The "gainful employment rule" and nonprofit law schools

Today the New York Times published an editorial calling for the federal government to apply the "gainful employment rule" (GER) to all law schools, not just the for-profit schools to which the GER currently applies.  The GER requires that schools whose students receive certain federal tuition loans demonstrate that their graduates are achieving "gainful employment."  Gainful employment is measured by comparing graduates' debt burden to their annual income.  Under the GER, "a program would be considered to lead to gainful employment if the estimated annual loan payment of a typical graduate does not exceed 20 percent of his or her discretionary income or 8 percent of his or her total earnings."  (This quote comes from the Obama administration's press release announcing the policy.)  As that press release notes, "[p]rograms that exceed these levels would be at risk of losing their ability to participate in taxpayer-funded federal student aid programs" -- that is, their students would not be eligible for federal loans.

The basic idea behind the GER makes sense.  Without the GER, schools have an incentive to sell more education, at higher prices, without worrying about the market value of that education to the students who are purchasing it.  Government tuition loans increase demand for higher education in the same way home loans increase demand for nonrental housing:  they make it possible to purchase the product for the large majority of people who cannot pay for it in cash.  This increased demand creates an incentive for the seller (the school) to provide more of the product (that is, to admit more students) and to charge a higher price for it.  And, since the costs of the loans are born, not by the schools, but by the students (in the form of interest) and the lenders (in the form of default costs), there is no countervailing incentive for the schools to reduce their tuition (thus reducing the amount of interest students pay) or limit the supply of their product (thus reducing competition among holders of JDs, increasing the chances that any given graduate will get a job, and reducing loan default rates).  The GER supplies these countervailing incentives, giving schools a powerful reason to control costs (as a way of limiting student indebtedness) and to limit supply (as a way of increasing each graduate's chance of gainful employment).

Applying the GER to for-profit law schools is necessary -- inarguably so, it seems to me.  Because they are almost entirely market-driven -- their need to satisfy accrediting organizations (principally the ABA) being the only significant exception -- for-profit schools have very weak existing incentives to control costs or limit supply.  Theoretically the market itself would provide these incentives:  prospective students would not be willing to go deeply into debt in return for a relatively low chance at a decent-paying legal job, which is what graduates of for-profit schools typically face.  But information asymmetry (applicants to law school typically have less relevant information than the law schools themselves), cognitive biases, the difficulty of predicting where the market will be in three years when students will graduate, and the relatively cheap and forgiving terms of federal loans combine to distort the normal laws of supply and demand.  Many students whose prospects of gainful legal employment are dim continue to take out loans and apply to law schools, and without the GER these for-profit schools would continue to admit them in droves.

It's somewhat less clear whether the GER should apply to nonprofit law schools, which make up the vast majority of American law schools.  At least in theory -- and in my experience, in practice as well -- nonprofit law schools take seriously their status as holders of a public trust and thus at least attempt to behave in a way that is not entirely market-driven.  They consider, for example, the impact on the legal system of graduating large numbers of lawyers and saddling many of them with huge debt.  Indeed, many nonprofit law schools are public law schools, whose tuition typically is controlled by a state legislature, a public higher-education system, or some other public body.  And (at least in theory) these public decisionmaking bodies take the public interest into account in deciding how much tuition public law schools should charge.

In practice, however, the market inevitably intrudes in the decisionmaking processes of nonprofit law schools in a significant way.  Law schools have employees whose jobs and salaries depend on the economic viability of the institution.  Reducing tuition or class size means reducing the revenue available to pay these employees, requiring pay cuts or lost jobs.  (This point, by the way, often is obscured in discussions of legal education, and we ought to keep it in mind:  jobs are in fact at stake.)  It is difficult for law school deans, who themselves typically are members of the faculty, to make decisions with these drastic consequences.  At many law schools, moreover, deans cannot make enrollment or tuition decisions unilaterally:  the faculty itself often must consent (or at least advise) on enrollment, and as I mentioned above public law-school tuition often is set at the university or state level.  The fact that most faculty at most law schools are tenured complicates things further, by reducing a school's flexibility regarding the size of its work force.

These realities mean that nonprofit law schools are subject to some of the same incentives as for-profit schools:  to raise (or at least not to lower) tuition, to sell more degrees even if the legal-services market cannot support them.  Applying the GER to nonprofit law schools would countervail these incentives, probably forcing many or most of these schools to reduce their class sizes significantly and perhaps to cut tuition as well.  All else being equal, this would be a good thing for prospective law students, for the legal system, and for the taxpayers who foot the bill when students default on their federal loans.

But, as I suggested above, all else is not necessarily equal:  there would be costs as well as benefits to applying the GER to all law schools.  Significantly reducing tuition revenues means reducing operating expenses, and the largest operating expense for any law school by far is the personnel budget.  If the GER is applied to all law schools, faculty and staff salaries will be cut and people, inevitably, will be bought out or laid off or outright fired, perhaps in large numbers.  Some law schools might close altogether.  (This blog post, linked from the Times editorial, suggests that at least fifty nonprofit American law schools would fail to satisfy the GER if it were applied to them today.)  It may or may not be the case that laying off law school faculty and staff is better, as a public policy outcome, than continuing to sell many law students expensive degrees that they can't really use.  But at least we need to recognize that there is a significant tradeoff here.

We also need to recognize that there is a correlation, if far from a perfect one, between the cost of legal education and the quality of legal education.  As I discussed in an earlier post, many of the increased costs of legal (and other higher) education in recent years can be explained by very good reasons.  Law schools must hire staff to administer Americans with Disabilities Act requirements, for example, and must increase the experiential learning opportunities available to their students (which often means expanding resource-intensive live-client clinics) to comply with ABA mandates.  Law schools must employ academic support staff to enhance the success rates of students who are not well prepared when they enter law school -- not just students from underprivileged or nontraditional backgrounds but, increasingly, students from traditional backgrounds as well.  Law schools must employ career services professionals to help their students find gainful employment when they graduate.  And of course law schools must recruit and retain excellent full-time teachers who will not be distracted from their mission of education and scholarship by the need to make extra money practicing law on the side.

All of these expenditures benefit a law school's students and the legal system generally.  I think it's too early to tell what effects applying the GER to all law schools would have on these priorities, but it's at least far from clear that the effects would be entirely benign.  Which is to say that while the Times certainly is correct that the availability of cheap federally backed student loans distorts some of the key incentives in legal education, it's not obvious that the cure the Times recommends wouldn't be worse than the disease.  We simply need more data and more discussion on that question.

One final point.  The Times editorial correctly notes that there are large swaths of legal-services needs going unmet or undermet in the current system; for example, "millions of poor and lower-income Americans remain desperate for quality legal representation."  (I discussed this problem at some length in an earlier post.)  Applying the GER to all law schools would do nothing to solve this enormous social problem and might even exacerbate it:  the average annual income figures used by the GER to determine "gainful employment" are likely to be driven downward if large numbers of a school's graduates take lower-paying public-interest jobs, thus increasing the chance that the school will become ineligible for government loans.  The Times suggests providing more federal funding for legal services organizations, which would be a good start -- it would better serve the public and also create more jobs for public-service-oriented law graduates.  An even more focused solution might be to shift some federal money from general student loans (like those to which the GER applies) to public-interest grants.  Currently the Public Service Loan Forgiveness program forgives federal loans for some students who take government or nonprofit jobs when they graduate.  It might make sense to consider funding, not just loan forgiveness for students after they graduate, but also up-front tuition grants for current or prospective students who will commit to practicing in the public interest for a period of time when they earn their degrees.