Tuesday, February 05, 2013

On Higher Education As A Bad Investment

Paul Campos wrote a column about the problems of the US college system and in particular the student loans.  It may be the case that college is not such a good investment, after all:

The American system of higher education is increasingly becoming a fiscal disaster for ever-larger numbers of students who move through it.  That disaster is being caused by a combination of terrible incentives, institutional greed — and the pervasive myth that more education is the cure for economic inequality.
The extent of this myth is highlighted by a new report from the Center for College Affordability and Productivity, which indicates that nearly half of all employed college graduates have jobs that require less than a four-year college education.
Far from being “priceless,” as the promoters of ever-more spending on higher education would have Americans believe, both undergraduate and post-graduate education is turning out to be a catastrophic investment for many young and not-so-young adults.

The problems Campos refers to are really several in a complicated knot, beginning with the question whether the United States produces too many college students in the first place (compared to what other countries do), whether a college education should be regarded as a general money-making investment in professional skills, whether the way college education is funded is correct in this country and then the question of the role of higher education in that global rat-race for a job which pays enough to live on.

To talk about all of those requires a book or two, and even then room for debate would remain.
Not that Campos intended such a general discussion; those are my thoughts.  What he does is give us an example from law schools.

Law and medicine and a few other fields are actually not the best examples here, because they truly are occupational training.  A general university degree is not.  But that simplifies the problem in a few ways because we can set aside the question of general citizen benefits of education and the benefits which come to the whole society and so on and pretty much concentrate on the financial and career benefits from a law school degree.

These, Campos argues, may not justify the loans most students must take.  Or, rather, he argues that the loans shouldn't be given on such lenient grounds, given the poor state of the law labor markets:

In recent years, law school has become the most striking example of this remarkably perverse system. Consider how American legal education is funded:
    •    Law schools calculate a total annual cost of attendance, based on their tuition and the cost of living in the area where the school is located. For example, American University’s law school estimates this year’s cost of attendance as $70,204.
    •    Any student a law school chooses to admit can, assuming he or she is not currently in default on an educational loan, borrow 100 percent of the cost of attendance for that particular school from the federal government, in the form of educational loans that currently carry interest rates of 6.8 percent and 7.9 percent.
    •    The federal government puts no limits on how much money a school can make its students eligible to borrow, nor does it make any effort to determine whether the federal loans students are taking out have any reasonable prospect of being paid back.
    •    Interest begins to accrue on these loans as soon as they are disbursed. This means that a student who enrolled, for example, in American University last fall will have — assuming a 3.5 percent annual increase in the cost of attendance — approximately $260,000 in debt when the student’s first loan payment comes due, six months after graduation.  The student will owe monthly payments of more than $3,000 on the standard 10-year repayment plan, and nearly $2,000 on an extended 25-year repayment schedule.

Hmm.  I haven't had enough time to think through the alternatives and I'm not sure what the alternatives are that Campos would propose, if any.  Should law schools be more strictly regulated so that they don't take advantage of the students?  Should  student loans be given on the basis of the odds that a particular student will get a good job? 

But that would bring back all sorts of stuff we don't really want back, such as the importance of old-boy-networks and family connections in getting a job, and it would most likely involve geographic discrimination, too.  Or should we stop subsidizing higher education in law?  Or what?  Maybe there should be better predictions about how many law jobs are going to be available and then limits on how many students schools can take so that the two match better?

From the law student's point of view the problem is in the mismatch between the high costs of training and the likely future earnings:

Starting pay is down for 2010 law graduates, and the drop is greatest for law firm jobs.
Median starting pay dropped by nearly 13 percent for all jobs and by 20 percent for law firm positions, according to NALP, which calls itself the association for legal professionals.
The national median for 2010 law grads working full time and reporting a salary was $63,000, compared to $72,000 for the class of 2009, NALP says in a press release. The national median salary at law firms was $104,000, compared to $130,000 the previous year.
The drop in law firm pay largely reflects a shift in jobs to smaller firms, rather than a drop in salaries paid by individual employers. Fifty-three percent of the class of 2010 who obtained law firm jobs went to firms of 50 or fewer attorneys, compared to 46 percent the previous year. Only 26 percent went to firms of more than 250 lawyers, compared to 33 percent the previous year.
The drop in overall pay is also spurred by the erosion of jobs in private practice. About 51 percent of the graduates from the class of 2010 who found jobs were employed by private law firms, compared to about 56 percent of the class of 2009.
NALP executive director James Leipold says in the press release that aggregate starting salaries fell because more 2010 law grads found jobs with the smallest law firms. “This downward shift in starting salaries is not, for the most part, because individual legal employers were paying new graduates less than they paid them in the past,” Leipold said.
The press release cautions that few salaries are actually at the national median of $63,000 or the national average of $84,111. Many salaries cluster at the $40,000 to $65,000 range at the lower end and at the $145,000 to $160,000 range at the high end. The mean and median also skew high because NALP collects more salary information from large than small law firms. When the statistics are adjusted to place greater weight on small firm salaries, national average pay is $77,333 for all full-time jobs.

In fact, the law jobs have shown that clustering into two ranges for several decades now.  One cluster centers on a fairly low level (for a jobs which requires a graduate degree) and applies to small-town lawyers, the other cluster centers on a fairly high level and applies to lawyers in large firms.  So a student trying to figure out whether the investment in law school will pay off should determine which cluster is most likely for her or him.

There's much more to the value of an education than simply the money it provides, of course.  But the money it provides is important because those loans must be paid back and future children must be fed and so on.

I've read a lot about the high loans of medical students and how those affect the desire to enter medical school or the desire to set up an independent business.  But data on starting salaries in medicine demonstrates a totally different reality.  It will not take terribly long to pay those loans back in medicine, compared to the time it will take in law.

What's interesting about these problems is that they might be different for women and men.  This is because the net return from an investment in higher education of some particular type must be compared with what's-the-alternative-pay, and that alternative pay is higher for men than for women.  Thus, to some extent a deal which looks bad for the average man considering higher education might look better for the average woman considering higher education, simply because her alternatives are worse.

As I mentioned above, this particular dilemma has many, many tentacles, and I only shook hands with one.  There's the question of what the value of lawyers to the society might be, too, and the question whether the privately-determined number of lawyers is the correct one from a societal point of view.  A fair legal system depends on everybody having access to a proper and informed defense.  A purely free-market system of producing lawyers most likely produces only enough for the upper and middle classes who can afford to pay for the services out-of-pocket.