Thursday, April 29, 2010

The Next Bubble: Law School Tuition

A bubble is a bubble. I would venture that a similar situation is going on with university tuition in general. My son is 11 now, and I'm already shocked by the current undergraduate tuition rates, especially at public institutions. My wife's current law school tuition is about $15,000 per year, which I think is somewhat reasonable and a worthwhile investment. Undergraduate, in-state tuition at the same school runs $9,400 per year. THAT is ridiculous.

The Next Bubble: Law School Tuition:
"It’s one thing when I write about how crushing law school debt has impacted the value proposition of going to law school. I’m just repeating what every jobless 4L already knows. And prospective law students, 0Ls, have already proven that are too full of themselves to take out a calculator before they commit to three years of debt financing.

Because new students can’t seem to act in their own self-interest, it’s unlikely that change will come from below. Despite the proliferation of blogs by recent graduates trying to educate others about the danger of going to law school, new students keep signing up in record numbers. Law schools are not under any pressure to control tuition hikes when the demand for legal education is higher than ever.

But perhaps change can come from within. The legal blogosphere has been buzzing about an article penned by Christine Hurt — a University of Illinois law professor. She argues that there are similarities between the student loan “bubble” and sub-prime mortgages.

It’s an argument that many current law students are already familiar with, but Professor Hurt distills the main points for those that have simply not been paying attention…

Writing for The Conglomerate, Professor Hurt nails the parallels between the situation facing recent law school graduates and the housing crisis:
For a couple of decades now (and until a few years ago), the conventional wisdom was that real estate would always rise in value and that the world would always need lawyers. Home ownership at whatever cost, particularly with tax-deductible interest rates, was better than alternatives such as renting; financing a law degree with student loans, some of which was low-interest and tax-deductible, was an equally good investment given the value of the law degree. Just as something about home ownership seemed intrinsically good, so did getting a law degree, from any law school. Strangely, most law school educations were priced similarly. Law schools with lower employment rates charged more money than some schools with higher employment rates. Price was not a clear signal of quality. Anyway, more and larger houses were built; more and larger law schools were built. Then, as if on a dime, the world changed and all of a sudden lots of people with law degrees were getting laid off, deferred, ignored. The legal market was shrinking or changing in a seemingly semi-permanent way. We found out from Bill Henderson that the market for graduates was not what the “mean” employment statistics seemed to be touting. But more students came, financing the journey with student loans premised on promised salaries that have de-materialized before our eyes.
At least when the housing bubble burst, housing prices came down across the board. So far, that’s not happened in the educational debt market. During this recession, law school tuition has continued to go up. Think about that for a second: in the middle of a global recession, a global credit crunch, law schools are charging more money — forcing students to take out on more debt at the very same time when the legal jobs needed to pay off those debts are disappearing. It’s hard to get a loan to start your own business, but it’s still easy to get money to get an education that isn’t worth what it used to be. Law school tuition might be recession proof, but student debt repayment is not.

Hurt’s article was picked up by the Chicago Tribune. But the paper chose to focus on the fact that tuition isn’t going up as much as in the past — as if somehow tuition hikes are inevitable regardless of how terrible the economy is for law school graduates:
The recession already has forced law schools to rein in tuition hikes that were well above inflation for the last 25 years, including double-digit increases in many years. Last fall, Northwestern University’s law school raised its tuition by about 4 percent, its smallest increase in 32 years, said David Van Zandt, its dean. Its annual tuition is still among the highest in the country at $47,202.

Van Zandt said the small tuition hike reflected the tougher job market students face, even at one of the nation’s elite law schools. Northwestern could justify bigger increases in the past because typically about 70 percent of its graduates find jobs at the nation’s largest 250 law firms, where starting salaries had reached $160,000.
A 4% tuition hike might be “small” from a certain point of view. But it’s infinitely greater than the percentage hike of a Biglaw starting salary this year — which I believe is 0% unless my math is wrong.

But do you know what the real bitch of it is? If it turns out you made a terrible investment by going to law school, it’s impossible for you to get out from under your mistakes. You can’t discharge law school debt through bankruptcy absent a showing of undue hardship. As Hurt points out, you are arguably in a worse position if you are saddled with law school debt than if you took out a sub-prime mortgage that you couldn’t afford:
How can someone write off $100,000 or $200,000 in student loans as a bad call? Many of these loans aren’t federal loans — they are from private lenders at high rates. And, unlike homeowners, law students don’t have a “put” option — they can’t tell lenders to take their law degrees and quit calling them.
You can’t re-sell your law degree at a huge loss (unless you’re this guy). You can’t rent out your law degree. You can’t even hire the mafia to burn down your law degree and reap an insurance payout. The cost of your law degree just sits on top of you. Law schools are releasing an army of mid-twenties professionals who start off six figures in the hole and will spend their prime earning years just trying to get back to a net worth of $0.

Law school tuition doesn’t need to go up more slowly. It doesn’t need to flatline. It needs to go down, drastically.

Everybody is up in arms about Goldman Sachs allegedly selling products it expected to fail. How is that any different than the scam being run by some law schools where the tuition keeps going up while the job prospects disappear?

Minding Our Own Business Forum: Bubbles, Student Loans and Sub-Prime Debt [The Conglomerate]

Law school tuition hikes spark talk of bubble [Chicago Tribune]

Law Prof Sees Parallels Between Tuition Hikes and Subprime Mortgage Bubble [ABA Journal]

Earlier: The Hubris of Would-Be Lawyers"

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