April 19, 2010
Minding Our Own Business Forum: Bubbles, Student Loans and Sub-Prime Debt
Posted by Christine Hurt

Thanks to my colleague Larry for getting us off to a great start on the topic of the future of lawyering and legal education.  For the past few years, I've been having conversations with various colleagues, including David Hyman, about the parallels between the subprime mortgage crisis and the proliferation of law school debt.  Bear with me.

For a couple of decades now (and until a few years ago), the conventional wisdom was that real estate would always rise in value and that the world would always need lawyers.  Home ownership at whatever cost, particularly with tax-deductible interest rates, was better than alternatives such as renting; financing a law degree with student loans, some of which was low-interest and tax-deductible, was an equally good investment given the value of the law degree.  Just as something about home ownership seemed intrinsically good, so did getting a law degree, from any law school.  Strangely, most law school educations were priced similarly.  Law schools with lower employment rates charged more money than some schools with higher employment rates.  Price was not a clear signal of quality.  Anyway, more and larger houses were built; more and larger law schools were built.  Then, as if on a dime, the world changed and all of a sudden lots of people with law degrees were getting laid off, deferred, ignored.  The legal market was shrinking or changing in a seemingly semi-permanent way.  We found out from Bill Henderson that the market for graduates was not what the "mean" employment statistics seemed to be touting.  But more students came, financing the journey with student loans premised on promised salaries that have de-materialized before our eyes.  (See Forbes; see NYT.)

I have generally been sanguine about the disruption in the legal services market.  After all, I went to law school from 1990-1993, which was a time of cancelled summer programs, fired associates and 50% offers to summer recruits.  But I think the biggest difference is the debt burden.  Law school tuition is much higher now, even at public schools where state money has all but disappeared.  How can someone write off $100,000 or $200,000 in student loans as a bad call?  Many of these loans aren't federal loans -- they are from private lenders at high rates.  And, unlike homeowners, law students don't have a "put" option -- they can't tell lenders to take their law degrees and quit calling them.

So, what's the future of law school pricing?  Will someone create an affordable model that doesn't depend on third-party financing?  Will some law schools start to look like culinary schools or technical institutes that provide financing of $40,000 a year for a law degree few employers are looking for?  Or will law schools pride themselves not on inputs (LSAT, GPAs, you know -- USNews stuff) and on outputs (where our graduates actually end up working, and how much they make).

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