Saturday, October 20, 2012

The next bailout

Our government has a long, rich history of using taxpayer money to bailout the poor decision-makers among us.  Most recently, of course, we had a bailout of what seemed like the entire “financial system,” and even had to bailout the American auto industry.  But these days, we’re moving into a new “bubble,” and a new bailout is underway.  It turns out that when we blindly accept long-held beliefs—such as “more education is better”—bad things happen.  Today, there is more than $1 trillion in student loan debt outstanding, with many of these debtors unemployed and in default on their payments.  This, of course, has given rise to an education bubble, and has even spawned several books on the topic and a website of the same name.

A large part of this educational debt was incurred by law students (now graduates) who, unfortunately, typically find themselves among the poorest of Americans.  That is, they’re often in debt to the tune of $200,000 or more, and huge numbers of them are unable to find legal employment, or any employment at all.  In response, some of these graduates sued their former law schools, claiming that the schools provided false or misleading employment data that induced them to enroll.  Typically, schools had reported that their graduates were obtaining salaries well into the six-figure range, with 95 percent or more obtaining jobs—but neither one of these things was true.  In fact, most of the lawsuits against the law schools were dismissed, oddly, because the employment data was so obviously false, that the then-prospective law students (now law school graduates / plaintiffs) should have known better than to rely on the data.  

Now that’s rather curious judicial reasoning.  But, in any case, with law schools off the hook, and with their graduates owing massive amounts of debt that they’ll never be able to pay, who is on the hook?  That’s right: we the taxpayers are.  And we could be on the hook for up to a $160,000 bailout for each unemployed or underemployed lawyer.  But what’s different about this bailout is that it’s not just being used after-the-fact to bailout poor (or lied to) decision-makers; instead, it’s being used proactively by law schools to entice prospective students to enroll and take on debt that they know, up front, they’ll never be able to repay.

With our $16 trillion (and growing) national debt—not to be confused with our annual trillion dollar deficits—the bailouts have to end at some point.  And the way to stop students from taking on more debt in the future, which will result in more bailouts even further down the road, is simply to cap the amount that the government will lend to each prospective law student.  And when that happens, watch how fast law school tuition rates will plummet to match the available funds. 


  1. I believe the loans are USG guaranteed so couldn't the USG stipulate that they only guarantee loans for that proportion of Law School students that the School says will not find jobs in their advertising? So if the school advertises that 95% of their graduates get jobs loans would only be USG guaranteed as needed - i.e. for the 5% that would not find jobs. This might work better than "moral hazard".


    1. LFF -- Great idea, and it would probably force schools to give more accurate job numbers. The problem is, though, if that happens, then the USG would be guaranteeing loans for an increasingly larger percentage of graduates. Plus, many of the students who DO get jobs don't make nearly enough to pay off their loans, so that is as bad as being unemployed. Many solutions have been proposed, including allowing students to discharge their debts in bankruptcy, thereby putting the risk on the lenders who are so willing to lend these massive sums of money. Here's one blog post on the the topic from "inside the law school scam" blog: