Bankruptcy and Bad Behavior - The Real Moral Hazard: Law Schools Exploiting Market Dysfunction

Abstract

The widespread discussion about the market for law graduates ignores an essential fact: it's not a single market at all. Employment opportunities vary dramatically across schools, yet tuition prices fail to reflect those differences. As a consequence, many schools with the worst placement rates burden their students with the highest levels of educational debt. How is that possible?

The answer is market dysfunction. Current federal student loan and bankruptcy policies encourage all law school deans to maximize tuition and fill classrooms, regardless of their students' job prospects upon graduation. This law school moral hazard combines with prelaw students' unrealistic expectations about their legal careers to produce enormous debt for a JD degree that, for many graduates, does not even lead to a JD-required job.

This article proposes a way to identify three distinct law school submarkets. Using those submarkets, it offers a plan to create a more functional market that enhances law school accountability, encourages meaningful price differences among schools based on outcomes, and spurs innovation.

Keywords: Law schools, law school market, educational debt, non-dischargeable education loans, federal student loans, law graduate employment, law school market dysfunction

JEL Classification: H20, H52, I22, I28, J44, L84