Financing a Legal Education Michael Simkovic Seton Hall University - - PowerPoint PPT Presentation

Michael Simkovic Seton Hall University School of Law

• Aug. 9, 2014

ABA Task Force on the Financing of Legal Education Boston

Financing a Legal Education

Law schools can help their students by helping to reduce financing costs

 Law graduates typically earn far more per year than similar bachelor’s degree holders  BUT the value of these benefits depends on the cost of financing a legal education  Many law students are low-risk and are overpaying for federal student loans  Tuition helps pay for education services that benefit students, but higher-than-necessary interest is a cost with no benefit to students  Law schools could help reduce student loan interest rates by:  Lobbying the federal government  Partnering with private lenders  Pooling resources through a law-school-owned student lender

Law degree holders continue to earn substantially more per year than similar bachelor’s degree holders . . .

$22,216 $39,814 $58,521 $70,418 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 25th Percentile Median Mean 75th Percentile Difference in annual earnings between bachelor’s and law degree 2014 USD

95% Confidence Interval

The lifetime value of the law degree is high across the distribution, but . . .

$566 $877 $1,004 $1,453 $442 $784 $1,055 $1,455 $405 $660 $1,021 $1,589 $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 25th Percentile Median Mean 75th Percentile Women Both Genders Men Law degree lifetime earnings premiums Real 2014 USD thousands

Law degree earnings premium is stable over the long term, with short term cyclical fluctuations

• 10%

10% 30% 50% 70% 90% 110% 130% Average Coefficient S.E.(+2x) Law Degree Earnings Premium, 1996-2013 Percent

$0 $400,000 $800,000 $1,200,000 $1,600,000 $2,000,000 $2,400,000 $2,800,000

The value of a law degree depends on the cost of financing the degree

Present value as of the start of law school by nominal discount rates Real 2014 USD

Law students’ low default rates suggest a break-even interest rate

• approx. 50 basis points above funding and administrative cost

13.9 7.6 1.7 1.4 Bachelor's and Below Master's Doctoral or Professional Law School Law School (adjusted)

Student loan two-year cohort default rate, 2011 Percent of those in repayment who default within 2 years of entering repayment

78 percent recovery on defaulted student loans Federal student lending is profitable Loans to law students are especially profitable because:

• high interest rates
• low default rates

But law students pay 300 to 600 basis points above funding costs on PLUS loans

Treasury Yields, CDs, Graduate PLUS Loans Nominal Interest rate

0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 1 mo. 3 mo. 6 mo. 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr maturity

PLUS loans were 765 bps; statutory spread is now 460 bps above 10yr treasury base Funding costs are lower for shorter maturities

Law students pay 200 to 500 basis points above funding costs on Stafford loans

Treasury Yields, CDs, Graduate PLUS Loans Nominal Interest rate

0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 1 mo. 3 mo. 6 mo. 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr maturity

Funding costs are lower for shorter maturities Stafford loans were 655 bps; statutory spread is now 360 bps above 10yr treasury base

Law school education is funded through a mix of Perkins, Stafford, and Grad PLUS loans

24,000 85,500 24,000 61,500 20,000 40,000 60,000 80,000 100,000 120,000 140,000 Perkins Stafford Grad PLUS Remaining Educational Costs Federal loan limits for a three-year graduate degree 2014 USD

Nominal int- erest rate (%) 5 5.41 / 6.21 6.41 / 7.21 Nominal less auto-debit incentive (%) 5 5.16 / 5.96 6.16 / 6.96 Real Interest Rate (%) 2 2.16 / 2.96 3.16 / 3.96

Percent of students by debt level Percent

Prepayments suggest that short-term refinancing could reduce funding costs for many law graduates

$91,000 $57,000 $52,000 $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000 $100,000 3 years after 7 years after 12 years after Median educational debt among those with debt Real 2014 USD

Students have up to 25 years to repay federal loans under extended repayment

Zero debt

• 43%

5 10 15 20 25 30 35 40 45 50 3 years after 7 years after 12 yeas after > $100k in debt

Federal policy changes that would benefit law students and other graduate and professional students

 Increase borrowing limits  Increase limits on less expensive Perkins and Stafford loans; reduce need for expensive PLUS loans  Limits indexed to wages or tuition (not CPI)  Reduce interest rates (especially on PLUS and Stafford loans)  Across the board reduction OR  Equalize undergraduate and graduate rates in the middle OR  Move toward break-even risk-based pricing by field and level of study  Restore in-school interest subsidy  Continue IBR, ICR, and Pay-As-You-Earn  Full tax-deductibility of student loan interest

Opportunities to partner with private lenders

 Startup lenders have started undercutting the federal government’s student loan pricing to graduate and professional students, especially  MBA  JD  MD  Engineering  Computer science  Examples  Securitizers / Alumni financing  Social Finance (SoFi)  CommonBond  Deposit-funded  DRB

A consortium of law schools could establish a law school lender

 Precedent: Access Group  Non-profit  192 ABA approved law schools are members  Gap lender / securitizer  Several hundred million in assets, but not actively lending  Suggestion: Depository institution with federal deposit insurance  Industrial Loan Company (FDIC)  Legal Profession Credit Union (NCUA)  Traditional state or nationally chartered bank not ideal (BHCA)

Advantages of law-school owned lender

 Low customer acquisition costs  Specialization & local knowledge  Deposit insurance reduces funding costs and increases leverage  Positive market signal – law schools willing to invest in their own graduates  Takes political pressure off federal student loan programs  Many critiques funded by private student lenders  Sallie Mae  Lumina  New America Foundation, CCAP, AEI.  Pro-competitive cooperation between law schools

Other topics of discussion  Why has tuition increased?  What are the advantages and disadvantages of merit vs. need- based scholarships?  What are the potential benefits and risks of a two-year law degree?  What are the advantages and disadvantages of debt compared to alternate financing arrangements?

Several hypothesis have been advanced to try to explain tuition increases  The quality and value of legal education has increased  The costs of providing a high quality legal education have increased  Increasing use of scholarships and grants increases gross tuition by more than net-tuition (gross tuition less scholarships and grants)  Taxpayer funding for public institutions has declined, or at least not kept pace with costs  Market failure / monopoly power / excessive regulation (?)

There are several factors which suggest that the value of legal education (and higher education in general) have increased  Rising completion rates (coupled with increasing diversity)  Rising higher education earnings premiums since the 1970s  Higher life expectancy, especially for the highly educated  Lower interest rates  lower discount rates

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Law school completion rates have increased

Estimated 4-year completion rates at ABA approved law schools, 1967 - 2013 Percent; number of JDs awarded divided by size of first year class 4 years prior

Total J.D. Minority enrollment has increased over time

0% 10% 20% 30% Minority Enrollment in JD Programs Percent Source: ABA Section of Legal Education and Admissions to the bar, first year J.D and total J.D. Minority enrollment for 1971 – 2012.

Completion rates are typically lower for under-represented minorities

Graduating within 4 years after start, all 4 year institutions Percent of 2006 starting cohort

Real median income for young lawyers grew from 1960 to 2010

20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 1960 1970 1980 1990 2000 2010 All 26-34

Median income for all full-time white males and full-time white males aged 26-34 Real 2012 USD

Decades of data show that educated workers earn more, and the wage premium has increased over the last 30 years

Median usual weekly earnings of full-time workers 25 years and over by educational attainment,1979-2012 Real 2012 USD

$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 $1,800 $2,000

Limitation: “Professional degree holders” is overinclusive

Law schools have reduced student-to-faculty-ratios

5 10 15 20 25 30 35 40 FTE 1-299 FTE 300 - 499 FTE 500 - 699 FTE 700 - 1099 FTE >1099 Student to faculty ratios by size of law school (Full time equivalent student enrollment), 1979-2013 Source: ABA Section of Legal Education and Admissions to the bar, Student Faculty Ratio 1978-2013 * No data available these years

An increase in availability and quality of full-time faculty may improve student outcomes

 Increased specialization with faculty teaching fewer, more focused courses and gaining expertise through research  More faculty attention for each student  Ability to attract higher quality faculty with more attractive working conditions  Empirical studies at the undergraduate level find  Better outcomes for students (after controlling for differences in student populations) with higher tuition, more resources, and higher spending on instruction

 Dale & Krueger, QJE 2002.

 Worse student outcomes associated with instruction by adjunct faculty

 For a review see Simkovic & McIntyre, Populist Outrage, Reckless Empirics: A Review of Failing Law Schools, 108 NW. U. L. REV. ONLINE 176 (2014)

Type of Legal Education Pass rate Number of exam takers CA ABA Accredited 45,011 Out-of-state ABA 18,413 Law Office/Judges Chambers 54 Correspondence 463 CA Accredited 9,555 CA Unaccredited 5,025 4 Year Qualification 394

64 53 28 22 20 15 12

Bar passage rates, California Bar Exam, all-takers, Feb. and July, 2007-2013 Percent

Legal education through methods other than ABA-approved law schools is associated with much lower bar passage rates

Median faculty salaries have not increased for a decade

$0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 $160,000 $180,000 Postsecondary law instructors annual wage earnings, 1998-2013 Real 2014 USD

Faculty earnings have increased

• nly near the top
• f the distribution

Earnings figure includes bonuses Does not include cost of employer provided health insurance

Law professors earn less than lawyers at every point in the distribution

20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 10p 25p 50p Mean 75p Law Teachers, Postsecondary Lawyers

Earnings by occupation, 2013 Real 2014 USD

Lawyer earnings excludes law firm partners Law professors could likely earn more than average lawyer if had chosen to practice law

• more experienced / older
• graduated from high-ranked

law schools

• above average academic

performance

• more likely to have federal

judicial clerkships Pay differences may reflect a “compensating differential” for more pleasant work

Grants and scholarships per student have increased

Grants and scholarships per student enrolled in law school 1 Real 2014 USD

$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000

100 120 140 160 180 200 220 240

A mix of Producer Price Indexes may provide a better measure

• f the costs faced by law schools than the Consumer Price Index

PPI for Legal Services Specialties, National Wage Index, and CPI, 1996-2013 Index; 1996 = 100

CPI

• excludes employer-provided

health insurance costs

• weighted toward mass-

produced or imported goods rather than professional services

The Consumer Price Index does not reflect the costs faced by law schools  CPI is a weighted index of consumer goods  CPI does not reflect industry-specific cost structures  Excludes employer and employee costs of health insurance  Heavily weighted toward mass produced and imported goods produced in lower wage countries  The National Wage Index has increased much faster than CPI  The BLS recommends using a weighted mix of PPI (Producer Price Indexes) instead of CPI for industry costs

Tuition growth is slower after subtracting grants, focusing on private institutions, and deflating by PPI

8.51% 6.02% 4.48% 6.37% 3.93% 2.42% 4.68% 3.45% 0.79% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% Nominal Real (CPI) Real (PPI) Public Resident Public Non-Resident Private Average estimated net tuition growth, 1996-2012 Compound Annual Growth Rate (CAGR)

Less is understood about the benefits and costs of administration  How has the number of full time professional administrators changed relative to number of students and number of faculty?  How has administrative compensation as a share of total compensation changed over time?  To what extent does this add value?  (i.e., specialization and expertise?)  Is this in line with changes in other industries?  Could some administrative tasks be streamlined with changes to regulation?

Considering the merits of merit compensation

 Viewed systematically (across institutions) merit compensation may be similar to need-based compensation  Grants may be offered on “merit”  But students may be more likely to accept (instead of going to a higher ranked institution) if they have greater need  Peer effects from high-performers may help lower-performing classmates

 Gordon C. Winston & David J. Zimmerman, Peer Effects in Higher Education, in COLLEGE CHOICES: THE ECONOMICS OF WHERE TO GO, WHEN TO GO, AND HOW TO PAY FOR IT 395, 418 (Caroline

• M. Hoxby ed., 2004)

 Ron Zimmer, A New Twist in the Educational Tracking Debate, 22 ECON. EDUC. REV. 307, 313–14 (2003)

 Merit compensation increases competition between law schools of different ranks  Merit compensation helps attracts talented students who could chose another field instead of law

The market for legal education appears to be price competitive and reasonably efficient . . .

 Over 200 ABA approved law schools  Many new entrants over the past few decades  Law schools face additional competition from  Non-ABA approved law schools (esp. in California)  Law office study  Alternative graduate degrees (i.e., MBAs)  Students appear to consider price in deciding between institutions  Widespread use of tuition discounting  Wide range of costs and quality across institutions (?)  Bar passage and student loan default rates appear to suggest correlation between cost and quality  Causation or selection?

But there may be opportunities for improvement: Need for data on long-term value-added by institution

 General Problem in Higher Education (law schools no exception):  No widely available, regularly up to date measure of value added across institutions  Short term outcomes not sufficient  Selection issues  Lifetime value  Employment outcomes improve dramatically over time  Early outcomes not highly predictive of later outcomes

But there may be opportunities for improvement: Inadequate information on outcomes by specialized field of study

 Information on outcomes by college major available from various surveys (quasi-experimental methods possible in some contexts)  Inadequate information about effect of particular courses of study on long term outcomes  Do clinics provide benefits commensurate with their increased costs?  Are certain specialties associated with better than-average or worse than average outcomes? Are differences causal?  Do law faculties have the appropriate mix of specialties to prepare students for the job market?  What should law schools teach to help prepare the 40 percent of law graduates who do not practice law?

The two year law degree could save on opportunity costs . . .  If 2-year law degree could add same value as 3-year law degree, it would provide the following benefits:  One extra year of full time work with law degree  Even if total tuition were higher to fund an intensive program, students and schools could both benefit

But two year law degree would increase financing costs and risks eroding value and quality

 Financing costs would increase  Federal student loan programs have annual borrowing limits  2-year law degree means more high-interest PLUS loans  2-year law degree risks lower quality  Very low bar passage rates for 4-year option (CA, NY, others)  One or two years of law school PLUS two or three years of law

• ffice study

 Lower bar passage rates within each race and within each state  Selection or causation?  Perhaps different versions of these programs could work more effectively

Backup slides

Backup Slides

Interest rate increases with likelihood of default and loss given default

Modeled break-even risk based interest rate

Note: Assumes risk-free interest rate (r) = 2.75%. Source: Equation 1

L = 0.1 L = 0.2 L= 0.3

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% Probability of Default (D)

L = Loss given default

• ,=,'/!=+/,!5307-!K,!=,Y=&//

!

Law student loan default rates have been relatively low for 20 years

Law schools (adjusted) Law schools Bachelor's All postsecondary 2 4 6 8 10 12 14 16 Federal student loan two-year cohort default rates by institution type, 1990-2011 Percent

Law students rarely default on their student loans

12.1 7.1 2.1 1.7 Bachelor's and Below Master's Doctoral or Professional Law School Law School (adjusted)

Student loan two-year cohort default rate, 2010 Percent of those in repayment who default within 2 years of entering repayment

78 percent recovery on defaulted student loans Federal student lending is profitable Loans to law students are especially profitable because:

• high interest rates
• low default rates

Law students rarely default on their student loans three years out

20.1 11.6 3.5 2.8 Bachelor's and Below Master's Doctoral or Professional Law School Law School (adjusted)

Student loan three-year cohort default rate, 2010 Percent of those in repayment who default within 3 years of entering repayment

78 percent recovery on defaulted student loans Federal student lending is profitable Loans to law students are especially profitable because:

• high interest rates
• low default rates

Law students rarely default on their student loans

12.2 6.8 1.7 1.3 Bachelor's and Below Master's Doctoral or Professional Law School Law School (adjusted)

Student loan two-year cohort default rate, 2009 Percent of those in repayment who default within 2 years of entering repayment

78 percent recovery on defaulted student loans Federal student lending is profitable Loans to law students are especially profitable because:

• high interest rates
• low default rates

Law students rarely default on their student loans three years out

19.2 10.4 3.3 2.7 Bachelor's and Below Master's Doctoral or Professional Law School Law School (adjusted)

Student loan three-year cohort default rate, 2009 Percent of those in repayment who default within 3 years of entering repayment

78 percent recovery on defaulted student loans Federal student lending is profitable Loans to law students are especially profitable because:

• high interest rates
• low default rates

Completion rates are typically lower for under-represented minorities

Graduating within 4 years after start, private non-profit institutions Percent of 2006 starting cohort

Completion rates are typically lower for under-represented minorities

Graduating within 4 years after start, public institutions Percent of 2006 starting cohort

25th percentile income for young lawyers grew from 1960 to 2010

10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 1960 1970 1980 1990 2000 2010 All 26-34

25th percentile income for all full-time white males and full-time white males aged 26-34 Real 2012 USD

Tuition has increased, but less quickly after taking into account scholarships and grants

Average estimated net tuition, 1991-2012 Real 2014 USD

$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000

Tuition increases slower after deflating by PPI legal services instead of CPI

Average estimated net tuition, 1996-2012 Adjusted for overall PPI for legal services

$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000

Tuition has increased, but less quickly after taking into account scholarships and grants

Average estimated net tuition, 1996-2012 Compound Annual Growth Rate (Nominal)

Tuition has increased, but less quickly after taking into account scholarships and grants

Average estimated net tuition, 1996-2012 Compound Annual Growth Rate (Real - CPI)

Tuition has increased, but less quickly after taking into account scholarships and grants

Average estimated net tuition, 1996-2012 Compound Annual Growth Rate (Real - PPI)

Law degree earnings premium is stable over the long term, with short term cyclical fluctuations

0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00 Average Coefficient S.E.(+2x) Law Degree Earnings Premium, 1996-2013 Log points

Law degree earnings premium is stable over the long term, with short term cyclical fluctuations

• 10%

10% 30% 50% 70% 90% 110% 130% Average Coefficient S.E.(+2x) Law Degree Earnings Premium, 1996-2013 Percent

Recent premiums for young law graduates are within historical norms

Average, 70 20 40 60 80 100 120 140 160 1996-99 2000-03 2004-07 2008-13 Coefficient 95% Confidence Interval Law Degree Earnings Premium, Graduates Median Age 27 to 33, 1996-2013 Percent

JD earnings premium probably has not declined for recent cohorts

0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 27 28 29 30 Age 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Earnings premium of likely JDs* age 27-30, 2001-2011 Ratio of earnings of likely JDs to Bachelor’s degree holders

Life expectancy through the years has increased with higher degree of education.

Life Expectancy at Birth, by years of education at age 25.

63 66 69 72 75 78 81 84 87 90 <12 12 13-15 16 or more Years of Education

1990 2000 2008

Life Expectancy Among Americans at Age Twenty-Five, Increases with higher level of Education.

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 100 Any College High school

• r less

Legal and professional services are difficult to automate or outsource

Work that is:

• Rules-based
• Routine
• Algorithmic
• Easily broken down

Work involving:

• Problem-solving
• Complex

communication skills

• Non-routine tasks

Automated / outsourced Difficult to automate / outsource

• H. Autor, Lawrence F. Katz, & Melissa S. Kearney, The Polarization of the U.S. Labor Market, 96 AM. ECON. REV. 189, 193 (2006); Alan S. Blinder, How Many U.S. Jobs

• J. INDUS. REL. 758 (2010).

• F. M. Finch, Legal Education,

• ffice copies nothing and sees
• nothing. The stenographer and

Predictions of disruption and structural shift date back to the typewriter

1901 1978 2012 1966

Real median income for young lawyers grew from 1960 to 2010

20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 1960 1970 1980 1990 2000 2010 All 26-34

Median income for all full-time white males and full-time white males aged 26-34 Real 2012 USD

25th percentile income for young lawyers grew from 1960 to 2010

10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 1960 1970 1980 1990 2000 2010 All 26-34

25th percentile income for all full-time white males and full-time white males aged 26-34 Real 2012 USD

Decades of data show that educated workers earn more, and the wage premium has increased over the last 30 years

Median usual weekly earnings of full-time workers 25 years and over by educational attainment,1979-2012 Real 2012 USD

$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 $1,800 $2,000

Limitation: “Professional degree holders” is overinclusive

Productivity and Disposable Personal Income increase over time

Real Per Capita Disposable Personal Income, 1929-2012 Real 2013 USD

$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000

• 8%
• 6%
• 4%
• 2%

0% 2% 4% 6% 8% 10% 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Real Disposable Income YOY Real Growth Diposable Income 40 year trailing CAGR

Real personal disposable income per capita has historically grown more than 2 percent per year

Annual Real Growth of Per Capita Real Disposable Income, 1929-2012 Percent

• 15%
• 10%
• 5%

0% 5% 10% 15% 1929 1934 1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 Real Disposable Income YOY Real Growth Diposable Income 40 year trailing CAGR

Real personal disposable income per capita has historically grown more than 2 percent per year

Annual Real Growth of Per Capita Real Disposable Income, 1929-2012 Percent

Productivity and Disposable Personal Income increase over time

Real Per Capita Disposable Personal Income and Gross Domestic Product, 1929-2012 Real 2013 USD

$0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000

Law degree holders’ earnings grow rapidly and peak late in life

Law degree Bachelor's degree 20 40 60 80 100 120 140 160 61-65 56-60 51-55 46-50 41-45 36-40 31-35 26-30 Age group

Annual mean earnings by degree type and age, age 26-65 Real 2013 USD thousands

Earnings in early years are not strong predictors

• f subsequent

earnings

Recent federal student loan interest rates suggest a real (nominal) discount rate of around 3 (6) percent

Nominal less auto- debit Real (net inflation) 1 2 3 4 5 6 7 8 $25,000 $50,000 $100,000 $150,000 $200,000 Educational Debt USD Average interest rates by total amount borrowed for three-year graduate degree Percent

Assumes 3 percent inflation May overstate financing costs because ignores:

• Prepayments
• IBR and other debt

forgiveness programs

Education financing costs fell slightly in 2013-2014, But will likely increase substantially as treasury interest rates rise

Nominal less auto- debit Real (net inflation) 1 2 3 4 5 6 $25,000 $50,000 $100,000 $150,000 $200,000 Educational Debt USD Average interest rates by total amount borrowed for three-year graduate degree Percent

Assumes 3 percent inflation May overstate financing costs because ignores:

• Prepayments
• IBR and other debt

forgiveness programs

• 6
• 4
• 2

2 4 6 8 10 12 14 16 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 10-year treasuries (nominal) 10-year treasuries (real) 20 year moving average (nominal)

Interest rates on treasuries are currently very low and are generally expected to increase with Fed tapering

10-year treasuries, 1962-2013 Percent

Federal student loans to graduate students have become less generous

 Interest rates increased by around 3.25 percent  Base rate increased by about 1.5 to 2 percent  From 3 month treasury (1998-2006) to 10 year treasury (2013- present) for Stafford and Grad PLUS  Spread increased by around 1.3 to 1.5 percent  Stafford from 2.3 to 3.6  Grad Plus from 3.1 to 4.6  Elimination of in-school subsidy (interest now accrues while in school)  Borrowing limits on Stafford and Perkins loans have not kept up with inflation or tuition (but more expensive PLUS loans available up to full cost)

• 1.0
• 0.5

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 Difference 20 year moving average

Recent changes to the the student loan base rate may increase federal student loan interest rates by around 1.5 to 2 percent

Difference in yield between 10-year treasuries and 3-month treasuries, 1962-2013 Percent

Stafford and PLUS loan interest rates were calculated as a spread above a 3- month treasury base rate from 1998 to 2006; Starting in 2013, student loan interest rates are calculated as a spread above a substantially higher 10-year treasury base rate

Yield Curves

Treasury Yields, CDs, Graduate Loans Interest rate

0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 0.0833 0.25 0.5 1 2 3 5 7 10 20 30 Years

Yield Curves

Treasury Yields, CDs, Graduate Loans Interest rate

0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 Treasuries (5/15/13) Treasuries (12/19/13) CDs (12/26/2013) Stafford (7/1/2013-6/30/2014) Stafford (7/1/2014-6/30/2015) Stafford (Avg 10 year treasury) PLUS (7/1/2013-6/30/2014) PLUS (7/1/2014-6/30/2015) PLUS (Avg 10 year treasury) Years

2 4 6 8 10 12 14 16 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 10-year treasuries 3-mo treasuries

10-year treasuries vs. 3-month treasuries

10-year treasuries vs. 3-month treasuries, 1962-2013 Percent

Law school education is funded through a mix of Perkins, Stafford, and Grad PLUS loans (based on current 10-year treasury rates)

24,000 85,500 24,000 61,500 20,000 40,000 60,000 80,000 100,000 120,000 140,000 Perkins Stafford Grad PLUS Remaining Educational Costs Federal loan limits for a three-year graduate degree 2012 USD

Nominal Interest Rate 5% 5.54% 6.54% Nominal less auto-debit incentive (%) 5% 5.29% 6.29% Real Interest Rate (%) 2% 2.29% 3.29%

Law school education is funded through a mix of Perkins, Stafford, and Grad PLUS loans (assuming maximum statutory interest rates)

24,000 85,500 24,000 61,500 20,000 40,000 60,000 80,000 100,000 120,000 140,000 Perkins Stafford Grad PLUS Remaining Educational Costs Federal loan limits for a three-year graduate degree 2012 USD

Nominal Interest Rate 5% 9.5% 10.5% Nominal less auto-debit incentive (%) 5% 9.25% 10.25% Real Interest Rate (%) 2% 6.25% 7.25%

• 6
• 4
• 2

2 4 6 8 10 12 14 16 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 10-year treasuries YoY Annual Inflation Difference

Interest rates on treasuries are currently very low and are expected to increase

10-year treasuries vs. U.S. inflation from CPI, 1962-2013 Percent

Law school education is funded through a mix of Perkins, Stafford, and Grad PLUS loans (disbursed 7/1/2013 - 6/30/2014)

24,000 85,500 24,000 61,500 20,000 40,000 60,000 80,000 100,000 120,000 140,000 Perkins Stafford Grad PLUS Remaining Educational Costs Federal loan limits for a three-year graduate degree 2012 USD

Nominal Interest Rate 5% 5.41% 6.41% Nominal less auto-debit incentive (%) 5% 5.16% 6.16% Real Interest Rate (%) 2% 2.16% 3.16%

Law degree earnings premium is stable over the long term, with short term cyclical fluctuations (needs updating)

20 40 60 80 100 120 Average Coefficient 95% confidence interval Law Degree Earnings Premium, 1996-2011 Percent

Law degree holders continue to earn substantially more per year than similar bachelor’s degree holders . . .

$21,714 $38,915 $57,199 $68,827 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 25th Percentile Median Mean 75th Percentile Difference in annual earnings between bachelor’s and law degree 2013 USD

95% Confidence Interval

The lifetime value of the law degree is high across the distribution, but . . .

$554 $857 $981 $1,420 $432 $766 $1,031 $1,422 $395 $645 $998 $1,553 $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 25th Percentile Median Mean 75th Percentile Women Both Genders Men Law degree lifetime earnings premiums Real 2013 USD thousands

$0 $400,000 $800,000 $1,200,000 $1,600,000 $2,000,000 $2,400,000

The value of a law degree depends on the cost of financing the degree

Present value as of the start of law school by nominal discount rates Real 2013 USD