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December 5, 2011 7:16 PM

Law School Debt Bubble, Part II: Data Show Feds Will Lend $54.3 Billion to U.S. Law Schools by 2020

Posted by Matt Leichter

Two weeks ago, I used U.S. News and Official Guide data to show that in 2010, 44,245 ABA law school graduates took on $3.6 billion in student loans, a sum that increased from $3.1 billion in 2008.

The increases occur because Congress allows law students to fully finance their legal educations (and living expenses!) with a combination of $20,500 in Federal Direct Stafford Loans and Graduate PLUS loans that cover the remaining cost. Consequently, the amount of debt law students will take on will increase exponentially into the future to pay for rampant tuition increases, leaving Congress with no alternatives involving 199 J.D.–conferring law schools employing 22,000 people at their current salaries. Indeed, the solution will not be pretty for the profession's reputation—or for taxpayers.

While the available U.S. News data only cover three years, the American Bar Association's Section of Legal Education's Web site provides an almost insignificant PDF titled, "Average Amount Borrowed for Law School," which begins in the 2001–02 school year and ends in 2009–10.

I doubt the law schools sent the ABA the actual debt numbers for 45,000 graduates. It's more reasonable to believe that they took the average of their students' debts and sent those numbers to the section. In other words, what you see on the PDF is likely the average of law schools' reported average graduate debt levels. To test the ABA's version’s accuracy, we can compare it to the U.S. News numbers (without filling in missing entries for schools that didn't report to it).

 

YEAR ABA PUBLIC U.S. NEWS PUBLIC DIFFERENCE
2008 $59,324 $62,222 -4.7%
2009 $66,045 $66,445 -0.6%
2010 $68,827 $70,795 -2.8%

*****

YEAR ABA PRIVATE U.S. NEWS PRIVATE DIFFERENCE
2008 $91,506 $95,234 -3.9%
2009 $100,003 $101,537 -1.5%
2010 $106,249 $107,141 -0.8%

These numbers are close enough that we can use them for debt projections.

Average Graduate Debt Levels (ABA)

And, yes, the ABA's debt figures closely track three-year average tuition levels, at least for private law schools. For public law schools, I added one year of nonresident tuition to two years of resident tuition; comparing it to the projected debt level, it falls a little short. This suggests one of two things: either a large proportion of people who go to public law schools move to different states and pay at least one year of resident tuition, or public law school students are taking on more debt now than they were before the turn of the century.

Graduate Debt Levels w Tuition (ABA)

With the ABA data in hand, there are three more things we need in order to determine total law school graduate debt: the number of graduates, the breakdown of graduates (public/private), and how many of those graduates took on debt. According to the Official Guide, the average split between public and private law school grads between 2008 and 2010 was 35/65. In the same period, according to U.S. News, 85 percent of all public school grads took on debt compared to 84 percent of private grads. Using these estimates we can compare total graduate debt for the classes of 2008 through 2010 with the two methodologies.

 

YEAR ABA GRAD DEBT U.S. NEWS GRAD DEBT DIFFERENCE
2008 $2,947.0 mln $3,147.1 mln -6.4%
2009 $3,267.2 mln $3,371.4 mln -3.1%
2010 $3,473.7 mln $3,620.8 mln -4.1%

It appears the ABA data are more generous than U.S. News's, placing total graduate debt at $3.4 billion rather than $3.6 billion in 2010.

Using the 35/65 public/private grad split and U.S. News's average percentage of students who take on debt assumptions from above, we can calculate how much total law school graduate debt law grads took on going back to the 2001–02 school year.

(We should note that only two of the 16 law schools that received ABA accreditation between 2001 and 2009 were public schools—Irvine received accreditation in summer 2011, so it is not counted)—so these numbers likely overestimate the totals because the proportion of public law school graduates would have been greater at the beginning of the decade—say, 37 percent—than now. In other words, most of the enrollment growth over the last several years has gone to private law schools, whose students borrow more to pay higher tuition.)

Total Annual Law Graduate Debt

Since the debt levels are growing exponentially, we can easily project the graduate debt levels for 2020 grads.

Total Annual Law Graduate Debt Projections

It appears legal education has been one of America's winning industries over the last 20 years, posting an estimated 6.9 percent annualized growth rate in terms of debt-revenue alone, though that's a slight overestimate due to the relatively greater number of graduates between 2001 and 2009 than in the previous years.

The projections show that total annual graduate law school debt will double by the end of the decade ($7 billion/year). That may sound extreme, but it's actually a conservative estimate given that many public law schools are rapidly "privatizing" by going off state subsidies. State governments' prolonged fiscal problems will cause more public law schools to reduce their reliance on state support, as Minnesota State and Arizona State already are. Public law schools will supplement subsidy shortfalls with tuition increases and alumni donations. The projections add up  to $52.2 billion of debt placed on the shoulders of roughly 500,000 future law graduates.

In 2010, the total average debt for graduates who borrowed money to attend law school was $97,310. At current enrollment rates, 44,706 of the 53,000 people expected to graduate from law school in 2020 will take on debt, and their total average indebtedness will be $156,977 ($118,128 for public grads, $178,179 for private grads).

Actually, $52.2 billion isn't completely accurate because not everyone who starts law school finishes. The ABA kindly furnishes us with another PDF that tells us what law school attrition rates are by year (if you do the math, you'll find that about one entering student in eight drops out). The ABA figures don't tell us what the rates are by public or private law school (the Official Guide would), though I'd guess the attrition rate is higher for private law schools than public ones. Nor do they tell us how many of them took on debt. I'll use the previous estimates anyway and add the following:

(1) Dropouts paid half their last year's tuition, so 1Ls paid 1/6th of what they would've paid as 3Ls, 2Ls 3/6ths of what they would have paid as 3Ls, and 3Ls 5/6ths of what they would've paid had they not left. It's a crude average, but fair. I projected the average public and private tuitions for the next two years.

(2) Those who dropped out never came back and finished (or left again).

(3) They all paid with debt.

For some reason, the 2008–09 school year is missing from the attrition PDF, so I averaged the numbers from the previous and subsequent years to fill the gap. I'm omitting 4L attrition. These students are few in number, and I suspect many of them returned to complete their degrees later. Here's what we get:

Total Annual Law School Debt

Total Annual Law School Debt Projections

Factoring in attrition adds about 4  percent to the debt totals, increasing the ten-year sum to $54.3 billion, an additional two billion dollars the Department of Education  will disburse. According to the Office of Management and Budget, the U.S. will issue a grand total of $1.216 trillion in direct loans to all forms of higher education between FY 2011 and FY 2020 (Table S-12, and yes, you read that right: student debt will be an embarrassing disaster for the federal government). $54.3 billion of that will be new law school loans (4.5 percent), if the government's estimates are comparable. I don't think anyone has an idea how much existing student debt is held by law students, but given what the ABA data already show and looking backward, it's probably between $10 billion and $30 billion. Knowing how little job growth there will be for lawyers going forward, it is clear that the federal government will waste a lot of money supporting the legal education system due to the impracticability of loan repayment under even 25-year repayment plans. Law school debtors will have no choice but to heavily rely on ED's Income-Based Repayment program (IBR).

I'm in favor of IBR because it's better than nothing for overleveraged law graduates, but endless law school tuition increases makes this a losing program for the Department of Education and taxpayers, unless the interest from other higher education loans covers the forgiveness of billions of dollars in law school debt after 20 years. However, I doubt the Congressional Budget Office, much less the Office of Management and Budget, has projected IBR's effects 20 years from now using fair-value accounting as opposed to the accrual accounting method the government is currently required to use by law.

Meanwhile, as the above analysis shows, the projected doubling of annual law school debt over ten years all but verifies that law schools are claiming to the Education Department and Congress that law students must spend billions of federal dollars on educations that in many instances are overpriced and unnecessary for the economy at large, to say nothing of the students themselves. The only responsible solution is for Congress to terminate the Direct Loan Program and find an equitable and painless way to write down law students' debts, which will likely include restoring standard bankruptcy protections to all student loans, public and private. However, without freely available, bankruptcy-proof student loans, scores of ABA law schools will be forced to retrench, consolidate, and close. The American public will not miss them.

Matt Leichter is an attorney licensed in Wisconsin and New York, and he holds a masters in International Affairs from Marquette University. He operates The Law School Tuition Bubble, which archives, chronicles, and analyzes the deteriorating American legal education system. It is also a platform for higher education and student debt reform.

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