THE PERILS OF LAW SCHOOL: RISING COST AND BLEAK PROSPECTS

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1 The 4 th Stocks Essay Contest Youngstown State University Copyright Kevin Hulick (2012) THE PERILS OF LAW SCHOOL: RISING COST AND BLEAK PROSPECTS Abstract: In recent years, the cost of law school has risen dramatically. Despite this, more people are attending. Generally considered a ticked to a better life, many graduates of law school are either unable to find employment or only able to attain employment that cannot adequately service the debt that they have accrued. This problem is exacerbated by law schools, who publish misleading employment data. In order to correct for this problem, more information must be provided to prospective law students, so as to formally educate them on the inherent risks of attending many law schools, if that education is financed by debt. Keywords: law school, student debt, information asymmetry. Yearly, more individuals make the decision to attend college. In fact, a New York Times article stated that this increase in higher education has lead to credential inflation (Pappano). This means that people are spending more time in school, earning advanced degrees such as master s degrees, or professional degree s. Moreover, they are doing so at a higher cost. Researchers have found that, over the past 25 years, higher education tuition and fees have risen more than four times the rate of inflation (Cronin & Horton). These two facts combine to create a scenario where people are staying in school longer at a higher cost. A microcosm of this issue is with law students. More so than other degrees, student who graduate with a juris doctorate are hamstrung by the debt incurred. According to the American Bar Association, An average student considering enrolling in law school now should thus expect to graduate with debt well in excess of $100,000. This becomes a problem as the ABA reports these costs often exceed the expected return on their investment in the job market. This has boiled over to a situation where fifteen law schools have had class action law suits filed against them (Zaretsky). This problem is a function of many things. The costs of law school are too high for many students. They are unable to find jobs that can adequately service the debt that they accrue over three years of legal education. Many students are misinformed of the state of the legal market and the nature of its compensation law schools even exacerbate this misinformation. There is a bimodel pay structure, which many individuals are not aware of (Rampell). The key issue that law students face is a lack of proper information. Many students do not realize what they are getting in to when they go to certain law schools. Employment statistics that many schools advertise are rather misleading. Many schools report hearty average starting salaries; however, that number is not accurate due to lack of reported information. Schools survey their recent graduate to ascertain employment and salary data; however, some individuals do not report this information and some that do report do not provide salary information. According to Efrati, Academics who have studied new-lawyer salaries say that the graduate surveys of many law schools are skewed by higher response rates from the most successful students. The lack of information warps the result s authenticity and paints an inaccurate picture. One organization has stepped in to attempt to provide more accurate information. This organization is Law School Transparency. They take information that law schools reports to U.S. News World & Report. They then point out how the holes in that information. For instance, how much of a certain graduating class responded to a survey, and additionally, as a percent, how much of that graduating class reported salary information. For instance, New York Law School, one law school which has faced a class action lawsuit, demonstrates the lack of clarity that a cursory report of the data can provide. New York Law School reports that 82.7% of its 440 graduates in the class of 2009 were employed nine months after graduation. It is important to note, however, that this is misleading. Employed simply means having

2 some profession, it does not necessarily mean that all of these individuals are in positions that require a juris doctorate. Moreover, only 26.9% of graduates reported a salary. The published data indicates a private sector median salary of $160,000. That is patently inaccurate, though. That number only includes 15.7% of the entire graduating class, or approximately 30 out of 440 students. So, while it seems that the average student who enters private sector employment from New York Law School begins their career earning six-figures that is simply not the case. The data that schools advertise paints a much rosier picture than is truly present. The dean of New York Law School admitted as much. He admitted that most graduates of New York Law School find work in small to medium firms at salaries between $35,000 and $75,000 (Segal). It is important to point out, however, that some schools do provide quite transparent employment data. For instance, the University Of Virginia School Of Law recently aggregated comprehensive data for its graduating classes from 2008 to In that three year period, they graduated 1,182 students. Five of those students did not respond to the survey; six chose to pursue additional graduate studies; four were still seeking employment; and six were not seeking employment. All of those individuals were not calculated into the school s employment rate as employed. This totals to an employment rate slightly above 98%. The school also reports that sixtysix of their recent graduates were employed by the law school. If more schools took the approach that the University of Virginia did in publishing such detailed and accurate employment data, individuals would be able to make a more informed decision. Virginia also offers a break down on what type of employment its graduates have obtained, in addition to a comprehensive listing of salaries. Of their employed graduates they point out that slightly over 97%, or 1129 out of 1161 employed graduates, are employed in jobs that require a law degree. 27 graduates are in jobs classified as JD-preferred. The remaining five graduates are in other fields of employment. The school also has offers information that details the size of law firms in the private sector where graduates end up working. The classifications are based on number of attorneys at a given law firm. (Virginia reports that 815 out of 1182 graduates are in private sector employment, or almost 69% if graduates from ) The table below provides a break down and approximate percentages: Number of Attorneys Number of Graduates As a % of Employed Private Sector Graduates As a % of total graduates % 48% % 9% % 5% % 2% % 0.4% % 0.8% % 2% % 0.08% Unknown % 1.1% In addition, Virginia also provides salary ranges for the private and public sectors of employment. That information also comes with response rates on salary information. For the private sector, the median, seventy fifth percentile, and the twenty-fifth percentile salaries for Virginia grads in 2008 and 2009 were all $160,000. The 2008 response rate was 89% and the 2009 rate was 86%. Those response rates are in sharp contrast to the 26.9% response rate of New York Law School Class of 2009 graduates.

3 A comparison between the statistics between the two schools provides starkly contrasting results. New York Law School s information indicates that approximately 15 students had a starting salary at or above $160,000. For the class of 2010 at UVA, however, 214 individuals who worked in the private sector reported salary information. The 25 th percentile of that range was $135,000. That means, at least 160 individuals had a starting salary of $135,000 or above. That number actually provides some predictive value, as opposed to the median salary figure at New York Law School, which only accounts for approximately 15 students at or above the median. Moreover, New York Law School has a higher class size than UVA. Another misleading fact about the field of law is the salary distribution. Rampell notes that the average salary for lawyers is around $90,000. The problem with that however, is that very few lawyers actually make $90,000. The salary distribution is bi-modal. The graph below, provided in Rampell s article validates this assertion. The two main clumping of salary distribution appear at $160,000 and the $45,000-$65,000. In fact, only around five percent of graduates of the class of 2009 who gained employment in the private sector reported a salary between $85,000 and $95,000. This makes the average starting salary a very poor metric. Coupling the bi-modal salary distribution with the increasing costs of law school and the increasing debt that accompanies those higher costs young potential lawyers are placed in a boom or bust scenario. Either they get a job that allows them to pay back the high costs of law school, or they struggle to make payments out of their below- average lawyer salary. Numerically, for those who take out large loans and hit the jackpot, the $160,000 starting salary, the debt would be manageable; however, it would not appear so for students who are on the other end of the salary spectrum. For instance, if an individual took out $150,000 their monthly payment under a ten-year repayment plan at seven percent interest would be $ Before taxes, an individual making $50,000 makes $ per month that is before taxes. That is a little over forty percent of one s pre-tax income! The debt level at that salary is unbearable.

4 Moreover, there is no indication that salary levels drastically rise for those that start out in the lower salary clump. All of this is new and fast-developing. The issue really has started to gain traction as class action lawsuits have been filed. Based on the ruling in the case against New York Law School, however, it does not seem that law schools are doing anything illegal (Dolmetsch). Instead, schools are just representing information in a light most favorable to them, not distorting data. The situation has created a market where the supply of lawyers exceeds the demand. In relation to the rest of the economy, the legal sector is growing, half as fast as the broader economy (Efrati). While the demand for lawyers has slowed down in recent years, the supply has not. This influx of new students is a function of a few things including, the accreditation of new law schools and an influx of applicants (Efrati). There is no silver bullet to fix this situation. If a university meets the set criteria, it has the right to open a law school. Students choose to attend these schools. Granted, these students are not necessarily the most-informed; however, there is little evidence to suggest that law schools are defrauding students in any sort of way. That said, however, mechanisms can be put into place that could assuage the situation and help correct the market imbalance that currently exists. While markets are generally self-correcting if left to their own devices, a pure free market outcome is not possible here. First, the federal government has injected itself into the market by providing loans for prospective students to attend school. This is an issue of equity. It is viewed by many as a right for people that qualify for the opportunity to attend school and receive higher education; thus, necessitating the intervention of the government to aid those students in funding their education. The second reason for government intervention is critical and extends beyond notions of equity. Perfect competition is based on free information and equal access to information; that is not found here. Law schools have a huge advantage in the amount of information available. This takes away concepts of perfect competition. Law schools have information on the prospects that graduates of their school can expect. Many students do not. Part of that is societal; however, another large factor behind that is the misinformation provided by law schools. While not telling students that are not true, law schools are not providing accurate information. For instance, there is nothing to suggest that the information provided by New York Law School is in any way untrue. It is, however, limited. The salary information is most likely authentic; however, it is only for a small percentage of the overall graduating class. Its predictive power is near nothing. The idea of misinformation is similar to the controversy over prescription drug advertising. There are those that argue that drug companies misrepresent information that does not accurate and underplays the true risks involved with certain drugs ( Should prescription drug ads be reigned in ). Essentially, like drug companies, law schools make their product seem more appealing, by misrepresenting the data. This type of situation needs remedied. Attention has started to be placed on the issue. Even though the class action suits seem futile, based on the outcome of the case involving New York Law School, they will at least raise awareness on the issue. Moreover, the work of organizations such as Law School Transparency is a very positive step in the right direction. Part of a solution would be to have an independent third-party verify this information and ensure its accuracy. Also, there should be some type of minimum threshold in terms of response rate, so as to prevent for distortion from selection bias. For instance, if three-fourths of the graduating class does not provide information, than that particular metric ought not be published or advertised by the law school. The best option would be to have the government implement regulations on base requirements that must be met in published information. Another method that has been established to help students is income-based repayment (IBR) of federal loans. Under this formulation, students only have to pay back a percent of their debt in monthly payments, based upon the income that they receive. So, if a graduate ends up in the lower mode of the bi-modal salary distribution, they would not be completely crushed by the debt. Instead, they would take a long period of years to pay off that debt. If the loan is not repaid after

5 twenty-five years of proper payments, the loan is forgiven. So, for some, part of the original loan is not paid off, if the individual makes their payments on time and does not make enough income to pay off that debt. While that solution is helpful to those who are currently in such a struggle, it does not really solve the problem. Instead, efforts must be directed to prevent that type of situation from occurring. Instead of cleaning up the milk as it spills out of the loose carton, it is imperative to seal the leak so that more milk does not trickle out. IBR is a great idea; however, it is must be combined with an increased flow of information to prevent the problem from occurring in the first place. The rising costs of education and the over-saturation of markets are demonstrated by the current law school crisis. The huge amount of information asymmetry is problematic and is the key source of the issue. If prospective students had better knowledge of the bimodal nature of the legal profession, less people would be inclined to go to law school. Some still would attend; however, the problem would be less dire. Law school class sizes would better reflect the demand of the legal market and less individuals would be paralyzed by the debt accrued over three years of legal education. IBR programs are a good stop-gap solution; however, the main fix that needs to be focused on is the free flow of information to allow students to make a fully informed decision Words References Cronin, Joseph, and Howard Horton. "Will Higher Education Be the Next Bubble to Burst?." Chronicle of Higher Education. 22 May 2009: n. page. Web. 13 Apr < Dolmetsch, Chris. "New York Law School Wins Dismissal of Suit by Ex-Students." Businessweek. 21 Mar 2012: n. page. Web. 13 Apr < 21/suit-against-new-york-law-school-dismissed-by-state-court-judge>. Efrati, Amir. "Hard Case: Job Market Wanes for U.S. Lawyers." Wall Street Journal. 24 Sep. 2007: n. page. Web. 13 Apr < "Employment Data for Recent Graduates." University of Virginia School of Law. University of Virginia School of Law, n.d. Web. 10 Apr < Mitchell, Josh, and Maya Jackson-Randall. "Student Loan Debt Tops $1 Trillion." Wall Street Journal. 22 mar 2012: n. page. Web. 13 Apr < Pappano, Laura. "The Master's as the New Bachelor's." New York Times. 22 Jul 2011: n. page. Web. 13 Apr < Rampell, Catherine. "The Two-Track Lawyer Market." New York Times. 26 Jul 2010: n. page. Web. 13 Apr < "Should Prescription Drug Ads Be Reigned In?." New York Times. 04 Aug 2009: n. page. Web. 23 Apr < "The Value Proposition of Attending Law School." American Bar Association. ABA Commission on the Impact of the Economic Crises on the Profession and Legal Needs, Nov Web. 13 Apr < Zarerstky, Staci. "Twelve More Law Schools Slapped with Class Action Law Suits Over Employment Data." Above the Law. 01 Feb 2012: n. page. Web. 13 Apr <