Spring is here, which means that it’s acceptance letter season around many American kitchen tables this time of year. And because many graduate as well as undergrad schools send out acceptances around this time of year, both high school and college students will be checking the mail to see whether the school of their choice has sent fat or thin envelopes.More than ever in these tough times, those letters will pose some hard choices in many families. To attend a more expensive liberal arts college or go for the scholarship at the bigger but less expensive state school? Does it really make sense to take out all of that debt for that graduate degree?Many millions of students nationwide are now beginning to think about their local junior colleges, trade schools, or even start-ups as sensible post-secondary options. At the graduate level, if trends hold, close to 50,000 students, most of them probably liberal arts graduates without any real idea of what they want to do with themselves, will sign up for law school.It’s all quite exciting for students and their families. It’s also expensive – often more so than young people realize. For those considering law school, Professor Paul Campos analyzes the picture at his blog. Close to half of all of law school graduates, he emphasizes, end up working not in big law firms, but in “small law” (firms of two to ten lawyers), or opening up their own solo practice. Given the relatively low salaries in small law firms and the high overhead costs of founding a new law firm (conference rooms, legal databases, bar fees), most young lawyers can look forward to no more than a median salary of $50,000, with those in the 75th percentile looking forward to … $62,500. That’s higher than the median income in the USA, but the real problem is the level of compounding indebtedness that can’t ever be paid off. Writes Campos:
People with $125,000 of high-interest educational debt and a salary of $50,000 will, if they don’t have very significant alternative sources of income, have to go into IBR, (assuming they’re eligible, and that the program isn’t eliminated) where they will have a monthly payment equal to about a quarter of what they would owe on a 30-year repayment schedule for their loans. This means, of course, that something like ten thousand dollars in interest will accrue onto their balance for every year in which they remain in this situation.
In other words, for many young Americans, going to law school will mean literally signing away their financial independence for the rest of their adult lives. They will spend the next twenty-five years of their lives (if they never earn more than their Income-Based Repayment amount) — ten years if they work in public service — servicing debt they incurred for a skill that didn’t pay off. They might spend even longer before they are ever in the clear if they took those federal loans out before 2009 (when IBR kicked in), or if they have high interest private loans.This isn’t just a problem for the people involved. The result is a situation no one wants: young people who aren’t in a financial position to make major steps in life — marriage, purchasing a home, having children, or saving for retirement — because they spend the majority of their life financing a decision they made at 22.Young people should feel empowered, even encouraged, to take on loans to finance their education to leverage their future expected earnings against the costs of education in the now. But it’s clear from macroeconomic data — consider this recent report from Fitch Ratings and an excellent blog post by the Federal Reserve Bank of New York — that the combination of more or less unregulated federal backing of student loans plus the inability of twenty-somethings to grasp the shape of the working world of the future is creating an ugly mess. Discussing the investment prospects for asset-backed securities (ABS) funded by the interest payments on student loans, Fitch’s analysts write:
The Federal Reserve Bank of New York recently reported that as many as 27% of all student loan borrowers are more than 30 days past due. Recent estimates mark outstanding student loans at $900 billion-$1 trillion. Fitch believes that the recent increase in past-due and defaulted student loans presents a risk to investors in private student loan ABS, but not those in ABS trusts backed by FFELP loans.
That sounds like a sequel to the mortgage crisis, when “subprime” mortgage debt was repackaged into toxic CDOs. But the data from the New York Fed suggests that the student loan situation is even more grim. Past due balances represent about 10 percent of the roughly $870 billion in outstanding student loan debt in the United States, notes their team. They ask:
To put this in perspective, the same 10 percent rate applies on average to other types of household delinquent debt, including mortgages, credit cards, and auto loans. Does this mean that the prospects for student loan delinquencies are similar to those for the household debt in general, and thus no special attention is warranted?
The answer is no. The report points out that
as many as 47 percent of student loan borrowers appear to be in deferral or forbearance periods, and thus did not have to make payments as of third-quarter 2011. Specifically, 17.6 percent of borrowers had exactly the same balance in the third quarter as in the second quarter of this year, and 29.1 percent increased their overall student loan balance by taking on new originations or accruing interest to the balance.
In other words, one reason we don’t see a bigger student loan meltdown is that so many people are going back for more degrees if only to defer the reckoning. As much as $408 billion dollars in student loan debt remains on the books without any medium-term prospects of repayment. Those former career students (who may not be learning much on campus) can look forward to decades of debt, unless the American taxpayer can be convinced to pay for a program almost the size of TARP to finance all of those master’s degrees in peace theory, business communications, recreation management and creative writing.Given all of this bad news, Via Meadia is delighted to see that at least the intellectual standards of the course offerings at American universities remain high. At Yale ($218,025), students this spring can attend a reading group in “Joy and the Law” with Professor Christine Jolls. Presumably the good professor will include some sessions on the joys of debt.At Albany Law School (total cost: $182,025), meanwhile, Professor Patricia Salkin is teaching students Introduction to Chinese Law, a course which includes a ten-day trip to Beijing, Xi’an, and Shanghai. “China is a major trading partner, a competitor and represents potentially a very large market for U.S. corporations,” says third-year Albany Law student John Forbush in explaining why he took the course. Because Albany Law students can count on their future clients having lots of business in China, he explains, it “is important for young lawyers to understand how the Chinese system works.”The real question here isn’t whether these courses are intellectually legitimate. For all VM knows, these could be serious and well constructed, though we can’t help but question how much China legal knowledge will come out of a ten day, three city tour.Rather, there seems to be a disconnect between what many law schools offer and what, realistically, their students need and can afford. The old legal education model of professors teaching glorified liberal arts classes to students soon thrust out into the real world and forced to learn on the job might still work at Harvard, Yale, and Stanford. The value of the blue chip credential still offsets the costs of attendance for many if perhaps no longer all students.But a very large number of the other 200 odd law schools in the United States might serve their students better if they turned the JD into a shorter, skills-based course providing hands-on experience at a cost that won’t throw young Americans into debt peonage. An internet-based program that prepped students for the bar exam might, for many Americans, be a much more effective and efficient way to get the skills they need for the $50,000 to $65,000 jobs at the end of the rainbow.There is also the question of lost time and lost income. Add the foregone earnings for three years in law school to the hefty tuition bill and the return on investment for conventional generic brand law schools starts looking much worse.America in any case has become too classroom focused. Too many young people are spending too much time in classrooms where, often, they aren’t learning much. Students in many fields would benefit from an approach to education that involved better integration of work experiences and academic courses. Spending 19 years in mostly quite mediocre classroom settings en route to a JD degree that won’t pay off seems like an incredibly stupid way to live; it’s hard to believe that Americans will continue indefinitely to accept the belief that more time in class = more smarts in head.There’s one upside, however. Apparently, the administrators at Albany have been listening to Via Meadia‘s calls to export American legal education abroad in order to undermine the prosperity of other countries by saddling them with a culture of litigation and tort lawyers run wild. Albany’s study abroad junket was preceded by a visit of Chinese law students to Albany and New York to learn from American lawyers. And with only 25 law schools in China for over a billion people today, in order for Chinese students to enjoy as much institutional choice as Americans on a per-capita basis, our friends in the PRC need at least 834 more law schools. Via Meadia says, help them build. If anything can stop China’s rise in its tracks, 834 American-style law schools should do the trick — especially if we can persuade them to saddle those hungry young lawyers with huge student loans.Image courtesy of Shutterstock.