Bankruptcy And Bad Behavior – The Real Moral Hazard: Law Schools Exploiting Market Dysfunction by SSRN
Northwestern University/Northwestern School of Law
April 1, 2015
American Bankruptcy Institute Law Review , Vol. 23, No. 1, Winter 2015 Forthcoming
Abstract:
The widespread discussion about the market for law graduates ignores an essential fact: it’s not a single market at all. Employment opportunities vary dramatically across schools, yet tuition prices fail to reflect those differences. As a consequence, many schools with the worst placement rates burden their students with the highest levels of educational debt. How is that possible?
The answer is market dysfunction. Current federal student loan and bankruptcy policies encourage all law school deans to maximize tuition and fill classrooms, regardless of their students’ job prospects upon graduation. This law school moral hazard combines with prelaw students’ unrealistic expectations about their legal careers to produce enormous debt for a JD degree that, for many graduates, does not even lead to a JD-required job.
This article proposes a way to identify three distinct law school submarkets. Using those submarkets, it offers a plan to create a more functional market that enhances law school accountability, encourages meaningful price differences among schools based on outcomes, and spurs innovation.
Bankruptcy And Bad Behavior – The Real Moral Hazard – Introduction
Law schools have become poster children for market dysfunction. The headlines are ubiquitous: Too many law graduates; too much debt; too few legal jobs. Dig a little deeper and the puzzle becomes more intriguing. Pricing is irrational; differences based on product quality do not exist. Students at schools with the least success in placing their graduates in full-time J.D.-required jobs incur the most debt for their degrees. The story has been years in the making. Since 1985, tuition at private law schools has nearly doubled every decade; at public law schools the rate of increase has been even greater.1 From 1988 to 2008, law school tuition grew at a rate exceeding all other sectors of higher education.2 Even during the Great Recession, the cost of a J.D. rose at virtually every school.
Perhaps most remarkably, the rising law school tuition tide has lifted all boats. As a consequence, student debt has soared. Median debt for the 86% of law graduates who borrow to obtain their undergraduate and J.D. degrees is just over $140,000.3 Of that total, $120,000 is for law school.4 At the seventy-fifth percentile of borrowers, student debt totals more than $190,000; a staggering $150,000 is for law school alone.5 Recent law graduates owe a disproportionately large share of the $1.11 trillion in educational loans, which now surpass debt incurred for automobiles ($875 billion) and credit cards ($659 billion).6
The dynamic has been perverse. Even in the face of collapsing demand for new attorneys, the price of attending law school increased along with enrollments. As the Great Recession deepened and attorney positions vanished from 2008 to 2010, the first-year class still grew—from roughly 49,000 to 52,000.7 Although the number of law school applicants dropped dramatically after 2010, the reduction in total first-year enrollment was much smaller.8 Ten years ago, a little more than half of all law school applicants secured admission.9 Today, more than three-fourths find a law school willing to accept them.10
At the macroeconomic level, a functional law school market would have produced different results: (1) price and supply would have decreased in response to falling demand; (2) a school’s tuition costs and resulting student debt would bear a reasonable relationship to the legal employment prospects for that school’s graduates; (3) new law schools would not have entered an already glutted market; and (4) existing schools unable to place the vast majority of their graduates in law jobs would have been closing their doors.
But the microeconomic level is even more interesting. Most of the academic discussion about post-graduate employment outcomes, as well as predictions of future financial opportunities for law graduates generally, ignores a key point: individual law schools operate in different submarkets. Conflating them serves the interests of schools in the weakest submarket, namely, those whose graduates have little prospect of obtaining a job that requires a J.D. It also obfuscates a meaningful analysis of the problems plaguing legal education.
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