The Problem of Law School Discounting—How Do We Sustain Equal Opportunity in the Profession?

This article originally appeared in The Bar Examiner print edition, December 2016 (Vol. 85, No. 4), pp 6–15.

By Hon. Randall T. ShepardEditor’s Note: This article originally appeared in the Indiana Law Review, Vol. 50, No. 1, and is based on a lecture given by Hon. Randall T. Shepard at the Indiana University Robert H. McKinney School of Law (a James P. White Lecture on Legal Education) on February 11, 2016. It is reprinted with permission from the author and the Indiana Law Review, with minor modifications.

Even casual attention to legal publications, or for that matter the public press, reveals that legal education and the profession have had a hard decade—and that for lawyers and law schools the Great Recession continues.

Our collective responses have been substantial and suited to the challenge, except in one respect. The changes we have made in student aid have the potential for lasting harm to the profession and to society.

One cannot analyze the impact of changes in aid without laying out briefly what we’ve been through. It can be described in just eight words: rising tuition, massive debt, fewer jobs, fewer applicants. So first, a few words about each.

Rising tuition is not solely a law school phenomenon.1 Tuition rates for colleges and universities have been rising at more than twice the rate of inflation for decades, at least.2 Indeed, prices in higher education have advanced so far beyond the measure Americans commonly use for other goods and services, the Consumer Price Index, that the CPI no longer tells the full story. University finance officers have developed a new metric for measuring it, the Higher Education Price Index.3 Law school tuition has been rising at a rate even higher than is generally true in education, something like 8% a year during much of the last two decades.4 Only the crisis of the last 60 months has slowed this upward march.5

And, of course, how much students and families borrow to pay for post-secondary education has become very visible. When the amount Americans owe on student debt finally exceeded the amount they owe on their mortgages, it was inevitable that the cost of college would become a topic of daily conversation, and the stuff of presidential debates, including declarations by two leading candidates that college should be “tuition-free.”6

The legal press now covers new ideas for avoiding payment of student debt, though the default rate for law students is actually quite modest.7 Whether the ready availability of student loans has made college less expensive or more expensive is a more complicated question than we usually imagine.

Tuition and debt have actually been on everybody’s mind for some time,8 but it was the realization that there were fewer job openings for lawyers than most people believed that genuinely disrupted the system.9 The Bureau of Labor Statistics has reported that the number of new legal jobs was below the number of new law graduates for a very long time.10 Those graduates who could not find employment had long noticed this, but it did not enter our collective consciousness until two legal developments coincided.

First, the recession caused drops in just about every job category,11 and it created a gap in legal employment that was wider than ever. This gap led to tougher examination of the standard methods of reporting how many law school graduates could find jobs as lawyers.12 The collection of this data had historically done little to distinguish law grads who found lawyer jobs from law grads who ended up working at something else.13 Throughout the 1980s and 1990s, the headline reports said that about 90% found employment.14

At the worst of the recession, with new data collection methods that distinguished temporary work from permanent jobs and distinguished jobs that actually required a law license from jobs where you didn’t really have to be a lawyer,15 the picture was very painful to behold. Ten months after graduation, the class of 2014 had 59% of its members holding permanent jobs working as lawyers. This is actually an improvement over previous years.16

Of course, college seniors and pre-law advisers can read this data just like everybody else. A good number of 22-year-olds asked themselves a question they used to take for granted: if I go to law school, do I get to be a lawyer?17 The new, less fulsome answer to that question led a good number who might have decided to attend law school to look elsewhere for a career, thus fewer applicants. Twice since 2000, the total number of applicants for American law schools stood near or at 100,000.18 In an environment when the number of first-year seats stood at about 52,000, this meant that there were nearly twice as many applicants as people who would matriculate.

For the students who entered as the class of 2018, by contrast, there were 53,500 applicants and the number who matriculated was 37,000.19 Year after year, we asked ourselves, “Where’s the bottom?” It is at least possible that we have finally reached it. For the 2016–17 school year, applications were up 1.3% and applicants were up .9%.

How Have the Schools Reacted?

The task of managing through this crisis has been difficult, to say the least, for law faculties. Unsurprisingly, and with some justification, it was common early on to hear people say, “These numbers sometimes go up and sometimes they go down. This too will pass.” As time passed, the need for more robust responses became apparent and schools responded in ways that were aggressive and thoughtful. Many of the programmatic changes were very creative, and I will describe them later.

Managerial changes were more wrenching. First, many schools decided to get ahead of the applicant trend and shrink the size of incoming classes.20 The number of first-year matriculants shrank by 30% over a period of five years.21 In order to maintain even these numbers, many schools admitted students whose applications reflected lower measurable qualifications than those admitted in earlier, happier years.22 A fair number of schools took actions that are similar to those private enterprise might take but are pretty rare in education: hiring freezes, staff layoffs, and faculty buyouts.23

A Shift the Bench and Bar Haven’t Really Noticed

There has been yet another shift, driven partly by the drastic decline in demand, and partly by the rising tide of competition, made ever more fierce by the rankings issued each year by U.S. News & World Report.24 This shift has to do with student financial aid.25

First, a few words about what financial aid really is in the modern environment. When lawyers and judges hear about scholarships, they think largely of endowed funds created over the decades, often named in honor of a distinguished faculty member or alumnus.26

But in most schools, endowments generate relatively little of the expense of operating the school.27 Most American law schools operate primarily on how much tuition they can collect.28 Thus, when the financial aid office says to an applicant, “We are offering you $10,000 in assistance,” what is actually happening is that the school has discounted the tuition charge for that applicant.

The extent of such discounts has grown over the last decade, both in law schools and in universities more generally.29 From one view, this discounting seems like good news. More students are allowed to attend without paying what regular consumers might call the “sticker price.” Indeed, the actual “net tuition” being paid has not been rising as fast as the stated tuition price.

But, of course, a school must ultimately collect enough tuition to meet budget.30 Because that budget is so focused on personnel—tenure-track faculty, non-tenure faculty, and staff—it is extraordinarily difficult to reduce expenses in the short run.31 And despite energetic efforts at developing technology, it is difficult to cut costs through such efficiencies.

Thus, when one student is offered the chance to attend at a deep discount, the foregone revenue must be made up by charging higher tuition to those who are admitted on the basis that they pay the sticker price.32 It does not prove too much to call this a cross-subsidy flowing from some students to other students.

Most of the developments I described earlier have seemed unlikely to affect who will get to be lawyers and what sort of legal profession we will be over time. One change will do that: it is the shift away from offering financial aid on the basis of the economic need of the applicant and instead allocating aid on the basis of the applicant’s measurable credentials, particularly the applicant’s score on the Law School Admission Test (LSAT) and grade point average.33

This shift away from need-based aid has been going on almost from the moment that U.S. News began to issue rankings. Just 20 years ago, nearly 60% of the financial aid given to law students was based on the financial need of the individual students and their families.34 There’s reason to believe that as we sit here today, less than 20% is dispensed solely on the basis of need.35

While merit aid surpassed need-based aid for the first time during the 1990s, that trend accelerated during the first decade of this century.36 When the ABA reported to the U.S. Senate on financial aid in 2011, it identified aid in three categories: need, merit, and combination.37 In the previous five years, need aid had grown nationwide by $23 million. Merit aid had grown by nearly a quarter billion.38 Aid identified by schools as based on a combination had grown by $110 million.39

Just how much of that “combination” aid was motivated by need rather than LSAT scores is difficult to tell. One prominent academic who is often likened to the skunk at the garden party, Professor Brian Tamanaha, formerly dean of St. John’s University School of Law, has analyzed the available data and concluded that 84% of all aid is merit-based.40 My own examination of that data has led me to conclude that one cannot know whether Tamanaha is correct.

That said, when I have asked financial aid people about trends in college and law school aid, they mostly say that Tamanaha is right about the transformation in aid. My friend David Yellen, formerly dean at Loyola University Chicago School of Law, reported that he had asked his admissions staff to examine the 10 schools with which Loyola usually competed for students and they reported back that Loyola was the only one still offering any substantial student aid aimed at meeting economic need.41 A similar assessment came from a committee the ABA Section of Legal Education and Admissions to the Bar appointed to examine the impact of law school rankings.42 That committee represented a team with deep experience, individuals widely admired in the profession and the academy: Dean Kent Syverud, Dean Phoebe Haddon, Pauline Schneider, and Judge Martha Daughtrey, to name a few.43 That committee said in its final report:

Because median LSAT score and median UGPA are so important to the current rankings, law schools have largely abandoned other measures of merit or need in awarding financial aid. This can have the effect of shifting financial aid to those students with LSAT scores that will assist a school in achieving its target median for rankings purposes. The result is that students with the greatest financial need often are relegated to heavy borrowing to attend law school.44

Lay that finding up against current debates about who does well on standardized tests and the impact of their use on access to education. Most of that conversation accepts as fact, regularly validated by psychometric inquiry, that the use of such metrics favors whites and the well-to-do.45 This is true of both the SAT and the LSAT, and it has nothing to do with test design.46 Surely, the focusing of student financial aid offers on such scores has the same effect.

Focusing on the test scores and shifting financial aid to boost the profile of the entering class means this: people with great scores can come to law school relatively cheaply regardless of their financial status, and those tuition losses are made up by people who stand at the back of the applicant pool, who end up borrowing lots of money to attend.47 There is much detailed proof that this is so.48

The Myriad Defenses

In the course of the time I’ve spent engaging with people about these trends, four reasons have been lifted up for why this change in aid practice is a good thing.

The first defense is that we cannot really tell who is needy and who is not. Best to abandon the enterprise when the differentiation is so unreliable. I say that when the child of a physician or lawyer from a large firm applies, we can make a pretty good guess that such an applicant is in a better financial position than the applicant who grew up in a ­single-parent household where the breadwinner was an hourly worker. To be sure, as one comes closer to the middle of that continuum, the harder it becomes to make the call.

The second defense is that it is good for society to reward excellent performance. Yes, Americans believe in that, but we also believe that over the long run our nation is a more decent and a more successful place when we give an extra boost to young people who may not yet have the best metrics on their records, but who with a little extra assistance can make the grade and do good for society.

The third defense is to point at the student: an applicant who gets into Stanford but is not offered any student aid makes the choice to go there and load up on debt. If the applicant chose to attend a lower-tier school, that same student’s LSAT score would likely produce a good scholarship offer for her. Her decision reflects a choice. That’s true enough, but it does not put responsibility for the nature of the choice in the right place.

Fourth and finally, an old friend said to me, “Randy, I know that you’re just as competitive as the rest of us. If you were a law school dean, you’d want your school to have the strongest performers you could possibly recruit. You’d do exactly what we’re doing.”

Solutions

That brings me to the denouement, also styled as, “Okay, Shepard, what do you propose?” As with other dilemmas and developments, there are a number of possible approaches and a variety of possible actors. The ones I describe here all reflect the view that a school that decided to engage in unilateral disarmament and shift its money away from merit aid would get mauled in the market.49

Government Action on Loans

One action proposed to the ABA Task Force on the Future of Legal Education, which I chaired, came from a prominent academic, Professor Deborah Jones Merritt of Ohio State’s Moritz College of Law, who said, “Tying tuition to LSAT scores is not an educationally sound way to build a law school class or a multi-talented profession.”50 She proposed that the ABA standards for accreditation be amended to require that all schools divide scholarship offers equally between need-based and ­merit-based awards.51

Our task force featured her proposal in our final report,52 but it has seemed to me that the ABA Council’s legal authority as an accreditor rests on actions that are necessary to provide a program of legal education that, to quote Standard 30l, “prepares its students, upon graduation, for admission to the bar and for effective, ethical, and responsible participation as members of the legal profession.”53 Mandating such a division of aid on all schools looks more like economic regulation than accreditation. Recalling that the Department of Justice Antitrust Division came down on the Ivy League for collaborating on tuition and scholarships,54 and on the ABA for the simple act of publishing faculty salaries,55 using accreditation for this purpose seems problematic.

On the other hand, Congress could build such a requirement into the laws on student loans. This idea rests on more solid legal grounds, but the cure might be more painful than the disease. Most members of Congress probably do not know that the government is subsidizing turning out more lawyers, and placing that fact before them might not lead to the best answer.

The most plausible approach would be use of the Department of Education’s authority to shape student loan programs, and a new study group of the ABA has generated some ideas that might be productive. In this setting, Professor Merritt’s ideas seem worth pursuing.

State Court Action

One modest contribution state courts could make toward reducing the cost of becoming a lawyer would be permitting students to take bar examinations in February of the year they graduate rather than waiting until July. Indiana once permitted February sittings.56 The state’s law faculties urged the Supreme Court to abolish this practice, protesting that a February bar distracted students during their sixth semester. We agreed to do so, perhaps two decades ago, a change in support of promoting diligence in class.57

In the present moment, Arizona and New York have moved in the opposite direction. They now permit February sittings, because it means that law graduates receive their licenses earlier.58 In New York, the traditional system has meant that a student who took the bar in July might not receive a license until the following winter.59 If a student can instead obtain a license soon after graduation and can find work, he or she saves money in the overall cost of becoming a lawyer. The announced reason why those two courts decided to act was the rising cost of legal education.60

Legal Helpers

A more dramatic approach has been to permit people to render legal assistance who do not possess traditional six-semester J.D. degrees.61 The most prominent of these has been the Washington Supreme Court’s actions to create what it calls Limited License Legal Technicians (LLLTs).62 Washington has long permitted such people without a J.D. degree to perform legal work in the course of real estate closings in the capacity of Limited Practice Officers (LPOs).63 By creating its LLLT category of certification, Washington has now extended this technique to individuals who will render assistance in domestic relations cases, where a huge proportion of the people who come to court end up not being able to afford a lawyer at all.64 LLLTs and LPOs must complete specialized education, they have to pass a state examination, and they are subject to a code of ethics.65 As you can imagine, they do all this at a cost far below what a J.D. requires.

The New York Court of Appeals has similarly announced the creation of what it calls Court Navigators, a scheme whose participants are authorized to conduct a fair amount of activity that most of us would call the practice of law.66

These actions serve to illustrate the odd situation in which we find ourselves as a profession. We are producing fewer lawyers, at fairly high cost, so many of whom cannot find a job as a lawyer—and at the same time there are more people than ever who cannot find a lawyer to represent them when they have a legal problem. As the CEO of Voices for Civil Justice said recently in the Washington Post, “We don’t need fewer lawyers. We need cheaper ones.”67

This same impulse has led our comrades in the medical profession toward similar action.68 Even the movement to slice a full year from traditional medical education has not slowed the new practice of providing certain kinds of medical assistance through professionals licensed for limited purposes, such as physician assistants, various degrees of nursing licenses, and so on—even to giving certain injections in drugstores rather than in a doctor’s office.69

Indiana’s conversation in this field has been more modest, but it does include an Internet-based, court-sponsored self-help center, formal guidance for county clerks about how much they can do to advise unrepresented parties, and formal discussion about licensing paralegals and other legal assistants.70 I place the Indiana University McKinney School’s master of jurisprudence program in this same venue.71 State courts and bars and law schools should move this discussion ahead in a more purposeful way.

Schools and Law Practice

Crisis often prompts innovation, and the nonprofit law firms recently opened by Arizona State’s law school are such an example.72 The Alumni Law Group will employ recent graduates, supervised by a seasoned attorney, and build a law practice inside the university and also for citizens in need.73 Likewise, City University of New York School of Law and Thomas Jefferson School of Law in San Diego have set up incubators to train future practitioners in their first year after graduation.74

Conclusion

We lawyers hold as an article of faith that our profession both helps individuals in need and builds a “more perfect union,” to repeat the opening of the Constitution. At its best, our profession offers us the opportunity to play a role in creating a more prosperous and a more decent society. We must put our collective shoulders to the wheel to make it so.

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