My article in the Winter 2015 issue of the American Bankruptcy Institute Law Review, “Bankruptcy and Bad Behavior — The Real Moral Hazard: Law Schools Exploiting Market Dysfunction,” is now available on the Social Science Research Network. (Free download)
Here’s a teaser.
Loose talk about “the market for law school graduates” and related optimism about future employment prospects for entering students lack analytical rigor. That’s because the job market for new law school graduates is not a single market at all. Rather, graduate employment opportunities vary tremendously across distinct law school submarkets. But tuition and resulting law student debt often bear little relationship to graduates’ employment outcomes.
Current federal policies, including unlimited educational loans that are not dischargeable in bankruptcy, ignore these differences in law school submarkets and confound the operation of a true market. Those policies allow many law schools to exploit the resulting moral hazard, namely, the absence of accountability for their graduates’ poor employment outcomes.
I propose a solution that will make many law school deans, admissions officers, and faculty squirm — as they should.
The Belly of the Beast 
Nice job!
Good piece. I think your argument would have been stronger if you had addressed in some way the potential gamesmanship that schools could do to get to the percentage FTLT-JD for funding that you suggest. In particular, if your proposal were accepted I would expect schools to go even further down the road of offering year-and-a-day school funded positions to their graduates to bolster their numbers.
Thanks. My proposal does not allow schools to include law school-funded positions in calculating their FTLT JD-required employment rates. That gamesmanship would end.
Ah. Fair enough. I think I must have missed that part when I read the paper.
Calling this “market” dysfunction is a misnomer. The root problem is the unlimited supply of loans offered by the federal government. Absent that non-market subsidy, most of this problem goes away.
Why exactly is there a blanket student loan policy for lawyers anyway? Does anybody claim that, absent federal guarantees on law school loans, there would be an under supply of attorneys (as a group)? And if subsidies are a good idea in individual cases (they may be), why isn’t the school itself offering the subsidy?
It’s not a misnomer. Federal subsidies combine with non-dischargeability of educational debt to make the law school market dysfunctional. In fact, it doesn’t get a chance to operate at all.
“Federal subsidies” necessarily imply a non-market price. Blaming “the market” that results is like blaming “the market” for the “shortage” of apartments when rents are price-controlled. The solution is to remove the market distortion and let market participants face market prices.
You say “market distortion”; I say those very distortions produce what I call a dysfunctional market. The important point is that we seem to agree that what is happening does not produce outcomes that would result from a functioning market that is free of those distortions.
“The root problem is the unlimited supply of loans offered by the federal government.”
Yes and no. While unlimited GradPLUS are currently allowing law school tuition to rise uncontrollably, those loans have only been available since 2006. Before 2006, one could only borrow about $60k for graduate school from the feds. Law school tuition has been growing like mad since the mid 1990’s. What precipitated that earlier growth? Equally unlimited private loans – which students would have to rely upon if GradPLUS were curtailed or repealed. Private student lending is still a >$10 billion/year industry, and actors like Sallie Mae would dearly love to increase it. They bundle the loans together as SLABS (Student Loan Asset-Backed Securities) and sell them on Wall Street, so why not? Heck, a consortium of about 195 or 197 law schools ACTUALLY OWN A PRIVATE STUDENT LENDING ORGANIZATION THEMSELVES, Access Group. It is folly to think that law school pricing would collapse if GradPLUS collapsed; rather, students would have to borrow six figures from the private sector and face down $1500/month to $2500/month student loan payments almost immediately after they pass the bar, with no IBR/PAYE/PSLF eligibility and few to no forbearance or deferral options.
Your quoted sentence does not appear in anything I wrote. But fundamentally, we agree on the key point: For a long time, law schools have had no accountability for their graduates’ poor employment outcomes because they have no financial skin in the game. The combination of federal student loans (and guarantees) and non-dischargeable educational debt leaves law schools with every incentive to increase tuition and enrollment, regardless of what the job market for their graduates may be telling them.
@Professor Harper,
I was responding to “Jeremiah Ouaouaron” and the quote was his.
Aha! Thanks.
P.S. “Pure” private loans have never had federal guarantees; only the defunct FFEL program had them. If you or I were to borrow $200k from Sallie Mae or Access or Citibank or Nelnet or whomever for law school instead of taking out federal GradPLUS loans, there would be no federal guarantees on those loans. It is the bundling and selling of those loans that provided the safety margin, much like the banks that bundled and sold all their mortgages to Lehman. The big investors in SLABS – mostly pension funds and college endowments, from what I understand (college endowments investing in student loan asset-backed securities; how’s that for perverse?) are the ultimately bearers of risk.
Agreed. Private lenders got the undeserved (and market distorting) benefit of issuing student debt that was not dischargeable in bankruptcy.
I still remain baffled that none of the innumerable law school crisis articles have bothered to mention that nearly all of the accredited law schools (197, I think) jointly own a non-profit private student lender as a membership organization. I mean, talk about moral hazard! And as so many law schools bleed oceans of red ink while Access idly sits on something like $300 million in cash, it would be nice to have some manner of watchdog make sure no secret (and illegal) dividends start shifting from the latter to the former. It would be interesting to find out if Access, as a private lender and an instrument of the law schools, ever lobbied alongside Sallie and the other banks to make private student loans retroactively nondischargeable back in 2005.
It would also be nice if some newspaper article covered how the neoliberal think tanks – Brookings, Lumina, etc. – that decry IBR plans and unlimited GradPLUS loans also receive millions in funding from the Lumina Foundation, which was set up and given a $700 million endowment by… Sallie Mae. I fear that all of this oh-so-earnest handwringing about IBR losses and GradPLUS abuses are really just Trojan horses to bring private lending back in a big way.