Legal Education

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.

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.

ABA Task Force Dodges Student Debt Reform

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

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

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.

LSAT Tea-Leaf Reading: June 2015 Edition

Make that three administrations in a row that the number of LSATs has risen, so no broken records and pop music jokes. Cast your eyes in horror:

No. LSAT Takers, 4-Testing Period Moving Sum

23,238 people took the LSAT in June 2015, raising the four-testing-period moving sum to 103,124 (+1.4%). Maybe it won’t fall below 100,000 after all.

In other surprising news, the number of law school applicants is … about the same as last year.

No. Applicants Over App Cycle

No. Applications Over App Cycle

It appears going to law school is becoming a thing again—at least later in the application cycle. Color me baffled as to why this is. A year ago, I predicted the bottom had not been reached, but maybe I was mistaken. Still, I’m left with two thoughts. One, is this just random noise or is it evidence of success for the now-is-the-best-time-to-go-to-law-school-ever crowd? Two if so, will we see change in the distribution of applications as opposed to change in the total number of applicants? More people applying to elite law schools that aren’t hurting while continued problems for those lower down.

I have some thoughts on how to test those hypotheses, but that’ll wait for another time.

Brooklyn Law School Building Might Sell for 7 Times Assessed Value

Readers might recall a year and a half ago the glee with which I reported that Brooklyn Law School sold a number of its buildings for triple their assessed values. It’s unusual that I can discuss legal education and land values at the same time, so when the opportunity presents, I pounce like a lion.

Yesterday, the New York Daily News contributed a sequel to the story: BLS plans to sell a “prime Brooklyn Heights” building, the 39-unit 2 Pierrepont Street. The sale hasn’t occurred yet, but the figure being thrown around behind the scenes, according to the article, is $30 million.

…Which shouldn’t be at all surprising. As former Brooklynite, I can tell you that Brooklyn Heights is absolutely gorgeous. Catastrophically under-built given its proximity to lower Manhattan, but absolutely gorgeous.

As one might expect, the assessed value of the 2 Pierrepont St. parcel is a laughable $3.88 million, even though BLS paid just $2.2 million to acquire it back in the 1980s. Thus, the alleged asking price is nearly 8 times the assessed value, strongly implying that the property is absurdly under-assessed. Given the location’s value, the article suggests the building will either be torn down or transformed into condos. Those BLS students never realized how good they had it, and they’ll probably never live in such an expensive neighborhood again.

As with last year’s post, the joke is on New York City. Because BLS is a nonprofit it can play land speculator while only being asked to pay $10,000 to the city after lopping off its full bill for “faculty and student housing.” Hopefully NYC will get more from 2 Pierrepont Street’s successors. The law school, though, is cashing in.

**********

Appendix: 2 Pierrepont Street’s assessment and tax bill:

Notice of Property Value–2 Pierrepont St

Property Tax Bill Quarterly Statement–2 Pierrepont St

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.

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