Financing a Legal Education Michael Simkovic Seton Hall University School of Law Aug. 9, 2014 ABA Task Force on the Financing of Legal Education Boston (c) Michael Simkovic 1
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 (c) Michael Simkovic 2
Law degree holders continue to earn substantially more per year than similar bachelor’s degree holders . . . Difference in annual earnings between bachelor’s and law degree 2014 USD 95% Confidence Interval 80,000 70,000 60,000 50,000 40,000 $70,418 30,000 $58,521 20,000 $39,814 $22,216 10,000 0 25th Percentile Median Mean 75th Percentile Source: U.S. Census Bureau, Survey of Income and Program Participation; Simkovic & McIntyre (2014); Author's calculations (c) Michael Simkovic 3
The lifetime value of the law degree is high across the distribution, but . . . Law degree lifetime earnings premiums Real 2014 USD thousands Women Both Genders Men $1,589 $1,600 $1,455 $1,453 $1,400 $1,200 $1,055 $1,021 $1,004 $1,000 $877 $784 $800 $660 $566 $600 $442 $405 $400 $200 $0 25th Percentile Median Mean 75th Percentile Source: U.S. Census Bureau, Survey of Income and Program Participation; Simkovic & McIntyre (2014); Author's calculations (c) Michael Simkovic 4
Law degree earnings premium is stable over the long term, with short term cyclical fluctuations Law Degree Earnings Premium, 1996-2013 Average Percent Coefficient S.E.(+2x) 130% 110% 90% 70% 50% 30% 10% -10% Source: U.S. Census Bureau, Survey of Income and Program Participation; Authors’ calculations Note: Solid line is the coefficient. Dotted lines represent 95 percent confidence interval. Horizontal dashed line represents multi-year average with each year weighted equally. A joint test (c) Michael Simkovic 5 rejects the hypothesis that the coefficients are equal across all years (p<0.001).
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 $2,800,000 $2,400,000 75th to 85th percentile $2,000,000 Mean $1,600,000 50th percentile $1,200,000 $800,000 15th to 25th percentile $400,000 $0 Source: Survey of Income & Program Participation; Simkovic & McIntyre (2014); Author's calculations Note: Assumes 3 percent inflation (i.e., real rates are 3 percent below nominal rates). Present value is pretax and pre-tuition. (c) Michael Simkovic 6
Law students’ low default rates suggest a break-even interest rate approx. 50 basis points above funding and administrative cost Student loan two-year cohort default rate, 2011 Percent of those in repayment who default within 2 years of entering repayment Bachelor's and Below 13.9 78 percent recovery on defaulted student loans Master's Doctoral or 7.6 Professional Federal student All lending is profitable postsecondary institutions Loans to law students average, Law School 1.7 10.0 are especially profitable because: • high interest rates Law School (adjusted) 1.4 • low default rates Source: U.S. Department of Education; Simkovic & McIntyre (2013); Author's calculations (c) Michael Simkovic 7
But law students pay 300 to 600 basis points above funding costs on PLUS loans Treasury Yields, CDs, Graduate PLUS Loans Nominal Interest rate 10.00 9.00 8.00 PLUS loans were PLUS 765 bps; statutory (7/1/2014-7/1/2015) 7.00 spread is now 460 PLUS (7/1/2013-6/30/2014) bps above 10yr 6.00 treasury base 5.00 4.00 Funding costs are Treasuries (08/01/14) 3.00 lower for shorter Treasuries (8/1/13) maturities 2.00 1.00 CDs (08/02/2014) 0.00 maturity 1 mo. 3 mo. 6 mo. 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr Note: Plus loan rate incorporates a 0.25% discount for setting up automatic electronic payments. 2014-2015 PLUS loan rates estimated based on 4.6% statutory spread, assuming 12/19/13 10-year treasury rates (c) Michael Simkovic 8
Law students pay 200 to 500 basis points above funding costs on Stafford loans Treasury Yields, CDs, Graduate PLUS Loans Nominal Interest rate 10.00 9.00 8.00 Stafford loans were 655 bps; statutory 7.00 spread is now 360 Stafford (7/1/2014-6/30/2015) bps above 10yr 6.00 Stafford treasury base (7/1/2013-6/30/2014) 5.00 4.00 Treasuries (08/01/14) Funding costs are 3.00 lower for shorter Treasuries (8/01/13) maturities 2.00 1.00 CDs (08/02/2014) 0.00 maturity 1 mo. 3 mo. 6 mo. 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr Note: Plus loan rate incorporates a 0.25% discount for setting up automatic electronic payments. (c) Michael Simkovic 9
Law school education is funded through a mix of Perkins, Stafford, and Grad PLUS loans Federal loan limits for a three-year graduate degree 2014 USD 140,000 Remaining 120,000 Educational Costs 100,000 80,000 60,000 61,500 85,500 40,000 20,000 24,000 24,000 0 Perkins Stafford Grad PLUS Nominal int- 5 5.41 / 6.21 6.41 / 7.21 erest rate (%) Nominal less auto-debit 5 5.16 / 5.96 6.16 / 6.96 incentive (%) Real Interest 2 2.16 / 2.96 3.16 / 3.96 Rate (%) Source: U.S. Department of Education; Title 20 of the U.S. Code; Authors’ calculations, Appendix Table A1 Note: Left side student loan rates for 2013-2014. Right side student loan rates for 2014-2015. (c) Michael Simkovic 10
Prepayments suggest that short-term refinancing could reduce funding costs for many law graduates Percent of students by debt level Median educational debt among those with debt Percent Real 2014 USD $100,000 50 $90,000 45 -43% $80,000 40 Zero debt $70,000 35 $60,000 30 $50,000 25 $91,000 $40,000 20 $30,000 15 $57,000 > $100k $52,000 in debt $20,000 10 $10,000 5 $0 0 3 years after 7 years after 12 years after 3 years after 7 years after 12 yeas after Students have up to 25 years to repay federal loans under extended repayment Source: Ronit Dinovitzer, et al., ABA AND NALP, After the JD II: Second Results from a National Study of Legal Careers (2009); 10 Interesting Facts from the After the JD Survey, Feb. 10, 2014; Joyce Sterling presentation at 2014 AALS. (c) Michael Simkovic 11
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 (c) Michael Simkovic 12
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 (c) Michael Simkovic 13
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) (c) Michael Simkovic 14
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 (c) Michael Simkovic 15
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? (c) Michael Simkovic 16
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