THE NEXT DEBT CRISIS

One of the next big bubbles is educational debt. A recent article in The New York Times notes that it exceeds one trillion dollars — more than total consumer credit card debt. Meanwhile, according to The Wall Street Journalthe Federal Reserve Bank of New York reports that for those aged 40 to 49, the percentage of educational debt on which no payment has been made for at least 90 days has risen to almost 12 percent. Sadly, history will view these as the good old days.

Middle-aged education debt blues

Growing delinquencies among middle-aged debtors result from two phenomena. First, some people took out loans for their own education, such as the 50-year-old who woman told the WSJ that she got her bachelor’s degree in 2008. The recession pushed many newly unemployed workers into higher education as a way of reinventing themselves. For some, the strategy worked.

A second group consists of parents who took out loans to fund their kids’ education. A related Department of Education program is, according to the Journal, “among the fastest-growing of the government’s education loan programs.”

Now extrapolate

For anyone who thinks this problem is bad now, wait until today’s twenty-somethings who went to law school and can’t get jobs reach their forties. Indiana University Maurer School of Law Professor William Henderson has analyzed the origins and long-run implications of current trends. His article with Rachel Zahorsky, “The Law School Bubble,” describes them in thoughtful detail.

Recent graduates in particular know where this is going because many are already there: Lots of debt — averaging $100,000 for recent classes — and limited prospects of employment with which to repay it. Meanwhile, the nation’s law schools are turning out more than twice the number of lawyers as there are law jobs.

The problem is growing, but so is denial. Recent headlines proclaimed that a drop in law school applications must be a sign that the market is self-correcting. After all, first-year enrollment fell by seven percent — from 52,500 in 2010 to 48,700 in 2011. Now for some context: The current number is about the same as total one-L enrollment was each year from 2002 to 2006.

How are law schools responding to this continuing crisis? Some better than others.

Law school reactions

Deans at George Washington University, Hastings and Northwestern recently announced that they were considering plans to reduce enrollments. Meanwhile, Thomas M. Cooley Law School opened a new campus in Tampa where it has signed up 104 students — double the number it initially expected. Last month the WSJ quoted Cooley’s Associate Dean James Robb, who said that the school “isn’t interested in reducing the size of its entering class on the basis of the perceived benefit to society.”

All right, let society take care of itself. But how about the school’s students? Two weeks after the Journal article, the ABA reported recent law school graduate employment data that, for the first time, refined one category of “employed” to include only jobs requiring a J.D. degree. For that group, Cooley’s “full-time long-term” rate for the class of 2011 nine months after graduation was 37.5%. Remarkably, more than two dozen law schools did even worse.

I wonder how those who run Cooley — and many other law schools — would feel if they had to bear the risk that some of their alumni might default on their educational loans. For now, we’ll never know because: 1) the federal government backs the vast majority of those loans, and 2) even bankruptcy can’t discharge them.

Meanwhile, a court recently dismissed Cooley alumni’s complaint alleging that the school’s employment statistics misled them into attending. The most revealing line of Senior Judge Gordon Quist’s ruling is the conclusion:

“The bottom line is that the statistics provided by Cooley and other law schools in a format required by the ABA were so vague and incomplete as to be meaningless and could not reasonably be relied upon.”

Too bad for those who did. In some ways, the profession is a terrible mess — and it’s just the beginning.

DEBT, DECEPTION, AND THE ABA

The ABA kicked the can down the road again. When law schools classify their most recent graduates as “employed” in 2012, they still won’t have to disclose whether the jobs are part-time or require passing the bar. Anything and everything counts — which leads to this question:

Q: When are some law schools like for-profit colleges?

A: Every day.

Both groups are under increasing scrutiny for similar tactics. The Wall Street Journal doesn’t like the new efforts to hold for-profit colleges accountable. Recently, it used those initiatives to bludgeon a favored target:

“Where there’s money, there are trial lawyers…”

After the many WSJ articles about the rise of corporate big law’s multi-millionaires, such special disdain for greedy, non-corporate trial lawyers seems somewhat disingenuous. But I digress.

The editorial criticizes the government’s intervention in a whistleblower’s False Claims Act case against a for-profit college system and concludes with this non-sequitur:

“If the government thinks such schools are unfairly benefitting from federal subsidies, then it should cut off grants to all college students.”

Whoa, Nelly!

The Journal sidesteps the most important questions that the False Claims Act cases raise and that apply equally to many law schools: How do institutions of higher education recruit students and what happens after they sign up? When colleges are accused of “a boiler-room style sales culture,” it’s no answer to say “a recruiter’s job is to recruit.” Surely, the Journal‘s editorial board understands the importance of truthful information to the proper functioning of free markets.

For example, here’s information that for-profit colleges are loathe to emphasize: their student drop-out rate is over 50 percent. According to one report, only 38 percent graduate within six years (compared to 53 and 64 percent for public and private non-profit institutions, respectively). Another report of the ten largest for-profit schools puts their graduation rate at 22 percent.

Law schools don’t have those stunning drop-out rates, but two other criticisms apply to many of them:

Encouraging students to take on debt that can’t be repaid. Bloomberg News reports that for-profit colleges enroll 12 percent of all undergraduates, receive 25 percent of all student loan dollars, and account for almost half of all defaults. Only a day after its editorial, the Journal reported that the for-profit default rate had soared to 15 percent, compared to non-profit rates of 7.2 and 4.6 for public and private schools, respectively.

Ironically, the same edition running the editorial attacking efforts to increase for-profit college accountability also contained a small item on the front page: “Vital Signs” — a graph with this accompanying description:

“Americans are borrowing more for student loans. In July, consumers owed the government about $386 billion, largely for student loans, up from $139 billion two years earlier. However, during the same period of time, consumers pulled back on other types of borrowing, such as credit cards and loans for automobiles.” [emphasis supplied]

Evidently, a standard hot-button topic for the Journal‘s editors — “wealth redistribution” — isn’t so bad when the redistribution is from students to their schools.

Law schools? Almost half of their graduates incur more than $100,000 in educational loans. But the real tragedy that the ABA continues to facilitate involves ongoing deception about the prospects for getting jobs needed to repay them.

Misleading employment stats. For-profit schools’ recent battle over federal “gainful employment ” regulations mirrors the controversy over the way many law schools report employment data. Prospective students read about graduates who are “employed,” even though they’re performing tasks that don’t require the degrees that schools are trying to sell them. Likewise, law schools can call their graduates employed, even if they’re greeters at Wal-Mart.

Overwhelming educational debt is one of many terrible things happening to the next generation under the guise of “letting the markets decide” — however imperfect or distorted those markets may be. Whether for-profit or, like most law schools, run as if they were, educational institutions that pursue the myopic short-term mission of filling classrooms with tuition-paying bodies do their students a disservice. As the cycle of deception-debt-no jobs produces a bubble that is already beginning to burst, the resulting damage to the country will become increasingly obvious, too. Some of the “Occupy Wall Street” protesters are already making that abundantly clear.