Thursday, March 19, 2009

How High Can Tuition Go?

Saturday, June 14, 2008
How High Can Tuition Go?

by Jeff Sovern

Each year, colleges and universities hike tuition, typically by more than the rate of inflation. Competition among schools undoubtedly constrains the hikes to some extent, but are there any other limits? An economist might say that it makes sense to pay tuition as long as the tuition is less than the present value of the expected lifetime benefits of the education, minus the opportunity costs. Put another way, if the amount you receive in the form of increased salary over your lifetime after going to college is higher than the amount you would earn without a degree, which is what has consistently been reported, it makes sense to pay tuition as long as the tuition is less than the present value of that increase. That formulation overlooks the nonpecuniary benefits of education, which are substantial, but if you could quantify those benefits, you would add them to the expected benefits as well. In any event, it suggests that when the costs of education exceed the benefits, people should stop paying tuition.

That should work the same way for law schools as well, except that we’re comparing incomes as lawyers with incomes as non-lawyers for college grads. We’ve already seen some signs that law school tuition has risen high enough to price some people who formerly went to law schools out of the market. In my early years as a law teacher, our school had a substantial number of students who saw becoming a lawyer as a second long-term career; many were retiring after twenty years or so as teachers or police officers, for example. Most of them were enrolled in our part time night program, but some went full-time during the day. The number of such students has dropped dramatically with a correspondingly dramatic shift in the character of the night program. I can’t be certain, but I suspect that a contributing factor is that they can no longer expect to earn enough in the years between beginning their second career and retirement to justify spending money on the much higher tuitions we and other law schools charge. I haven’t researched the matter, but friends at other law schools with night programs have told me that their programs too have many fewer students who see law school as a doorway to such a second long term career. Those students used to enrich our classes by bringing in relevant experiences, and we’ve lost that (though in return we’ve gained greater financial resources to do other things), plus society has lost whatever benefits accrue from having lawyers with substantial experience in other careers.

Will law school tuition eventually rise to the point where it doesn’t make economic sense to go to law school even if you have forty years as a lawyer to make the money needed to cover tuition? It seems unlikely: presumably law schools at which tuition exceeded that point would stop attracting students and either find a way to lower tuition or shut down. A problem is that it’s hard to know what that point is. It varies from school to school and even within individual classes. Students with access to top firms with their higher salaries—which includes most students at elite schools and top students at non-elite schools—should find it in their interest to pay higher tuition than those who cannot command high salaries.

But even that is misleading because many students at non-elite schools who do not make substantial sums right out of law school may do so later in their careers after they establish a reputation. It’s also difficult for applicants to predict where they will rank in a law school class before they get their first-semester grades, much less when they are applying. But at some point, law school applicants should take into account the possibility that they may not make the amount needed to cover large loans. Some media reports suggest that some law school graduates regret having incurred those loans, though it’s not clear how many feel that way.

All this fails to take into account the desire of some students for public service careers, where loan forgiveness programs may to some extent compensate for diminished earnings. Nor does it consider the desire some people have to become lawyers no matter what the financial obstacles. The market for law school applicants is really at least two markets: first, those who very much want to be lawyers, and second, those who aren’t sure they want to be lawyers but to whom law school seems like the least bad option. We tend to attract the first group consistently, and probably would unless tuition became completely unaffordable. The second group is probably more price-sensitive. They tend to come to law schools when good jobs for newly-minted college graduates are scarce, but not otherwise, which is one reason legal education sometimes does well when the economy sours, and vice-versa. Those students seem more likely to go elsewhere as tuition rises. I wonder if that accounts for the fact that even though the economy has not done well recently, law school applications are also not doing well.

If I’m right about my speculations, and I have too little information to say that I am, then that suggests that non-elite law schools which continue to raise tuition as much as past increases will see drops in applications. [And just to make clear my own stake in this matter: as a professor, I of course benefit from the increased revenue received by my institution, both directly, in that it enables the school to pay higher salaries, and indirectly, because it permits the school to provide more resources for teaching and scholarship, among other things. But tuition increases may also harm institutions to the extent, for example, that they price some people out of the market for education who might otherwise have enhanced the classroom experience. They may also damage society at large for the same reason, and they harm me personally when I get the tuition bill for my children, one of whom is about to start at a college which says the combined bill for tuition, room, and board (never mind books and other expenses) will exceed $54,000 in the first year alone.]

Posted by Jeff Sovern on Saturday, June 14, 2008 at 09:23 PM in Teaching Consumer Law | Permalink
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I agree with this article completely. I am in the process of applying to various law schools across the country, and have had to limit applying due to tuition and boarding expenses. The average lawyer who graduates top of his/her class, can expect to make 60,000 to 70,000 dollars right out of law school. Now this number can vary based on many factors such as: previous law enforcement experience, foreign language ability, and also relevant work experience. This being said, if an individual were to be hired and paid on the higher end of the spectrum, there is still no guarantee they will earn enough after taxes to repay loans. This has caused many people to innovate in regards to paying for law school.
One way I've found for people who aren't directly related to the Trump family to pay for law school, is to seek employment within a City agency that will pay for higher education. When I worked for the New York City Police Department, they offered many tuition assistant programs. Officers who met the Department qualifications for the tuition assistance were placed inside of the Legal Bureau. This unit called the Legal Bureau allowed for officers to work directly with attorneys and also they were given special hours to attend classes. I have been told that many Departments across the country have programs like this one. So if you always wanted to know the inner workings of the Police Department, and be an attorney this may be ideal for you. I hope this idea has helped some of you, who are still trying to figure out how to pay for law schools.

Posted by: Anomie | Sunday, June 15, 2008 at 11:00 AM

You forget to include the one thing that has contributed the most to tuition increases: subsidies. As federal and state governments, and private foundations and organizations, continue to subsidize education through 1) scholarships and 2) subsidized access to financial markets, and as such activities continue to make it possible for the vast majority of students to pay for the increasingly high costs of education, there is little incentive for schools to cut tuition.

You also fail include lost wages and the labor involved in receiving an education as "costs".

The market for education is far more complicated than you suggest (although, I understand the limits of a blog post).

Posted by: Ion | Tuesday, June 17, 2008 at 10:08 AM

You raise a good point. But the larger point is, why should the states be subsidizing additional lawyers through taxes when there are enough lawyers at the current schools? New York has proposed 3 new state-subsidized law schools, and appropriated roughly $50 million. And that is just a start.

Posted by: Kenny | Tuesday, June 17, 2008 at 10:31 AM

I think there's another potential factor: loan companies. If tuition keeps going up, you're going to have more and more graduates who realize after school that they can't keep up with their high loan payments and more will default. And then loan companies may rethink how much they're willing to lend and to whom. The question is how long that will take.

Posted by: Josh | Tuesday, June 17, 2008 at 10:45 PM

"An economist might say that it makes sense to pay tuition as long as the tuition is less than the present value of the expected lifetime benefits of the education, minus the opportunity costs."

The only problem is that the demand will continue to remain high because the perceived "expected lifetime benefits of the education" is great.
Prospective students will continue to take out massive loans and even get their parents to be guarantors of loans so that they can obtain a law degree.
Similar to sub-prime mortgages, homebuyers bought houses that they could not afford because they perceived the benefits to be great. (They assumed incorrectly that the housing market would continue to boom and house values would go up indefinitely). The prospective law students also assume that they will make $140,000 fresh out of law school because that is what the media tells them. Well at the least, they believe that they will make a decent salary, or that their salary would be higher than if they only had an Undergraduate degree. For many law students, however, this is not true. The reality is that many work in small law firms, govt, etc with a salary of $40,000 to $60,000 but student loans of well over $100,000.
Increasing tuition may prevent some applicants but many others will believe (and many times believe incorrectly) that they will make a substantial income upon graduation. So the result will be more graduates with even high debts. Unlike the housing market, there is no foreclosure, no short-sale, no escape from student loan debt.

Posted by: ILLP | Wednesday, June 18, 2008 at 07:06 PM

Well, spending some money for tuition is like spending money for our future. The compedition worldwide is getting more and more hard and only people who are well educated have a chance to get a better "sun-place". Greetings, Niki

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