Forest	7,890,988	1,923,210	-5,967,778	-75.6%
34.	Ave Maria	9,074,461	2,293,830	-6,780,631	-74.7%
35.	Widener (Delaware)	15,458,193	3,989,430	-11,468,763	-74.2%
36.	Western State	5,821,292	1,517,250	-4,304,042	-73.9%
37.	Loyola (LA)	15,784,287	4,123,950	-11,660,337	-73.9%
38.	Touro	11,489,969	3,078,650	-8,411,319	-73.2%
39.	Quinnipiac	4,800,111	1,297,323	-3,502,788	-73.0%
40.	Boston University	9,809,602	2,762,480	-7,047,122	-71.8%
41.	Gonzaga	4,965,149	1,423,890	-3,541,259	-71.3%
42.	Golden Gate	14,318,443	4,263,350	-10,055,093	-70.2%
43.	Chicago-Kent, IIT	12,104,788	3,979,870	-8,124,918	-67.1%
44.	Pace	11,888,268	3,993,088	-7,895,180	-66.4%
45.	Atlanta’s John Marshall	16,084,711	5,613,700	-10,471,011	-65.1%
46.	Mississippi College	12,823,594	4,506,420	-8,317,174	-64.9%
47.	Washington University	11,705,942	4,181,706	-7,524,236	-64.3%
48.	Stetson	22,598,743	8,212,224	-14,386,519	-63.7%
49.	Valparaiso	15,710,039	5,732,824	-9,977,215	-63.5%
50.	Northwestern	28,591,723	10,570,038	-18,021,685	-63.0%
51.	Fordham	38,473,640	14,340,740	-24,132,900	-62.7%
52.	Oklahoma City	10,178,065	3,810,630	-6,367,435	-62.6%
53.	Elon	3,280,392	1,233,358	-2,047,034	-62.4%
54.	Capital	7,447,505	2,820,480	-4,627,025	-62.1%
55.	Cardozo, Yeshiva	21,942,175	8,838,095	-13,104,080	-59.7%
56.	John Marshall (Chicago)	25,576,716	10,437,840	-15,138,876	-59.2%
57.	Villanova	13,909,852	5,785,440	-8,124,412	-58.4%
58.	Thomas Jefferson	17,301,310	7,207,200	-10,094,110	-58.3%
59.	Samford	11,286,294	4,822,480	-6,463,814	-57.3%
60.	Santa Clara	16,091,642	6,913,980	-9,177,662	-57.0%
61.	San Diego	19,178,183	8,350,101	-10,828,082	-56.5%
62.	Roger Williams	12,099,840	5,362,380	-6,737,460	-55.7%
63.	St. John’s	18,866,076	8,366,530	-10,499,546	-55.7%
64.	Whittier	13,502,174	5,989,950	-7,512,224	-55.6%
65.	Seattle	15,747,526	7,248,700	-8,498,826	-54.0%
66.	Creighton	7,850,075	3,625,800	-4,224,275	-53.8%
67.	Hofstra	23,812,510	11,012,750	-12,799,760	-53.8%
68.	Drexel	2,205,873	1,056,750	-1,149,123	-52.1%
69.	Drake	6,852,106	3,342,476	-3,509,630	-51.2%
70.	Vanderbilt	5,452,630	2,670,720	-2,781,910	-51.0%
71.	Loyola (CA)	29,845,203	14,914,900	-14,930,303	-50.0%
72.	Detroit Mercy	15,782,962	7,903,740	-7,879,222	-49.9%
73.	Michigan State	12,439,389	6,453,892	-5,985,497	-48.1%
74.	Tulane	13,779,350	7,311,590	-6,467,760	-46.9%
75.	Barry	6,669,908	3,727,776	-2,942,132	-44.1%
76.	Chicago	12,401,406	7,083,930	-5,317,476	-42.9%
77.	Arizona Summit [Phoenix]	12,828,297	7,562,152	-5,266,145	-41.1%
78.	St. Thomas (FL)	16,799,445	9,990,390	-6,809,055	-40.5%
79.	South Texas	17,958,443	10,704,870	-7,253,573	-40.4%
80.	Pontifical Catholic	8,442,917	5,132,426	-3,310,491	-39.2%
81.	Nova Southeastern	24,168,295	14,852,135	-9,316,160	-38.5%
82.	Marquette	11,533,718	7,312,710	-4,221,008	-36.6%
83.	Miami	34,008,712	21,832,718	-12,175,994	-35.8%
84.	San Francisco	15,483,541	10,028,040	-5,455,501	-35.2%
85.	Western New England	3,630,743	2,375,332	-1,255,411	-34.6%
86.	Chapman	13,208,102	8,859,600	-4,348,502	-32.9%
87.	New England	12,668,264	8,665,140	-4,003,124	-31.6%
88.	Suffolk	27,272,730	18,739,094	-8,533,636	-31.3%
89.	Cornell	18,586,044	12,775,953	-5,810,091	-31.3%
90.	Boston College	16,102,424	11,277,420	-4,825,004	-30.0%
91.	Inter American	6,898,330	5,040,051	-1,858,279	-26.9%
92.	Loyola (IL)	4,583,328	3,351,312	-1,232,016	-26.9%
93.	Southwestern	20,968,555	15,449,600	-5,518,955	-26.3%
94.	American	31,922,411	23,868,936	-8,053,475	-25.2%
95.	Notre Dame	7,908,972	5,918,036	-1,990,936	-25.2%
96.	Denver	17,465,736	14,026,950	-3,438,786	-19.7%
97.	Emory	8,896,804	7,211,400	-1,685,404	-18.9%
98.	Richmond	7,438,055	6,232,200	-1,205,855	-16.2%
99.	Georgetown	52,209,277	43,872,470	-8,336,807	-16.0%
100.	Baylor	5,148,380	4,777,042	-371,338	-7.2%
101.	St. Mary’s	14,146,074	13,128,560	-1,017,514	-7.2%
102.	Columbia	38,452,666	35,989,800	-2,462,866	-6.4%
103.	Yale	15,515,266	14,918,850	-596,416	-3.8%
104.	New York University	46,942,488	46,870,700	-71,788	-0.2%
105.	Pennsylvania	22,739,776	23,802,872	1,063,096	4.7%
106.	Willamette	3,947,758	4,251,625	303,867	7.7%
107.	George Washington	32,385,362	35,444,670	3,059,308	9.4%
108.	Pepperdine	11,117,822	12,539,100	1,421,278	12.8%
109.	Harvard	41,997,217	51,660,654	9,663,437	23.0%
110.	Duke	3,507,038	5,136,813	1,629,775	46.5%
111.	Howard	5,501,024	8,221,176	2,720,152	49.4%
112.	Stanford	11,569,636	17,613,762	6,044,126	52.2%
113.	Liberty	96,858	189,372	92,514	95.5%
114.	La Verne	171,882	3,369,344	3,197,462	1860.3%
115.	Belmont		4,805,640	N/A	N/A
116.	Concordia		203,301	N/A	N/A
118.	Indiana Tech		94,080	N/A	N/A
119.	Lincoln Memorial		387,480	N/A	N/A
TOTAL		1,672,895,574	849,546,398	-828,839,677	-49.2%
10TH PERCENTILE		4,583,328	203,301	-14,636,023	-89.3%
25TH PERCENTILE		7,890,988	1,822,600	-10,094,110	-76.9%
MEDIAN		12,253,097	4,518,250	-6,759,046	-58.4%
75TH PERCENTILE		17,465,736	8,517,688	-3,438,786	-32.9%
90TH PERCENTILE		29,845,203	14,918,850	-371,338	-3.8%
MEAN		14,674,523	7,199,546	-7,270,523	-36.3%

(Source: ABA, author’s calculations)

Obviously full-time, full-tuition revenue doesn’t tell all of the story—and not just for part-time-focused operations like WMU Cooley—but it definitely illustrates the kind of circumstances many private law schools find themselves in. The same must be true for public law schools. It’s in this context that we can ponder the solvency of other at-risk law schools. Whittier is the first big closure, but it won’t be the last. Universities whose law schools are losing lots of money and have poor employment and bar-passage outcomes are watching Whittier and its neighbors.

A Retrospective on Obama’s Higher Education Accomplishments

“Obama” appears in 38 of the 641 posts I’ve published on this site since it began in May 2010. A few weeks before he left office, I threatened to investigate what I’d written about him or his administration over those six-plus years. The short answer is that if you didn’t know any better, you’d’ve thought this author was a Bernie Bro.

But I do know better, and no, I’m not a Bernie Bro, but my thoughts on the 2016 election are for another post. Until then, I can’t argue with much of what I’ve written about Obama.

Consider this gem from, “Bucket, Meet Drop, or Why We Shouldn’t Tolerate Electoral Sunk Costs,” October 27, 2011:

This is what I mean by “electoral sunk costs”: It’s one thing to wake up one morning and realize you’re wedded to policies that sell jet-setting globalization but in reality force people to reduce their life expectations to McJobs. It’s another thing to go out and campaign on, “This country has been wrecked by kleptocrats. Time for the rich to ‘suffer’ painful reforms, and pay no attention to the fact that we just spent four years on hope and change and delivered neither.”

A weasel hath not such a deal of spleen as I am tossed with.

In faith, I don’t disagree with this position. “President Obama squandered an opportunity to be the FDR voters hoped he’d be,” I would write a few weeks later, and indeed, in higher education Obama was no visionary.

Here’s a summary my writings on Obama’s statements or his administration’s actions on higher education and student loans. The order is non-chronological.

• College for all

I wrote a few posts on Obama or his administration’s overall higher-education agenda. Apparently, in August 2010 he said, “[Higher] education is the economic issue of our time.” (The White House has taken down the transcript. Hm.) He reasoned that because unemployment was double for non-college graduates than college grads, and that eight in ten jobs over the next decade would require workforce training or higher education, we needed to send more people to college. How the Great Recession suddenly made all these workers redundant escaped him; so much for aggregate demand.

He didn’t budge from that position. In “‘Hope and Change,’ Meet ‘No Hope, Cosmetic Change’” (February 19, 2013) I found that Obama’s Treasury Department and Education Department joined forces to argue the economic case for higher education. Treasury and ED believed that skill-biased technological change was forcing people out of work, even though the Labor Department projected more job growth in lower-wage service sector jobs than skilled ones. Labor productivity hasn’t gone far in the last decade either.

Obama even walked back the “Eight in ten” line a year after he made it. By 2011, only 60 percent of new jobs over the next decade would require more than a high-school diploma. I traced the source of that statement to a paper by the Georgetown Center for Education and the Workforce, which warned that by 2018—next year!—the U.S. would be short 300,000 college-educated workers. The paper dismissed pessimistic estimates of Labor Department data showing that tens of millions of college graduates are and would be “malemployed” because they worked in jobs that don’t require any real education.

• Promoting income-driven repayment (IDR) plans

If there’s one thing that’s driven me nuts about writing about student loans is all the names that the government and journalists gave to IDR plans. To this day I still casually refer to them as IBR, but after the administration created Pay-As-You-Earn (PAYE), then REPAYE, and then distinguishing ICR from PSLF, it got exhausting. The salient point though is that under Obama, the government created a bunch of improved repayment plans, and promoted the existing ones that the earlier W. Bush government made.

Naturally, critics—mainly The Wall Street Journal and the New America Foundation—attacked the plans’ loan-forgiveness features and then raised alarms over the administration’s success at enrolling debtors on them. For example, in, “WSJ: Big Numbers Divided by Small Numbers Yield Large Percentages,” I made fun of the publication for its slant against student debtors. Primarily the criticism of IDR plans focuses on graduate- and professional-school debtors who are certain to obtain high-paying jobs and therefore need IDR plans—to say nothing of PSLF—least. These outlets almost never separate the problems of IDR plans from the odious Grad PLUS Loan Program, which is responsible for graduates’ high debt levels in the first place.

Obama’s myopia on the value of college education was offset by his recognition that student debtors were hurting. Relying on a legislative framework created by his predecessor, the result is a cumbersome system (for debtors) that prevents widespread defaults and more Occupy Wall Street-type protests. At one point, he even proposed a budget that would change how the tax code treats forgiven loans.

• The “gainful employment” rule

The Department of Education began working on the “gainful employment” rule early in Obama’s first term. Frequently criticized as unfairly targeting entrepreneurs, the rule attempts to ensure that for-profit colleges don’t exploit the federal loan system. It’s too bad federal law doesn’t authorize this kind of accountability toward all institutions, because if the “gainful employment” rule were applied to all law schools, many of them would fail quite quickly and a majority would be in serious trouble.

• Ending the Federal Family Education Loan Program, buying up student loans.

One of the Affordable Care Act’s smaller cost-saving mechanisms was eliminating the program that guaranteed education loans by private banks, which are not to be confused with totally private loans. The program, which was the mainstay version of federal lending for decades, was a great way for banks to make easy profits. By socializing student lending, the government saved many billions of dollars, and made direct loans the only federal option for student debtors.

The Republican Party’s platform is to bring it back.

I discussed the ACA part here, but I think the numbers might be wrong because I didn’t consider that the government was buying up guaranteed loans, turning them into direct loans. This action is what will set the stage for many people shrieking that the government would lend $30 trillion by 2030 and more importantly a future write-down of the loans outstanding. Debts that cannot be repaid, won’t be. The only question is whether the write-down occurs through IDR mechanisms or something new. Here is where Obama kicked the can down the line to his successors.

• Undoing subsidized loans for grad students, floating student loan interest rates

One result of the pointless debt-ceiling fight in 2011 was taking away subsidized Stafford loans from graduate- and professional-school students. Ultimately, it cost a new law student about $3,600 in payments.

I’m unsure if it was related to another government crisis, but Obama also signed legislation that floated student loan interest rates. The rates are based solely on the whims of the bond markets every spring. Nevertheless, the legislation has benefited borrowers because interest rates have been lower than the fixed statutory rates in the days of yore. In 2016, graduate/professional Stafford loans and Grad PLUS loans were about 1.5 percent lower than the fixed rates. This will save debtors money in theory, but if rates rise, they’re hosed.

• The two-year law degree

In summer 2013, Obama even weighed in on legal education, which indicated either the coverage the topic was receiving or his interest as a former law professor. It was a throwaway statement, but I teased him for it in, “Obama Favors Law Graduate Underemployment, Poverty Wages.”

• Arne Duncan

Finally, I add that I expected Arne Duncan to find a warm seat at the Lumina Foundation after he stepped down as Secretary of Education. Apparently, he defied this expectation, and he’s working with troubled Chicago youth. Good for him, but I still think he was incompetent because he egged Obama on with his college-for-all dogmatism.

Conclusion:

Obama made the typical student debtor better off than when he left office—but not by much. Some superficial changes and policy nudges lowered debt burdens and eased repayments, but much of it was incidental to his other objectives.

In light of the 2016 election, what disappoints me most about Obama is his 20th century attitude towards sending everyone to college. I can forgive Sanders, Clinton, and possibly Trump for believing college is the answer. These candidates were the dead hand of the pre-Reagan America trying to fit obsolete policies around new problems. But Obama is younger than these people, and it only makes him look even more like an out-of-touch ivory tower intellectual. Underemployment is still around in 2017, and more self-inflicted political crises will push student debt further down the agenda, so it’s not going to be resolved for a while. Amid today’s excitement, we shouldn’t forget that Obama gave higher education and student loan debt a lost decade.

Speaking of Grad PLUS Loans…

This weekend, the Times both accepted the Bennett hypothesis and chose not to condescend to us about the “paradox” of how underemployed law grads can refuse to work for people who can’t afford to pay them. That’s really remarkable. What more can I say?

Okay, one point, an emphasis. When I wrote that applying the gainful employment rule to all law schools would cause fifty to close in short order, I was clearly being conservative. $50,000 in discretionary income is a lot of money, even for law school graduates.

And since we’re on the topic of student lending, the Department of Education updated its student loan data through the 2014-2015 academic year. I’ve updated the Student Debt Data page accordingly.

The big findings are that (a) people are borrowing less money from the federal government:

…But (b), Grad PLUS borrowing hasn’t changed much in the last year.

In the last two years though, the number of Grad PLUS borrowers has grown (+2,540) while the total amount borrowed has fallen (-$140 million). It only amounts to about $500 per borrower, but who knows, maybe it’s due to fewer law students? I wouldn’t be surprised.

Finally, in the same week that I bought my first car I realized after years of listening that Galaxie 500’s “Blue Thunder” is about a man’s love for his car, and the Route 128 reference indicates it’s an homage to the Modern Lovers’ “Roadrunner.” (I’m terrible at discerning lyrics; it’s usually not what I listen for in music.) I really dig how “Blue Thunder” denies the listener the chorus until the very end.

I prefer the album version, but how could I not post an ’80s video?

********************

What If The Gainful Employment Rule Were Applied to All Law Schools?

[UPDATE 2015-07-17: Because this post received so much traffic since I first ran it, I’ve updated the Gainful Employment Rule table to only show the total incomes law schools’ graduates would need to earn for their schools to pass (or not pass) under the rule. It occurred to me that even if the discretionary income result is lower than the total income number, the results the formulas produce are still equivalent. This means I can show you like-by-like comparisons, which are more informative. I’m not editing the rest of the text, so consider this update mutatis mutandis.]

The first draft of my latest article on The American Lawyer about the gainful employment rule asked that question, but I realized that reporting on the for-profits alone was more important. The broader question is much more appropriate for a blog post, and since another federal court upheld the rule, it appears it’ll stick around. So, here you go.

To recap, the Department of Education’s gainful employment rule applies two debt-to-earnings tests to a college’s debtors: one based on their total annual incomes and the other their annual discretionary incomes. The tests create three results: passing, falling “in the zone,” or failing. Passing either test gives the school an overall passing grade for that year, not passing either test but not failing puts them “in the zone,” but failing is failing. Sorry if there’s some equivocation among these terms; I blame the rule.

Failing in a given year won’t kill a school’s access to federal loans, but certainly four years of failing or being in the zone will do the trick.

So:

• Passing either debt-to-earnings test means debt payments are less than or equal to
  • 8 percent of total annual income, or
  • 20 percent of annual discretionary income.
• The “zone” means debt payments are greater than
  • 8 percent of total annual income but less than or equal to 12 percent of annual income, or
  • 20 percent of annual discretionary income but less than or equal to 30 percent of discretionary income.
• Failing occurs when debt payments are greater than
  • 12 percent of total annual income, or
  • 30 percent of annual discretionary income.

Got it? Good. If not, reread the article. I hate explaining this rule.

Rather than giving the numbers for both tests, I’m going to display the class of 2014’s mean debt (weighted with non-debtors (because I’m fair)), the minimum income (discretionary or total) needed to pass either test or at least stay in the zone, and the unemployment rate (“seeking” and “not seeking” employment, but excluding “deferred start dates”). The numbers will differ slightly from what I published in the article last week.

As for which test you’re seeing, since it’s somewhat important, the annual income test is the lesser test until about $43,000. After that, you are seeing the minimum discretionary income graduates need to be earning for the school to pass the test. That means they need to be earning even more money than what’s stated.

CLASS OF 2014 GAINFUL EMPLOYMENT INCOME RULE REQUIREMENTS
SCHOOL	WTD AVG DEBT	MIN PASS	MIN ZONE	TOT UNEMP
Howard	$23,060	$20,178	$13,452	12.4%
Brigham Young	$39,026	$34,148	$22,765	7.2%
Hawaii	$39,949	$34,955	$23,304	15.5%
Alabama	$45,830	$40,102	$26,734	3.5%
Lewis and Clark	$47,014	$41,137	$27,425	15.4%
Arkansas (Fayetteville)	$48,927	$42,811	$28,540	7.0%
Nebraska	$49,758	$43,538	$29,026	6.0%
North Carolina Central	$49,932	$43,691	$29,127	14.1%
District of Columbia	$51,954	$45,460	$30,307	25.2%
Tennessee	$52,961	$46,341	$30,894	14.6%
Wyoming	$52,999	$46,374	$30,916	23.9%
North Dakota	$55,743	$48,776	$32,517	13.2%
Connecticut	$56,813	$49,711	$33,141	9.1%
Arkansas (Little Rock)	$58,407	$51,106	$34,071	12.8%
Missouri (Columbia)	$58,541	$51,224	$34,149	8.9%
Georgia State	$58,650	$51,319	$34,213	5.6%
Mississippi	$59,132	$51,741	$34,494	12.3%
Kentucky	$60,629	$53,051	$35,367	5.6%
Wisconsin	$61,117	$53,478	$35,652	7.6%
Kansas	$61,410	$53,734	$35,822	8.4%
SUNY Buffalo	$61,568	$53,872	$35,915	9.9%
New Mexico	$61,795	$54,071	$36,047	3.6%
Liberty	$63,917	$55,927	$37,285	25.0%
Georgia	$63,954	$55,960	$37,307	13.6%
Texas Tech	$64,047	$56,041	$37,361	18.8%
Northern Illinois	$64,061	$56,053	$37,369	9.1%
Montana	$64,094	$56,083	$37,388	11.3%
City University	$64,284	$56,248	$37,499	20.7%
Oklahoma	$64,613	$56,537	$37,691	7.7%
Florida	$65,104	$56,966	$37,977	9.4%
Memphis	$66,326	$58,035	$38,690	18.3%
Akron	$66,681	$58,346	$38,897	8.7%
Cincinnati	$66,697	$58,360	$38,906	10.4%
South Carolina	$66,826	$58,473	$38,982	7.4%
Northern Kentucky	$67,221	$58,818	$39,212	9.6%
Arizona State	$67,227	$58,824	$39,216	1.5%
Florida State	$68,319	$59,779	$39,853	6.0%
Wayne State	$68,698	$60,110	$40,074	11.2%
Michigan State	$69,711	$60,997	$40,665	1.2%
Houston	$70,931	$62,065	$41,377	7.4%
South Dakota	$71,067	$62,183	$41,456	6.2%
Boston University	$71,181	$62,283	$41,522	6.5%
California-Davis	$71,993	$62,994	$41,996	10.1%
Temple	$72,019	$63,017	$42,011	9.1%
Washburn	$72,555	$63,485	$42,323	8.9%
Indiana (Bloomington)	$72,726	$63,635	$42,423	6.8%
Southern University	$73,214	$64,062	$42,708	23.0%
Louisiana State	$73,366	$64,195	$42,797	3.1%
Texas A&M [Wesleyan]	$73,485	$64,299	$42,866	18.5%
West Virginia	$73,712	$64,498	$42,999	8.5%
Utah	$74,002	$64,751	$43,168	8.1%
Duquesne	$74,172	$64,901	$43,267	13.5%
Arizona	$74,516	$65,201	$43,468	4.9%
Texas	$74,642	$65,312	$43,541	6.8%
Boston College	$74,695	$65,358	$43,572	6.6%
North Carolina	$74,905	$65,542	$43,694	11.9%
Maryland	$75,615	$66,163	$44,109	8.8%
Illinois	$76,374	$66,827	$44,552	5.9%
Campbell	$76,555	$66,986	$44,657	13.6%
Iowa	$76,670	$67,086	$44,724	2.3%
Washington University	$76,828	$67,225	$44,816	1.2%
Drexel	$77,209	$67,558	$45,038	11.3%
William and Mary	$77,805	$68,079	$45,386	8.4%
Indiana (Indianapolis)	$78,287	$68,501	$45,668	7.9%
Florida International	$79,037	$69,158	$46,105	6.5%
Villanova	$79,097	$69,209	$46,140	9.5%
Nevada	$79,742	$69,775	$46,516	10.1%
Ohio State	$80,527	$70,462	$46,974	1.4%
Pittsburgh	$80,700	$70,612	$47,075	12.7%
Cleveland State	$80,891	$70,780	$47,186	13.9%
Rutgers-Newark	$81,451	$71,270	$47,513	8.4%
Idaho	$81,604	$71,404	$47,602	8.1%
Louisville	$82,077	$71,818	$47,879	7.1%
Baylor	$82,833	$72,479	$48,319	11.8%
California-Irvine	$83,342	$72,924	$48,616	10.8%
Tulsa	$83,416	$72,989	$48,659	5.1%
Washington	$83,732	$73,266	$48,844	14.0%
Maine	$84,452	$73,895	$49,263	14.7%
Minnesota	$84,834	$74,230	$49,486	6.9%
Cardozo, Yeshiva	$85,151	$74,507	$49,671	15.3%
Toledo	$87,232	$76,328	$50,885	17.9%
St. Thomas (MN)	$87,349	$76,430	$50,954	8.4%
Washington and Lee	$87,538	$76,595	$51,064	12.6%
Richmond	$88,304	$77,266	$51,511	7.4%
Detroit Mercy	$88,604	$77,529	$51,686	16.9%
St. John’s	$89,567	$78,371	$52,248	8.9%
Yale	$90,162	$78,891	$52,594	3.9%
Brooklyn	$90,813	$79,461	$52,974	9.9%
Notre Dame	$91,274	$79,865	$53,243	3.9%
Oregon	$92,133	$80,616	$53,744	14.1%
Chicago-Kent, IIT	$92,311	$80,772	$53,848	8.9%
Vanderbilt	$92,969	$81,347	$54,232	2.6%
California-Los Angeles	$93,221	$81,568	$54,379	6.3%
Emory	$93,473	$81,789	$54,526	2.6%
Massachusetts — Dartmouth	$93,819	$82,092	$54,728	16.0%
Fordham	$94,187	$82,413	$54,942	9.8%
Baltimore	$95,222	$83,319	$55,546	11.5%
Wake Forest	$95,703	$83,741	$55,827	7.0%
St. Mary’s	$95,761	$83,791	$55,861	17.9%
Southern Methodist	$95,955	$83,961	$55,974	6.7%
Seton Hall	$96,075	$84,066	$56,044	6.3%
Case Western Reserve	$96,159	$84,139	$56,092	9.5%
Pennsylvania	$96,201	$84,176	$56,118	0.4%
South Texas	$96,686	$84,600	$56,400	9.2%
Dayton	$97,598	$85,398	$56,932	11.4%
Colorado	$97,675	$85,466	$56,977	4.2%
Quinnipiac	$99,563	$87,118	$58,079	14.2%
Stanford	$99,947	$87,454	$58,302	2.7%
Duke	$100,325	$87,784	$58,523	2.8%
Samford	$100,526	$87,960	$58,640	13.2%
Oklahoma City	$100,825	$88,222	$58,815	5.6%
Mississippi College	$101,946	$89,203	$59,469	21.1%
Syracuse	$102,107	$89,343	$59,562	11.4%
Drake	$102,326	$89,535	$59,690	9.2%
Suffolk	$102,844	$89,989	$59,992	14.4%
Southern California	$102,872	$90,013	$60,009	5.1%
William Mitchell	$102,986	$90,113	$60,075	7.3%
Virginia	$103,102	$90,214	$60,143	2.3%
Ohio Northern	$104,531	$91,465	$60,976	18.1%
Loyola (LA)	$104,924	$91,808	$61,206	19.3%
Pace	$105,075	$91,940	$61,294	14.3%
San Diego	$105,351	$92,182	$61,455	18.3%
Harvard	$105,951	$92,707	$61,805	2.4%
Michigan	$105,978	$92,731	$61,821	2.6%
Mercer	$106,506	$93,193	$62,128	13.3%
Capital	$106,628	$93,299	$62,200	31.3%
Tulane	$107,133	$93,742	$62,494	9.7%
Hamline	$107,514	$94,075	$62,717	8.7%
George Mason	$107,715	$94,250	$62,833	2.7%
Gonzaga	$107,940	$94,448	$62,965	16.0%
Chicago	$108,521	$94,956	$63,304	1.9%
Penn State (Dickinson)	$108,981	$95,358	$63,572	14.8%
New Hampshire	$109,322	$95,657	$63,771	10.3%
New York University	$109,331	$95,664	$63,776	1.3%
Western State	$109,519	$95,829	$63,886	11.6%
DePaul	$109,529	$95,838	$63,892	18.9%
George Washington	$110,250	$96,469	$64,312	5.3%
Roger Williams	$110,547	$96,729	$64,486	17.9%
Pepperdine	$110,599	$96,774	$64,516	18.2%
Albany	$110,656	$96,824	$64,550	14.2%
St. Louis	$110,737	$96,895	$64,597	10.1%
Miami	$110,761	$96,916	$64,610	7.7%
California-Berkeley	$111,966	$97,970	$65,313	2.4%
Cornell	$112,050	$98,044	$65,363	1.0%
Loyola (IL)	$113,373	$99,201	$66,134	8.0%
Santa Clara	$113,702	$99,489	$66,326	33.0%
Elon	$113,902	$99,664	$66,443	27.9%
Denver	$114,912	$100,548	$67,032	8.3%
Hofstra	$114,917	$100,552	$67,035	7.9%
Ave Maria	$115,045	$100,665	$67,110	33.6%
California-Hastings	$116,260	$101,728	$67,818	22.1%
Regent	$116,397	$101,847	$67,898	12.3%
Creighton	$116,459	$101,902	$67,934	9.0%
Columbia	$117,098	$102,461	$68,307	2.1%
Chapman	$117,259	$102,602	$68,401	19.6%
Nova Southeastern	$117,347	$102,679	$68,452	11.1%
Northeastern	$117,379	$102,706	$68,471	14.4%
Marquette	$118,389	$103,590	$69,060	9.8%
Georgetown	$118,918	$104,053	$69,369	5.0%
Western New England	$119,714	$104,750	$69,833	20.4%
John Marshall (Chicago)	$121,990	$106,742	$71,161	8.8%
Valparaiso	$122,769	$107,423	$71,615	20.9%
Catholic	$123,026	$107,648	$71,765	13.4%
Stetson	$123,167	$107,771	$71,847	7.2%
Widener	$123,914	$108,425	$72,283	8.1%
Charleston	$124,976	$109,354	$72,903	24.0%
Pacific, McGeorge	$125,060	$109,428	$72,952	22.5%
Loyola (CA)	$125,546	$109,853	$73,235	17.9%
Seattle	$126,157	$110,388	$73,592	18.0%
Willamette	$126,572	$110,751	$73,834	13.9%
St. Thomas (FL)	$128,135	$112,118	$74,746	17.6%
Golden Gate	$128,733	$112,642	$75,095	33.3%
Northwestern	$130,452	$114,146	$76,097	7.2%
Touro	$131,627	$115,173	$76,782	19.9%
Vermont	$131,639	$115,184	$76,789	16.9%
American	$132,232	$115,703	$77,135	15.2%
San Francisco	$135,802	$118,827	$79,218	32.5%
California Western	$137,589	$120,391	$80,260	23.7%
Whittier	$137,958	$120,713	$80,475	24.2%
New York Law School	$138,296	$121,009	$80,673	13.3%
Barry	$141,716	$124,002	$82,668	17.7%
Florida Coastal	$151,390	$132,466	$88,311	14.9%
Thomas Jefferson	$156,925	$137,309	$91,540	29.0%

Note: Howard almost certainly published its graduates’ annual debt and not their total debts as it was asked, and this table excludes law schools that reported debt levels but not the percent of their graduates with debt.

I reckon that any law school whose graduates would need make $50,000 in discretionary annual income would probably fail the gainful employment rule in short order unless they were elite law schools with low unemployment rates. That’s about $100,000 in mean weighted debt, coincidentally—before interest. That’s at least 50 schools.

Kicking these law schools out of the federal loan program would be in keeping with the Department of Education’s stated goals for crafting the rule—accountability for student outcomes—but Congress won’t let it, which is why I found the comments to the department so galling. Some people claimed that graduate programs should be excluded from the rule because they didn’t face the same “employment challenges and return-on-investment considerations” compared to lower levels of higher education.

Looking at the above table … Right.

New Rule Spells Trouble for For-Profit Law Schools

…Is up on The American Lawyer.

Doomed! DOOMED I TELL YOU! Mwahahahaha!

I’d wanted to comment on the ABA Task Force on the Financing of Legal Education’s report, but alas my trusty computer that I’d been working on to write this blog all these years ran its last clock cycle over the weekend. Naturally, everything was backed up and has been transferred to my new machine. The show will continue—albeit with a delay.

In the meantime, here’s some Cloud Cult, which I saw at Minneapolis’ Northern Spark a couple weekends ago.

********************

Who Knew That Law Students Were Scamming the Government All Along?

[UPDATE: My mistake, California Western is a non-profit law school. Western State, on the other hand is.]

Andrew Martin, “Well-Off Will Benefit Most From Change to Student Debt Relief Plan, Study Says,” New York Times

Before I get started, there were two errors in my discussion of IBR last week.

One: Unpaid interest on IBR loans is not capitalized onto principal but it isn’t eliminated (except for the first three years for Subsidized Stafford Loans—not an issue for law school debt anymore). Unpaid interest accrues and is counted separately from principal, which I’ve never heard of before. Thus, the growth in debt is linear (unpaid principal plus unpaid interest) and not exponential (interest capitalized onto principal). Interest is capitalized when the debtor is no longer eligible for IBR, so don’t make a lot of money all of sudden after being on IBR for a while. As a result, large unpaid professional school debts can leave large tax burdens for debtors when the loan is forgiven.

Two: Readers will recall last week that I posted a chart showing the minimum income necessary to stay on IBR for a given debt level. That was based on the belief that the average interest rate IBR uses is not weighted. I think it is, in fact, so it looks something like this instead:

The difference is actually quite minor between the strict and weighted averages, but today’s post exists because I wasn’t the only one surprised by the gains debtors made by reducing the discretionary income percentage from 15 percent to 10 percent. The New America Foundation, via the New York Times, just released a report criticizing the changes to IBR—for unusual reasons.

“[T]he changes would provide big benefits to middle- and high-income borrowers, particularly for those seeking a graduate degree, the authors found. The report says that at least one financial planning company is telling law school students that the changes could allow them to write off $100,000 in student debt.

‘If left unchanged, the program is set to provide huge financial windfalls to people who, far from being in need, are among the most financially well-off graduates in today’s job market,’ the report says.”

Good news all you lawyers! You’ll make massive salaries even on IBR!

Law grads are a very bad example, and it’s unfortunate that the New America Foundation chose America’s most expensive and least lucrative professional degree to show how the rich are getting more benefits under the new rules. It’s one thing if Ben Bernanke’s son gets to be a doctor with $400,000+ of student loan debt, but it’s not like he went to the umpteenth tier trash pit Roger B. Taney Law Center in Annapolis, MD and couldn’t get a job, which is much more common than the New America Foundation cared to research.

Worse, the Times drew the wrong conclusion from the study: The problem isn’t that high-income law grads can write off large amounts of debts after 20 years instead of 25; rather, it’s that law schools are enticing applicants into doing so because it helps their bottom line, not because the educations they sell are needed or will produce the kinds of incomes necessary to pay off the loans.

Wait a sec, just which “financial planning company” is the Times referring to?

Why, the one that owns California Western Law School, one of the four for-profit law schools that are facing disproportionate scrutiny due to the newly enacted (and watered-down) “Gainful Employment Rule” that might limit the amount of Direct Loans their students can access.

The New America Foundation’s report has a few good suggestions for revising IBR that would help poorer debtors, and it’s right that the proposed changes to the program will benefit high-debt/high-income debtors, but that’s primarily because IBR’s debt-to-income ratios already scale upward.

The more significant criticism is that there aren’t that many high-debt/high-income debtors out there (I don’t think the report gives an actual number of high income debtors or their share of the total on IBR), which makes the New America Foundation’s arguments like those for means testing Social Security. Sure, we could reduce the amount that Warren Buffet gets when he retires (if he does), but the savings that come from specifically sculpting the policy to ensure that he doesn’t get any Social Security don’t outweigh the costs of implementing them.

Likewise, IBR doesn’t recognize that high-income debtors benefit from scaling effects of their incomes on their living standards. $80,000 in discretionary income is plenty to live on no matter what debts you have. The problems are why that much debt came into being in the first place, whether it’s payable in the long term, and how big the shortfalls will be. The aforementioned Bernanke fils might be doing just fine for himself, but he’s probably not better off than a doctor who graduated from his same med school in 1992. That’s the problem.

The fact that a few high-income grads benefit from a change a law that’s already generous to low-income debtors isn’t that big a deal. I stand by my conclusion that IBR shouldn’t be a protracted, bureaucratic, Chapter 13 bankruptcy. Just give debtors the real thing and eliminate the Direct Loan Program.

I’d like to stop there, but I have to set the record straight: California Western is a terrible example of IBR free-booting. The New America Foundation writes:

“Sure, having $100,000 in debt forgiven while you earn $70,000 a year sounds like a get-rich-quick scam. After all, the most the federal government will provide college students is $22,200 over four years through the Pell Grant program, which is targeted to only the neediest undergraduate students. Surely the federal government doesn’t have a program that would give over four times as much aid to law school graduates with starting annual salaries of $70,000 who go on to earn much more over their careers? Except, this turns out to be true.” (1)

FALSE.

Law school graduates do not have $70,000 starting salaries. Even NALP says that’s a distorted figure. The median starting lawyer salary (not just JD-holders, guys) in 2011 was $61,500 for 15,999 of 45,495 graduates reporting (PDF).

Speaking of graduate outcomes, just what happened to California Western’s?

Last year 26.7 percent of its graduates were either unemployed or didn’t even bother returning their employment surveys. Only 60 percent were “Employed Bar Passage Required,” and 21.8 percent reported working in solo to 10-firm positions full-time/long term. Only 8.4 percent landed in larger firms.

This is not a graduating class that’s “having $100,000 in debt forgiven while earning $70,000 in a get-rich-quick scam.” It’s a graduating class with an average of $153,145 in debt that requires more than $80,000 annually to reduce its loan principal under the current IBR, an income few of California Western’s 285 graduates will have any time soon. Implying that these law grads are scamming the government based on advertising from a for-profit law school is shoddy research, and the “Narrated Borrower Example” of Robert the Law School Grad is unreasonably unindicative of the majority of outcomes California Western Law School students can expect. Many of them will be paying 10 percent of their discretionary incomes for 20-25 years for degrees they will never use, and the government will end up canceling large amounts of their law school debts.

On the bright side, at least California Western pays for a fraction of that in corporate income tax.

NPR Asks If Law Schools ‘Cook Their Employment Numbers’

Larry Abramson, “Do Law Schools Cook Their Employment Numbers?” National Public Radio

Much of the piece is a rehash of law schools luring students in with juked employment numbers. To that extent, it tells us nothing new. Moreover, the problem I’m having with these types of pieces that characterize the problem as graduates vs. law schools vs. the ABA vs. Law School Transparency is that they take it as a given that law school must be expensive. The only time the word “tuition” appears is when NPR talks somewhat dismissively about scam blogs.

“But in blogs like the LawSchoolScam.blogspot.com [Exposing the Law School Scam], former students howl about high tuition and lousy job prospects.”

That’s it. No discussion on if these “howling” former students have a point about tuition being too high, if there is tuition inflation, and what’s causing it. But that’s not what raised my eyebrow:

“[Changes in the ABA’s rules] will help applicants in the future decide if they are picking a school that is turning out employable lawyers.”

If you’re a layperson, doesn’t this sound bizarre to you? Why on earth should we loan money to people to go to law schools that don’t turn out employable lawyers? Doesn’t this mean law schools should close? How many? I chalk this up to unartful writing, but it still sounds like NPR contemplates allowing law schools to waste loan dollars so long as the applicants—I mean—consumers make an informed choice.

There’s one point of fresh substance at the end of the piece: ED’s and the ABA’s powers regarding employment and accreditation.

“When critics attacked for-profit colleges for similar problems, the Department of Education tightened regulations on those schools. But the Department says it has no authority to do the same to the vast majority of law programs.”

So this means ED can’t condition loan access on gainful employment rates ala the gainful employment rule. Earlier:

[ABA Section of Legal Education Chair and New England School of Law’s Dean John] O’Brian says it’s still up to students to scrutinize that data, because the ABA can only demand transparency. “These schools are simply required to report. We do not have minimum standards for employment,” he says.

Required to report, yes; enforced to report? No. We’ll see how that one goes. However, can the ABA enact minimum employment standards? 34 CFR 602.16(a) reads:

“§ 602.16   Accreditation and preaccreditation standards.

(a) The agency must demonstrate that it has standards for accreditation, and preaccreditation, if offered, that are sufficiently rigorous to ensure that the agency is a reliable authority regarding the quality of the education or training provided by the institutions or programs it accredits. The agency meets this requirement if—

(1) The agency’s accreditation standards effectively address the quality of the institution or program in the following areas:

(i) Success with respect to student achievement in relation to the institution’s mission, which may include different standards for different institutions or programs, as established by the institution, including, as appropriate, consideration of State licensing examinations, course completion, and job placement rates.”

The only interpretation of this regulation I could find is in a draft of ED’s “Guide to the Accrediting Agency Recognition Process,” dated February 2010, which states on page 27:

“Compliance Factors … The agency must specify when it is appropriate to consider course completion, State licensing examination, and job placement rates and provide justification.”

It sounds to me like the ABA can do a whole lot more than transparency when it comes to regulating law schools’ graduates’ employment outcomes, and it would use the same mechanism that allowed it to rescind the University of La Verne’s provisional accreditation last summer due to its low bar passage rates. All it has to do is prove to ED that applying more rigorous job placement standards denotes “success with respect to student achievement.” I’m not sure if that means it can say that 95 percent of grads have to be in full-time JD-preferred positions nine months after graduation, but it can at least make the argument, contrary to Dean O’Brien’s statements.

[UPDATE]: I forgot to mention that I liked Kyle McEntee’s point that the ABA’s changes “won’t help students already in school.” Why current students aren’t walking away is still a mystery to me.

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.

PROJECTIONS

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?

Gainful Employment Rule Gutted and Adopted

Tamar Lewin of the NYT and EduBubble believe ED has failed to rein in for-profit higher education.

“We believe that very few programs will be forcibly closed by our standards,” Secretary of Education Arne Duncan said. “We want to give people a chance to reform. As a country, we need this sector to succeed. This is not about ‘gotcha.’ ”

I have nothing against for-profit higher education in principle so long as the students pay out of pocket (and I see no reason to treat nonprofit higher education differently). If they’re thriving on federally originated non-dischargeable student debt with no increase in quality, then the ‘gotcha’ is on taxpayers.

[D]epartment officials estimated that 5 percent of the 13,155 for-profit programs covered by the rules, and 1 percent of the 42,290 public and nonprofit programs, would lose their eligibility for student aid.

A program would lose eligibility for federal aid only if: fewer than 35 percent of its graduates are repaying principal on their student loans three years out, and, for the typical graduate, loan payments exceed 30 percent of discretionary income as well as 12 percent of total earnings.

So even if a program loses access, students can turn to private student loans, which have been completely covered by the ‘undue hardship’ exception to dischargeability since 2005. Then the Times heralds the revenge of lemon socialism.

[T]he for-profit education sector had many of the “same characteristics of what happened with subprime housing and securitization, namely that they can capture all the upside of increasing volume while shifting all of the downside to somewhere else, which is students and taxpayers.”

[National Economic Council director Gene Sperling] said the rules would “only decrease access to very weak programs that leave students with a crushing debt burden.”

In other words, don’t expect student debt to drop for a while.

[UPDATE]

At Innovations, Richard Vedder attacks the Gainful Employment rule for different reasons. Although I disagree that the Obama Administration is particularly anti-business (I think businesses are on a general hiring strike and don’t want to make money), I largely agree with Dr. Vedder’s point that tax status should be irrelevant to regulating aid. Indeed, I wouldn’t be able to blog on legal education if that were the case.

A case can be made to restrict federal financial aid. I would go even farther—an excellent case can be made to eliminate such aid. An even more compelling argument can be made that we should not be trying to expand higher education enrollments. But if the U.S. government is going to try to expand higher education and distribute aid to students, it should not base restriction of that aid on the ownership structure of the institution.

[UPDATE]

Dean Baker spanks the Post:

The Washington Post, which is part of a corporation whose primary income comes from for-profit colleges, told readers that new regulations on student loans would:

“effectively would shut down for-profit programs that repeatedly fail to show, through certain measures, that graduates are earning enough to pay down the loans taken out to attend those programs.”

…

[A]nyone who wants to would still be able to attend any for-profit college they chose. They could even borrow money to do so. They would just be unable to get a subsidized loan from the government for this purpose.

The problem is that private student loans aren’t dischargeable in bankruptcy and thus place far more risk on students than on lenders. I wonder if for-profit colleges will start auto-financing.

Their Satanic Majesties Links—House Votes to Defund “Gainful Employment”

Default: The Student Loan Documentary’s Facebook page related a couple interesting links:

(1) Melissa Linton, “USC Ranked 7^th for Debt by CNBC,” in The Daily Trojan

So USC’s graduates carry an average $36,787 in debt. Its law students are charged $10,000 more than they were seven years ago.

(2) Sharona Coutts, “House Passes Amendment to Block Funding of Oversight Measure for For-Profit Schools,” in ProPublica

Arch-nemeses of higher education reform, representatives Virginia Foxx (R-NC) and John Kline (R-MN) sponsored a bill to defund any attempt to monitor enforcement of the yet-to-be-adopted “Gainful Employment Rule” to federal lending to for-profits. Coutts doesn’t believe it’ll pass the Senate, though. If conservatives were serious about balancing the budget, they’d cut the entire federal lending program and change the bankruptcy code to allow student debtors to restructure and spend their money on things they need.

Which leads me to…

(3) Richard Vedder, “From Wall Street to Wal-Mart: Why College Graduates Are Not Getting Good Jobs,” in Center for College Affordability

Dr. Vedder slipped this past me a couple months ago. A very quick and good read.

Here’s your quote of the day:

[R]ecent efforts by President Obama’s U.S. Department of Education to enact and enforce “gainful employment” rules primarily on for-profit higher education institutions are misguided. This report has shown clearly that severe gaps exist between college-level training and labor-market job opportunities for graduates. Underemployment is a persistent problem permeating throughout all of American higher education and is by no means limited to only one sector. Using for-profit institutions as a scape-goat fails to address the full-extent of this problem.