Law School View as Deeper Dive Into Financial Value Transparency Rules

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A few years ago, I was giving a talk at a small regional university in the rural south. We got to talking about student success, and some participants told me that over the past few years they had dramatically improved their outcomes in terms of retention and graduation rates. Thinking I had discovered a previously unknown Georgia State-like miracle, I excitedly asked them how they had done it. They replied that they had upped their entrance requirements, with the net consequence that they were now admitting fewer first generation students, fewer low income students, and fewer students of color. Voilà, improved outcomes.

It is a sad story, and to their credit, they did see the downsides of their actions. I have been thinking quite a bit about that story this week as I worked on the post below, for reasons that will soon become apparent.

A quick reminder about FVT

In October 2023, the Department of Education (ED) published the new Gainful Employment (GE) and Financial Value Transparency (FVT) regulations which will take effect in July 2024. Gainful Employment has been around for some time, but the new rule has some important changes and an expansion of scope around new metrics, applying to a larger population of schools and with new reporting requirements.

Gainful Employment regulations

GE regulations apply to all for-profit institutions and credit-bearing certificate programs at all institutions. Earlier versions of GE were based on a debt-to-earnings (DTE) metric, and this concept is retained with some adjustments. Graduates must have annual loan payments less than or equal to 8% of total earnings OR less than or equal to 20% of discretionary earnings (which is calculated using the higher of either annual earnings or 150% of the poverty rate). The new regulations added an additional metric, the Earnings Premium (EP) based on earnings of program completers three years after completion and compares it to statewide high school graduate (but not postsecondary) earnings for ages 25-34.

Programs will become ineligible for Federal financial aid if they fail to meet these metrics for two out of three consecutive years. The first set of metrics will be published in 2025. Starting in 2026, programs that do not meet the metrics after just one year will be required to notify current and prospective students, warning them that the program is at risk of losing federal financial aid eligibility. Previous iterations of the rule didn't require such notices until after the second failure.

Financial Value Transparency addition

The big change is the addition of FVT regulations which apply the DTE and EP metrics described above to programs at all institutions, regardless of profit or not-for-profit status. Non-undergraduate and non-Puerto Rico programs that fail these metrics will be required to notify prospective students of this fact, in writing.

A useful summary of the rules and their applicability is provided in the flowchart diagram below.

But what about law schools?

Since the rules first came out, I have wanted to do a deeper dive into professional programs to better understand the implications. I did one dive into library and information science degrees but wanted to take a look at another and perhaps more conventional program. Implications emerge much more clearly if you focus on one program type rather than thinking about them in aggregate.

Higher education is a highly-differentiated space and context-dependent. The impact of a new rule is likely to have different implications depending on what type of degree and where.

The charts below show how law school JD programs in the US perform against the FVT metrics, using the ED-provided Program Performance Data (PPD) dataset used in GE & FVT rule making. The future values are not yet known, and the PPD values are the best view of these programs assuming no major changes in debt or earnings.

Let’s tighten our focus around the pass / fail line.

The institutions below the line pass the FVT metrics but those above the line fail. The for-profits that fail will no longer be able to offer Federal financial aid (as these programs are subject to the GE portion of the rules). The non-profits that fail will have to begin notifying prospective students that the programs do not meet federal requirements on providing value.

Most of the programs failing FVT are private non-profits, but there are some publics included. Roughly 42% of law schools reporting data are publics, private nonprofits comprise a larger share, with a small sprinkling of (usually specialized) for-profit programs.

At first glance at the charts above, whether a program passed FVT or not seems to be a function of how highly ranked schools are. As I delved deeper into the data from both the Program Performance Data on which the metrics are based as well as College Scorecard data (as shown in the table below), it became clear that that was a big part of the explanation. Tuition is generally high across the board; the big difference is in the kinds of salaries that graduates can command. Having low costs is no guarantee of success. Southern Illinois University at Carbondale (go Salukies) has one of the lowest, if not the lowest, tuition in the country, and yet still fails FVT because the salaries of their graduates are low as well.

The detailed data tell us three things about programs that pass versus programs that fail the FVT test (which sounds a bit like a test for a virus).

1. Programs that pass FVT attract a far higher proportion of students with lower financial aid needs. In general, students in FVT passing programs borrow less than the total cost of tuition, meaning they need less money from the get-go, and ultimately their debt repayment is lower. This is supported by looking at the levels of borrowing in those programs by students who did borrow (the debt in the table is for all students, borrowers, and non-borrowers alike, which is what FVT is based on). The difference between borrowers and non-borrowers is much higher in FVT passing programs than in FVT failing programs, indicating that more students going into FVT failing programs require aid. Additionally, students graduating from law school who were Pell-eligible as undergraduates (i.e. who came from lower socio-economic backgrounds) earn less than students who were not Pell-eligible. Thus, lower socio-economic family background means lower salaries post law school. The more of these kinds of students a program admits, the lower their overall salaries, meaning they would be more vulnerable to failing FVT.

2. FVT failing programs have a far higher proportion of black students than FVT passing programs. There are 6 HBCU’s that have law schools, of which there are data on five. All five fail the FVT test.

3. In general terms, women are paid less than men, but this tends to emerge more strongly after the first year, post-graduation. In the schools sampled above, by year four, women are paid less than men in 10 out of 16 cases. Looking across all law school programs for which there are data in the College Scorecard, women are paid less by Year 4 over 70% of the time. Additionally, where women are paid less than men, the gap is often large; for example, at Notre Dame and John Marshall. Where women out earn men, the gap is usually much smaller, for example the University of Miami or the University of Wisconsin-Madison.

What does this all mean?

The implications of this situation are currently far from clear. The vast majority of the schools failing FVT are non-profit. If the metrics do not change by the time of new data releases, these programs would have to warn prospective students of the failing metrics. Program administrators probably won’t want to do this, but the impact on students is also not obvious.

I completed a PhD program in political science which took (on average) eight years to complete, where only one in three students made it to the end, and an even smaller number got tenure track academic jobs (the goal upon which most of us were focused). To give a qualitative sense of this, I remember one of my friends who was in the job market pointing out to me that there was a total of eight tenure-track political theory jobs available in the country that year, and the University of Chicago alone had ten political theorists in the job market. My friend did in fact get one of those positions. That’s a bit of an extreme example, the job market was better in sub-fields other than political theory and most of us (myself included) were not smart enough to be political theorists. But you get the point.

The department (to its shame) never sat us down and said that our degrees would take an extraordinarily long time and that our chances of success were grim. But in a sense, they did not need to. We were analytical types and worked it out ourselves, but most of us continued anyway, if not confident then at least clinging to some hope that we would somehow be an outlier and finish sooner and get a job. I imagine most students entering law school are the same, most of them will ignore the warnings.

So, I am not sure that the warnings will have a huge impact on enrollment. Psychologists or behavioral economists probably have a name for the way that people ignore these warnings. Despite my reading of Kahneman and Thaler, I haven’t yet come across it.

But law is a competitive field, and I suspect that programs that fail FVT (which to start with are not the most highly ranked) will want to make changes to improve their position to make sure they are able to recruit the best students they can.  Law schools are limited in what they can do to cut costs. Most costs come from faculty salaries, and law schools by virtue of American Bar Association (ABA) accreditation are required to tenure the vast majority of the faculty (the reason for example that law school faculty are the only tenured faculty at Liberty University).

Given that they can’t cut faculty numbers substantially, these schools may look to tweak the kinds of students they admit, and this is where we see potential unintended consequences from ED’s regulatory zeal. To me, the most obvious method to improve metrics would be to admit wealthier white male students. This potential decision might not be consciously made, but like the rural regional institution mentioned in the introduction, this might be the result of tweaking admissions to get better outcomes and avoid failing FVT.

Parting thoughts

Looking at the data in detail highlights the somewhat arbitrary nature of the new regulations and the fact that they are very likely to have unintended consequences. But the data also raise some important philosophical questions about what we want to be like as a society and whether our public policy supports or gets in the way of our collective goals.

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