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Reinflating the Law School Bubble?

Published:  October 17, 2012

One of the great mysteries of higher education is when, exactly, college prices will finally hit the Herbert Stein Unsustainable Trend Event Horizon. As a matter of simple logic, the price of higher education can’t grow faster than personal income forever--or at least, it can’t if we as a society aspire to keep college enrollment and completion at current levels, much less improve them. The combination of government subsidies and rising market prices for credentialed workers has forestalled the day of reckoning, and will probably continue do so for a while, absent some kind of disruptive competition (and wouldn’t you know it, the UT system just joined edX...). But there does appear to be a canary in the coal mine: Law school.

Since they tend to be financially independent and train people for potentially lucrative careers, even public university law schools charge students close to $50,000 a year. The whole market is bizarrely priced, with top-tier law schools that virtually guarantee entry into the upper echelons of the legal profession charging prices similar to bottom-tier schools that are basically running a legally-sanctioned racket. Over the last few years, the illogic of this has finally started to affect consumer behavior. The number of students taking the LSAT is dropping sharply as students appear to be reacting to the combination of high prices and a lawyer glut. This seems like nothing but a good thing, and probably a sign of larger trends to come.

But, as my colleagues Jason Delisle and Alex Holt have written, a valuable and well-intentioned federal government loan program could inadvertently re-inflate the law school bubble. The program is called Income-Based Repayment, or IBR. It’s based on the very sensible idea that student loan payments should be tied to student income. That way, borrowers struggling to make money in a tough labor market won’t be overwhelmed by their debt burdens and end up in ruinous default. In principle, IBR is a great idea and Congress did the right thing in 2010 by making it more generous, reducing the percent of income students have to pay and shortening the time period after which remaining debt is forgiven. The Obama administration sensibly acted to accelerate the implementation of that plan, which is getting underway this year.

The problem, however, is that the program seems to have been created with undergraduate borrowers in mind--people who are limited in the amount of federal debt that can take on and aren’t usually paying $50,000 per year. But IBR also covers people who take out Graduate Plus loans, which are only limited by the “cost of attendance” i.e. whatever the graduate or professional school decides to charge. And it turns out that if you borrow a ton money to go to law school and only have to pay back 10 percent of your income for 20 years, a whole lot of that debt will be forgiven. Under one plausible scenario, $160,000. That’s seven times more than students can get from Pell Grants.

What’s worse, this will benefit bad law schools the most. If you pay $49,950 a year to go Harvard Law, you’re probably going to make a lot of money, so even if you’re only paying 10 percent of that per year, you’ll pay most of your loans back. If, by contrast, you pay $43,600 a year to attend bottom-tier California Western School of Law, you’re much less likely to make a lot of money, which means much more of your debt will be forgiven by the government. And don’t take my word for it: look to the crack team of financial aid professionals at www.ibrloans.com who offer “Student Loan Advise” -- yes, that’s how they spell “advice,” all major credit cards accepted--who are currently touting IBR to California Western students on the grounds that “In 2010 the average indebted graduate from Cal Western School of Law owed more than  $145,000” and that under IBR they could have “Have over $100,000 of debt forgiven.”

Once everyone else catches on--and they will catch on--an unreformed IBR program could completely remove price discipline in a law school market that desperately needs it, with the worst law schools coming out as the biggest winners. Fortunately, the program is just getting up up and running and can be easily fixed by limiting the lower repayment rates to borrowers with lower incomes and extending the repayment period for people with large loan balances to 25 years. Otherwise, a smart and useful program could inadvertently result in a taxpayer-subsidized windfall for people and institutions that don’t deserve it.

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