Action Items

How the Education Department and Congress can set legal education back on track.

Actions Needed
A. Demand accountability
B. Eliminate blank checks
Extend Gainful Employment regulations
Eliminate GradPLUS Loans
Use the Cohort Repayment Rate

Department of Education / Congress

The federal government holds two keys to legal education. First, the Department of Education recognizes the ABA Section of Legal Education as the accreditor for J.D. programs. If the Department of Education is not satisfied with the ABA's accreditation standards and enforcements, the agency may revoke (or decline to renew) the accreditation authority. The National Advisory Committee on Institutional Quality and Integrity (NACIQI) is a federal panel that evaluates accreditors and recommends whether they should have accreditation authority. The NACIQI will reevaluate the ABA in 2016. Second, the federal government controls the purse strings, through accreditation because only accredited institutions and programs have access to federal student loans and through the statutes that sustain the federal student loan program.

A. Demand accountability: Both the Inspector General for the Department of Education and interested U.S. Senators should write law schools enrolling a significant number of at-risk students to ask how each school determined whether applicants appeared capable of completing law school and passing the bar, as well as an evaluation of how well the school adheres to its policies and procedures. These government representatives should also write the ABA Section of Legal Education about its enforcement of Standard 501 (the "do not exploit" standard) and Standard 316 (the "bar passage requirement" standard), its progress on using Rule 6 and Rule 7 to monitor the concerns identified by this report, and its plans to strengthen Standard 316.

Depending on the government's findings, a hearing within the Senate Judiciary Committee (because its jurisdiction includes the integrity of the legal profession) and/or the Senate HELP Committee (because of its jurisdiction over professional education and student lending) may be appropriate. It may also be appropriate for the NACIQI to recommend that the Department of Education revoke the ABA's accreditation authority if the ABA does not enforce its own standards and ensure that law schools are not exploiting students in order to remain solvent.

B. Eliminate blank checks: Our failing legal education system is propped up by federal student loans. Exacting changes to the federal loan program will drive prices down, making entry to the legal profession more affordable and accessible to all. The legal profession, for the sake of our society and the rule of law, needs to be capable of attracting people who can get through the now-present rigors of licensure and deliver justice for all. Transparency is great, and it has been effective, but the last leg to a more affordable and inclusive entry to the profession requires loan reform.

For years pricing has followed a willingness-to-pay model. Willingness was artificially inflated by borrowers' financial unsophistication and by misleading employment statistics, both against a cultural backdrop that reinforced law school as a ticket to financial security. Many justify tuition by pointing to a J.D. wage premium. In fact, this attitude is common throughout higher education. A fairer pricing model, however, does not ask how much post-graduation value your school can capture without reducing your investment's net present value to zero. Neither does it use aggressive price discrimination to provide more affordable access to the students most likely to succeed in the job market.

Rather, a fairer pricing model considers how paying for education affects your outlook in the short, medium, and long-term. Integrating these concerns looks beyond the net present value of human capital investment. It attunes all the aspirations you may have in life: a fulfilling career, owning a home, having a family, helping your community, saving for retirement, etc. Fundamentally, the model needs to acknowledge how paralyzing debt due to unconscionable prices impacts and undermines our aspirations. If obtaining an education burdens one or more of our basic needs, we need to question whether we can still celebrate "access to higher education."

The reforms below do not make fundamental changes to the federal loan program and pricing model, but nevertheless stem from recognition that affordability ought to be a cornerstone of the definition of access. Otherwise, access is an empty term, even if no student will technically lack the loans to pay educational costs. Today, no law student lacks access to expensive loans, but the debt penalty needlessly and senselessly mortgages decades of our future leaders' productive lives.

The Basic Contours of Today's Federal Lending Program for Law Students. A law student may borrow two types of loans from the federal government, one with limits (Stafford Loans) and one that is limited only by the annual cost of attendance at the institution they attend (GradPLUS Loans). The full cost of attendance is determined by the school and there are absolutely no limits on how much the school may charge for tuition or allow students to borrow for books and living expenses. Each year, law students may borrow up to $20,500 of Stafford loans, with the rest coming from GradPLUS loans. The Stafford Loan interest rate for the 2015-2016 academic year is 5.84%, with a 1.073% loan origination fee if before October 1, 2015 and 1.068% if after. The GradPLUS rate for the 2015-2015 academic year is 6.84%, with a 4.292% loan origination fee if before October 1, 2015 and 4.272% if after.

As this report shows, the loan program props up many law schools that admit a high percentage of students who face serious risk of not passing the bar exam. If the school can convince a student to attend, the subsidies flow no matter what. There is no accountability, taxpayers pick up the tab, and struggling graduates must pick up the pieces—all as a result of risky, irresponsible bets made by law schools.

The cohort default rate, which ties federal loan subsidies to loan default, provides the only hope of accountability today. But law schools, the ABA, and the fact that every ABA-approved law school student already has a college degree ensure that default only happens when a former student or graduate does not know better. Federal government hardship programs provide loan repayment plans to borrowers that delay, reduce, or eliminate payments without defaulting. The purpose of this particular accountability measure is not to ensure that students receive ample financial aid training, but that these students will be able to repay and retire the money they borrowed for professional/educational training.

Last year, graduates of ABA-approved law schools borrowed $4 billion for their law degree. Limiting these funds to schools that meet society's needs would add a much-needed layer of accountability and spark the process of law schools evolving their broken economic models. The next three sections address several measures the government could take to eliminate the blank checks many law schools shamelessly abuse.

Extend Gainful Employment Regulations to Law Schools. The current gainful employment rule sets standards and outcome minimums related to student debt for professional training programs. It aims to reduce the number of programs that leave students with poor earnings prospects and high amounts of debt. When a program does not meet these standards, it may lose federal loan eligibility. Currently, the gainful employment rule applies (as of July 1, 2015) only to the six for-profit ABA-approved law schools and the programs (JD, LLM, etc.) that they offer. The Department of Education does not have the authority to promulgate regulations under the Higher Education Act of 1965 (HEA) that extend the gainful employment rule to all law schools, but the HEA could be amended. The effect would be to selectively reduce availability of the federal loan program entirely for failing schools, rather than making wholesale changes to the federal loan program for all schools.

As President Obama put it in August 2013, "it is time to stop subsidizing schools that are not producing good results." In the law school world, there is zero reason to restrict this philosophy to the for-profits. For-profit loan dependency in the college world, which is frequently and justly vilified, pales in comparison to law schools of all types. According to data released by the Department of Education, about two-thirds of for-profit colleges received over 70% of revenue from federal student aid programs (including Pell Grants, which are essentially cash gifts and not available to law students).

The Department of Education's data (law school rows are orange) show that the for-profit law schools are some of the most-federal loan dependent for-profit schools in the country. The Infilaw law schools (Arizona Summit, Charlotte, and Florida Coastal) range from 86.6% to 87.7% dependent during the 2012-13 academic year. All others are within shouting distance, with Charleston at 76.8%, Western State's parent institution at 78.8%, and Atlanta's John Marshall at 83.6%. We do not have direct numbers for other law schools to compare, but the ABA Task Force Report indicates how dependent law schools are on tuition and how dependent students are on student loans.

The rule works like this. There are two "debt-to-earnings" (D/E) tests that compare annual debt payments to income. One test uses total income; the other test uses discretionary income. A program meets the tests if the estimated annual loan payment of a typical graduates does not exceed 20% of their discretionary income or 8% of their total earnings. It fails if the estimated annual loan payment exceeds 30% of discretionary income and 12% of total earnings. Otherwise, the program is "in the zone." A school that fails in two of three years loses its loan eligibility. A school that is in the zone or fails for four consecutive years also loses its loan eligibility.

Eliminate GradPLUS Loans. Alternatively, Congress could make statutory changes to the student lending program that apply to law schools or, if appropriate, all graduate and professional schools. Such an effort would provide an opportunity for the government to experiment with major changes to the lending landscape for a relatively small number of programs to measure the impact and assess whether expanding the strategy to other programs makes sense in light of the findings. The following legislative provisions would need to be adopted together in order to achieve the full effect:

  • Eliminate Grad PLUS loans
  • Cap private student loan interest rates (via usury statute) at the Stafford Rate +1% and the loan origination fee at the Stafford Fee + 3%
  • Require law schools to co-sign private loans
  • Forbid consolidation of private loans with Direct Federal Loans

Unlike the gainful employment rule, this proposal eliminates only part of the loan program, but does so for all schools. The change would cause students to look to private lenders to fill the gap, but private student loan lenders have a history in this country of treating borrowers abusively. To ensure that they do not lend to students at unfair rates, we included a cap on the interest rates a lender may charge. Pairing a usury provision with reduced federal loan amounts will prohibit lenders from exploiting these borrowers with outrageous interest rates, which may be essential for the underwriters to justify the risk. Utilizing the private market in this way will also force schools to price degrees based on expected earnings during the life of the loan. To the extent that evidence shows underwriters will focus on individual characteristics rather than institutional characteristics, the private lending system could protect disadvantaged borrowers by, for example, requiring the law school or parent university to co-sign the loan and share in the risk of non-payment.

Use the Cohort Repayment Rate. Through legislation, Congress could tie federal loan eligibility to a cohort repayment rate rather than cohort default rate. Presently, schools lose federal aid eligibility if default rates get too high. Under this proposal, federal aid eligibility would be tied to the progress former students (graduates or not) are making in repaying their debt. Progress would be defined as reducing the principal loan balance by at least one dollar. Repayment progress is superior to default for holding law schools accountable. Default is a function of financial aid literacy rather than value and well-being because multiple federal hardship programs allow borrowers to indefinitely avoid default without ever making any progress on their loans. Recently, Senators Shaheen and Hatch proposed legislation taking this approach. However, federal loan eligibility should be tied to program-level repayment rates not just at the institutional level.