Tuesday, April 10, 2018

Jake Brooks in NY Times: Direct Federal Student Lending Should Provide Insurance to Students and Public Investment in Education (Michael Simkovic)

John Brooks of Georgetown's excellent Op Ed is available here

Brooks calls to task some of the questionable and alarmist narratives that have been coming out of nominally liberal think tanks (which are funded by foundations linked to the private student loan industry and purveyors of ed-tech of dubious value), noting that Direct Lending, IBR and debt forgiveness can benefit both students and taxpayers.  He also notes the dangers of the new PROSPER act and graciously linked to Friday's post about how small the direct budgetary impact of student loans is when viewed in context.

Brooks notes that some Democrats have been advancing a traditionally Republican privatization agenda.  Jeff Sachs has similarly taken Obama and Clinton to task for underinvestment in basic and essential public services and infrastructure, noting that by the numbers they invest only marginally more than Republicans.  Brooks argues that because of IBR, Obama deserves more credit, and that this important legacy of his presidency should be preserved.

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April 10, 2018 in Guest Blogger: Michael Simkovic, Law in Cyberspace, Legal Profession, Of Academic Interest, Science, Student Advice, Web/Tech, Weblogs | Permalink

Monday, April 9, 2018

U.S. News.com and Pepperdine: There but for the Grace of God go we all (Michael Simkovic)

Pepperdine’s law school recently made an error when submitting enrollment data to U.S. News.com.  Pepperdine contacted U.S. News promptly after uncovering the error and submitted corrected data in time for U.S. News to use the corrected data in its ranking.  Although the erroneous data was more positive than the corrected data, no reasons have been given to believe that Pepperdine intentionally sought to deceive U.S. News. 

I know and respect Paul Caron, the current Dean of Pepperdine.  While we don’t always agree on technical or political issues, the notion that he would intentionally commit fraud—and then immediately correct his error—is outlandish.  (In the interest of disclosure, Leiter Reports joined a network of legal education blogs that Paul organized, but Leiter Reports and Caron’s blog, TaxProf, often compete and advance different perspectives.  I have vocally criticized some of the research covered on TaxProf blog.).

Nevertheless, U.S. News punished Pepperdine by making it an “unranked” law school this year.  Those who are not familiar with the reasons for this move in the rankings might mistakenly believe that Pepperdine fell outside the top 100.  According to analyses by Bill Henderson and Andy Morriss, if not for the penalty imposed by U.S. News, in all likelihood Pepperdine’s rank this year would have risen from 72 to between 64 and 62. 

Unranked status could have an adverse impact on Pepperdine’s enrollments and finances.  It is punitive, unnecessary, and perhaps even counter-productive in that it might discourage honest self-reporting of mistakes.  A more reasonable and compassionate approach would be to let Pepperdine off with a warning, and report the incident without changing the rankings, for example by including a footnote in the ranking explaining the misreporting.  U.S. News is a private business, but because of its virtual monopoly on rankings, enjoys quasi-regulatory authority.

Some of Pepperdine’s competitors might rejoice at Pepperdine’s misfortune, believing that admissions and enrollment are a zero-sum game.  They are making a mistake.

The lesson of the last decade is that law schools rise and fall together far more than they benefit from each other’s hardship.  What U.S. News does to Pepperdine this year, it could one day do to any law school that makes a mistake, even if it honestly and reasonably attempts to correct it.

Healthy competition between law schools can promote innovation and efficiency, and be good for students and research productivity.  But we should be careful that competition does not erode our ability to act cooperatively in pursuit of shared beliefs and shared values of fairness and due process.

April 9, 2018 in Guest Blogger: Michael Simkovic, Legal Profession, Of Academic Interest, Rankings, Web/Tech, Weblogs | Permalink

Sunday, April 8, 2018

Susan Dynarski proposes reforms to student loan servicing (Michael Simkovic)

Professor Dynarski argues for Income Based Repayment as the default option here.

April 8, 2018 in Guest Blogger: Michael Simkovic, Of Academic Interest | Permalink

Friday, April 6, 2018

Student loans are too small to cause a fiscal crisis for the federal government (Michael Simkovic)

Many alarmist narratives suggest that federal student loans are going to lead to a fiscal crisis for the federal government unless loan limits are capped, interest rates are increased, and debt forgiveness is curtailed.  These hyperbolic claims are implausible. Higher education is a tiny fraction of the federal government’s spending and of the U.S. economy (around 3 percent of each). Moreover, education spending is a boon to the economy--boosting employment, earnings, growth and tax revenues.

The federal government spends 4 trillion per year and growing—mostly on the military, healthcare, and social security.  That’s $200 trillion dollars in net present value, discounted at 2% in perpetuity.[1] The whole U.S. economy is worth roughly 5 times that much.  Household net worth is close to $100 trillion.  The federal student loan portfolio is only about $1.3 trillion.  Student loans may look big on the federal government’s balance sheet, but the federal government’s balance sheet asset are small to begin with relative to the size of the government and the size of the economy.

Even with Income Based Repayment (IBR) with partial loan forgiveness, borrowers pay some interest and principle, so the loss rates on these programs are nowhere near 100%.  Several analyses by the GOA and DOE peg the net subsidy rate on these programs as negative by a few billion (i.e., the programs are slightly profitable for the government), with the possibility of eventually becoming positive by a few billion per year (i.e., the programs could become slightly subsidized).  These studies do not take into account the fiscal benefits of higher tax revenues, they only look at the net present value (NPV) of interest and principal payments.  The estimated annual subsidy rates are around 0.3% or negative 0.3% or less of the size of the portfolio.  

Different assumptions could produce different results.  But you would need some pretty extreme assumptions to get to the point where losses on student loans could move the needle.  Nations that are no more productive than the United States—and where the returns to higher education are lower—have fully funded higher education with public dollars (i.e., grants and direct institutional subsidies, not student loans) for decades while maintaining a lower debt to GDP ratio than the United States.  A grant is the equivalent of a loan with a 100 percent loss rate, since no funds will be repaid except in the form of higher tax revenue.

The direct budgetary impact of federal student loans as a pure lending program—that is, the net present value of all funds dispersed and all fees, interest, and principal collected—is tiny.  Viewed in context, whether the student loan program is slightly profitable or slightly subsidized, its direct costs are approximately zero.

But the indirect budgetary and economic benefits of student loans are huge.  Federal student loans help finance higher quality and more economically valuable higher education and boost the size of the educated work force.  Better education increases earnings, reduces unemployment, and facilitates economic growth and innovation.  Around 30 to 40 cents of every extra dollar earned because of higher education goes into the U.S treasury’s coffers through income and payroll taxes, which account for the overwhelming majority of federal revenue.

The real crisis in higher education is that the government is underinvesting in it. 

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April 6, 2018 in Guest Blogger: Michael Simkovic, Of Academic Interest, Science, Web/Tech, Weblogs | Permalink

Thursday, April 5, 2018

Northeastern law professor Jessica Silbey wins Guggenheim Fellowship in 2018 competition

She appears to be the only law professor to win a Guggenheim this year.

April 5, 2018 in Faculty News | Permalink

Sunday, April 1, 2018

"Legal Monism"

As usual, Larry Solum (Georgetown) has a funny April Fool's joke entry.  (I'm not sure this gag will be as successful as the one from 2010, which led to people, especially students, asking me for the article Larry described for years afterwards!)

UPDATE:  And in the spirit of the day, several readers call my attention to this amusing piece by Columbia's David Pozen.

April 1, 2018 in Legal Humor | Permalink

Thursday, March 29, 2018

Amy Wax on the radio...

...at least until she got cornered by the (very polite) questioner.  Of course, Prof. Wax's comments attempted to violate the confidentiality of African-American students at her school, who, like all students, are entitled not to have their academic performance broadcast to the world by a faculty member.

March 29, 2018 in Faculty News | Permalink

Wednesday, March 28, 2018

Law firms imposing arbitration clauses on summer associates!

Adam Levitin (Georgetown) comments.

March 28, 2018 in Legal Profession, Of Academic Interest, Student Advice | Permalink

Tuesday, March 27, 2018

Trump takes out Craiglist ad in search of legal counsel

Very funny.

(Thanks to David Zimmerman for the pointer.)

March 27, 2018 in Legal Humor | Permalink

Dangerous new bill could hurt taxpayers and make financing education more expensive (Michael Simkovic)

Higher Education could soon become substantially more expensive to finance.  The federal government may reduce how much it lends to its most profitable borrowers—graduate and professional students—undermining the financial strength of the federal student lending program and reducing competition in the market for student loans.  Borrowers could lose an important safety net that limits federal student loan repayments if student incomes are lower than expected.  Public sector and non-profit employers could struggle to recruit and retain educated workers as a wage subsidy is eliminated and public-sector compensation becomes even less competitive with the private sector.  For-profit lenders and dodgy for-profit online education programs could see huge financial benefits.

A bill that has emerged from the House education committee and is moving forward with a full vote (summaries available here and here) would:

  • Cap federal Graduate PLUS loans
  • Scale back Income-Based Loan Forgiveness
  • Eliminate Public Student Loan Forgiveness (PSLF)
  • Open federal student loans to for-profit and online programs with questionable track records

Capping Graduate PLUS loans hurts taxpayers.  A recent analysis by the Department of Education and the Government Accountability Office found that Graduate PLUS loans are the most profitable in the Federal government’s portfolio, even after accounting for the costs of debt forgiveness. 

Figure 13 of the study shows that PLUS loans and unsubsidized Stafford loans make money for the government, after accounting for the cost of income driven repayment.[1]  

Dangerous new bill fig 13
 

PLUS loans charge the highest interest rates in the government’s portfolio—often more than private lenders would charge similar borrowers.  However, federal student loans come with a safety net that caps repayments as a fraction of a borrower’s income if the borrower’s income remains low relative to debt service payments for an extended period of time and eventually forgives the remaining balance.  Risk averse borrowers may find this safety net attractive—public and private student loans are difficult to discharge in bankruptcy. 

The Income Based Repayment safety net enables the federal student loan program to compete with private lenders, reducing borrowing costs even for those who opt for private sector loans.  The government’s profits from graduate and professional student borrowers help defray the costs of subsidizing other borrowers more heavily.

Figure 5 of the GAO study shows Graduate Plus Loans in Income-Driven Repayment have the lowest subsidy rate of any loan program—that is, graduate and professional students repay more of their loans. 

Dangerous new bill fig 5
 

The GAO/DOE study has several limitations that overstate the costs and understate the benefits of these programs.[2]  If Graduate PLUS loans are curtailed, the federal student loan program will become less profitable and therefore more politically vulnerable to future cuts.  The bill also threatens to undermine the performance of federal student loans by opening the floodgates to funding of low quality for-profit online programs. 

Private lending is more volatile than federal lending.  Private lending has an unfortunate tendency to become unavailable when it is most needed.  During the recession of 2008-2009, private student loan origination volumes plummeted even as demand for education surged.  Capping loans to graduate students could lock prospective students from poor and middle-class families out of graduate and professional school if they have the misfortune of graduating college during a recessionary credit crunch—precisely when the opportunity cost of pursuing more education is lowest because the labor market is weakest.

Limiting debt forgiveness could make federal student loans more “profitable” as a pure lending program but could have much larger costs to taxpayers if eliminating this safety net reduces investment in human capital.

The U.S. is already dramatically underinvesting in and overtaxing higher education, as demonstrated by the high public and private returns to education.  The public returns to investment in higher education are greater than the expected returns to the stock market or bond market because we have a shortage of high skilled, highly educated labor.  The proposed policy changes are bad for students, and they also threaten to undermine the long run economic growth and fiscal health of the United States. 

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March 27, 2018 in Guest Blogger: Michael Simkovic, Law in Cyberspace, Legal Profession, Of Academic Interest, Student Advice | Permalink