The Federal Government’s Massive and Declining Investment in Legal Education

May 22nd, 2013 / By Kyle McEntee

Nowadays, law students borrow from the Department of Education Direct Loan Program for school. These loans are income-generating assets for the government. As such, I thought it would be interesting to see how large of an investment the federal government presently makes in law schools.

Based on my calculations, the total annual federal investment in law schools through student loans is currently $4.88 billion (2012-13 school year). Last year (2011-12), that number was $4.95 billion.

Calculating the annual investment required a sequence of estimates along with hard data. First, I used school-supplied data to calculate the government’s investment in 2012 graduates of ABA-approved schools. Second, I incorporated ABA-supplied enrollment data to estimate the government’s investment in all students enrolled during 2011-12. Finally, I used enrollment figures and tuition estimates to extend that projection to 2012-13, the academic year that just closed.

Students, of course, use their loans to cover living costs as well as law school tuition and fees. Law students, however, are forbidden from working during their first year, and find limited opportunities for paid work during the second and third years. Law schools can recruit students only as long as the students have a way to pay for both tuition and living expenses. It’s appropriate, therefore, to speak of educational loans to law students as an investment in law schools, not just students.

1. $4.43 Billion Federal Investment in 2012 Graduates of ABA-Approved Schools

Hard Data on 192 ABA-Approved Schools: $4.33 Billion. Students who graduated law school in 2012 borrowed at least $4.33 billion in federally-guaranteed and federal direct student loans to finance their legal education: that’s the amount of federal loan dollars processed and disbursed by 192 law schools to their 2012 graduates who borrowed for law school.

To calculate the amount loaned for each school (available in the table here), I took the number of graduates and multiplied it times the percentage of those graduates borrowing loans processed by the school. I rounded that number to the nearest whole graduate and multiplied it times the average amount borrowed for that school. The known federal government investment figures do not include students who never graduated and those enrolled in non-JD programs.

Here is a table that aggregates federal investment by school type:

The following schools did not report sufficient borrowing data to U.S. News: Barry University (Private, 200 grads), Florida A&M University (Public, 160 grads), Indiana University – Indianapolis (Public, 295 grads), Inter American University (Private, 234 grads), Pontifical Catholic University of Puerto Rico (Private, 217 grads), University of Puerto Rico (Public, 202 grads), University of The District of Columbia (Public, 93 grads).

Estimated Investment in 2012 Graduates of Seven Other ABA-Approved Law Schools: $107 million. The seven ABA-approved schools (immediately above) had 1,401 graduates in 2012, but did not provide sufficient data about student borrowing. Three were non-profit private schools (with 651 grads); four were public schools (with 750 grads).

To estimate total federal investment in these graduates I used the average amount borrowed and average percentage borrowing by school type. The result is 548 graduates of the private schools borrowing an average of $125,963 and 629 graduates of the public schools borrowing an average of $89,078, or $125.2 million total. Because the three schools in Puerto Rico are on average much cheaper than their U.S. counterparts, I also discounted the amount borrowed 25% for the public Puerto Rican school and 30% for the private ones. This reduced the total for these seven schools to about $107 million.

Adding that total to the $4.33 billion discussed above yields a grand total of $4.43 billion that the Department of Education invested in students who earned JD’s at ABA-accredited law schools in 2012.

2. 2011-2012 Federal Investment in All Enrolled JD Students: $4.95 Billion

Estimating the federal government’s annual investment in all enrolled students, rather than just graduates, required some arithmetic gymnastics. Here are the calculations for 2011-12, the most recent year for which we have information about borrowing:

The 46,360 graduates in 2012 (with 84.3% borrowing) borrowed $4.43 billion, but that borrowing was over a period of three years during which tuition and cost of living rose steadily. In other words, the $4.43 billion estimate is for students who were first years in 2009-10, second years in 2010-11, and third years in 2011-12. (These numbers account for part-time and joint-degree students by assuming that, overall, their enrollment was steady from year to year.)

I next determined how much the 2012 graduates borrowed just for 2011-12. From the time those graduates entered law school, tuition rose on average about 7% each year. Under that assumption, 2012 graduates borrowed 31.2% of the amount borrowed for the first year, 33.4% for the second year, and 35.4% for the third year. So, 35.4% of the average amount borrowed for 2012 graduates came during 2011-12. Multiply 35.4% times total federal investment in 2012 graduates of ABA-approved schools ($4.433 billion) and the result is $1.569 billion for 2012 graduates during their last year—or an average of $40,146 for each of the students who borrowed.

Assuming that 1Ls and 2Ls followed the same borrowing patterns as the students who graduated, we could estimate the federal government’s annual investment in JD students simply by multiplying $1.569 billion (the amount loaned to 2012 graduates) by three. That yields a total of $4.71 billion. That initial estimate is low, however, because it doesn’t account for attrition. The graduating class is smaller than 1L and 2L classes.

To get a more accurate estimate of the federal investment in all JD students enrolled during 2011-12, I took the ABA-reported total JD enrollment for 2011-12 (146,288) and deducted the number of graduates (46,360). That left 99,928 students who attended JD programs in 2011-12 but did not graduate that year. If those students borrowed in the same percentages as graduating students did, then 84,239 (84.3%) of them took federal loans. Multiplying that amount times the average amount borrowed ($40,146) yields $3.382 billion. The total amount invested in all JD students enrolled during the 2011-12 school year, therefore, was about $4.95 billion.

Note the assumption that the average price paid did not vary by class year. Note, too, that my calculation does not include students at schools not approved by the ABA but nevertheless eligible for Title IV student loans. Nor, finally, did I include students eligible for federal funds who enrolled in LLM or other non-JD programs administered by law schools.

3. 2012-2013 Federal Investment in All Enrolled JD Students: $4.88 Billion

The estimate for 2012-13 faced several additional hurdles. The 2011-12 estimate must be adjusted for tuition rises (which increase the average amount borrowed), changes in total enrollment (which declined substantially), and the percentage of all students borrowing (which I assumed was steady at 84.3%).

In 2010, 2011, and 2012 law schools enrolled new classes of 52,488 students, 48,697 students, and 44,518 students. Based on prior graduation, enrollment data, and past attrition data, I estimated that 47,000 students graduated in 2013. We know that 44,518 were in their first year so, with total enrollment at 139,362 students, about 47,844 students were in their second year.

I next estimated how much these students borrowed in 2012-13. The 2012 graduate had borrowed an average of $40,146 for the last year of law school. If we assume that this amount rose due to tuition increases by an extremely modest 5% for the 94,844 upper-level students (with 84.3% borrowing), the federal investment was $3.37 billion for those students. However, the first-year students (in the aggregate, at least) did not feel the brunt of the tuition increases. Tuition discounts, financed through the upper-level students, were needed to sway prospective students. I assumed that students who began school in fall 2012 borrowed no more for their first year than the 2012 graduates borrowed for their last year. Using that assumption, I estimated that the federal investment in the 44,518 first-year students (with 84.3% borrowing) was $1.507 billion.

That brings total federal loans for JD students to an estimated $4.88 billion for 2012-13. That’s a substantial investment, but note that it’s $70 million less than the federal investment in 2011-12. JD tuition revenue declined significantly during the last academic year.

4. Bonus: 2013-14 Federal Investment Speculation

In 2011 and 2012, law schools enrolled new classes of 48,697 students and 44,481 students. For the coming fall, the most common projection is just 38,000. Based on prior graduation, enrollment data, and past attrition data, I estimate that 43,800 students will graduate in 2014. Using the projection of 38,000 first-year students, I estimate total enrollment at 125,300 students, which would be the lowest since 2000.

What will those students pay for law school, and how much will they borrow? Schools are competing to maintain first-year enrollments, so I predict that incoming students will borrow no more than the ones who just finished their first year (an average of $40,146). If 84.3% of the class continues to borrow from the federal government, then these incoming 1Ls will borrow a total of $1.29 billion. If we assume that the 87,300 upper-level students borrow 5% more than they did in the current year, and continue borrowing in the same proportions, those students will borrow about $3.18 billion. The estimated total federal investment in JD students during 2013-14 is $4.47 billion. That’s a lot of cash, but it’s $410 million less than the estimate for 2012-13.

Note that this estimate doesn’t include any changes in borrowing for living expenses–other than the reduction in the number of students. If inflation increases the cost of living, or if students have more difficulty finding paid part-time employment, total borrowing may be somewhat higher than this estimate. On the other hand, if students reduce living costs, borrowing may be even lower than my projection. The biggest story, here, however, is the reduction in number of enrolled students combined with modulation of tuition.

Putting all of the numbers together, I estimate that the federal government invested $4.95 billion in JD students enrolled in ABA-approved law schools during 2011-12; that it invested $4.88 billion in those students during 2012-13; and that it will invest $4.47 billion in 2013-14.

Conclusion

The calculations grow hazier as we move from hard data to estimates, but they are good ballpark figures for the amounts that law students borrowed from the federal government during the past two years, as well as for the amounts they are likely to borrow during the coming year. Two conclusions immediately stick out to me.

First, the federal investment in legal education is a lot. Compared to the $112 billion in federal investment in all of higher education in FY2012, law schools are disproportionately funded. As the conversation heats up about law school economics and student loans, and whether the federal government thinks such an investment is justified or fair, the estimates provide an idea about the magnitude of the federal government investment.

Second, law schools have a lot less money to spend and it is only going to get worse this coming year. My estimates for 2012-13 and 2013-14 suggest that fewer students are enrolling and that they are paying less tuition. The largest law school class ever enrolled just graduated and it will be replaced by the smallest class in 40 or so years. To enroll the upcoming class, schools will also likely offer larger discounts than ever before—a number that has been growing very quickly. My projections suggest that law students will borrow $480 million less during 2013-14 than in 2011-12 from the federal government. That’s a loss of almost a half billion dollars caused by lower enrollment and heavily discounted tuition. Information can do wonders, even in a dysfunctional market.

Schools may make up for some lost revenue through non-JD programs, which continue to expand unregulated and quickly. Others will have to cut costs. Most law schools will survive, but they have difficult decisions ahead.

Data, Student Body, Student Costs, Federal Investment, Fun with Numbers, Law School Economics, Student Loans