How Law Schools Understate Student Debt

Over at Inside the Law School Scam, Paul Campos and Deborah Jones Merritt have two interesting posts — with a promise of more to come later in the week — on how widely-reported law school debt figures systematically underreport actual student debt. The short answer from today’s posts: By ignoring the interest accrued during law school. An excerpt:

It turns out that when law schools report the educational debt accrued by their graduates over the course of law school they’re not really reporting that: instead they’re reporting the mean total of law school loans taken out by their graduates.

To see why this is an important distinction, consider the effect it has on the debt numbers at the typical graduating class of 2011 at a private law school. According the ABA Journal, the ABA reports “the average education debt for law grads at private law schools last year was nearly $125,000″ (given that Barry under-reported its graduates debt by a factor of three we can ignore the “nearly.”).

But that wasn’t the average education debt. Leaving aside for the moment that this figure doesn’t include other educational debt, the average (mean) balance of the law school loans 2011 private law school graduates had when their first payments became due in December was approximately $142,565. The extra $17,565 in debt represents interest accrued on those loans over the course of law school. Recall that with the exception of the first $8,500 of a subsidized Stafford loan (a subsidy that was eliminated this summer and will not be enjoyed by students going forward), interest on loans starts accruing as soon as they’re disbursed.

The practical upshot of this is that real law school debt — that is, the actual balances carried by graduates when their first payment becomes due — is on average quite a bit higher than the numbers reported by law schools to the ABA. And the effect becomes stronger the more a graduate owes, both because the effect of the subsidized Stafford loans is minimized, and because the gross dollars represented by a percentage increase become larger[.]