Matt Dorfmann

The Law-School Scam

For-profit law schools are a capitalist dream of privatized profits and socialized losses. But for their debt-saddled, no-job-prospect graduates, they can be a nightmare.

David Frakt isn’t easily intimidated by public-speaking assignments. A lieutenant colonel in the Air Force Reserve and a defense attorney, Frakt is best known for securing the 2009 release of the teenage Guantánamo detainee Mohammad Jawad. He did so by helping to convince a military tribunal that the only evidence that Jawad had purportedly thrown a hand grenade at a passing American convoy in 2002 had been extracted by torture.

By comparison, Frakt’s presentation in April to the Florida Coastal School of Law’s faculty and staff seemed to pose a far less daunting challenge. A law professor for several years, Frakt was a finalist for the school’s deanship, and the highlight of his two-day visit was this hour-long talk, in which he discussed his ideas for fixing what he saw as the major problems facing the school: sharply declining enrollment, drastically reduced admissions standards, and low morale among employees.

But midway through Frakt’s statistics-filled PowerPoint presentation, he was interrupted when Dennis Stone, the school’s president, entered the room. (Stone had been alerted to Frakt’s comments by e-mails and texts from faculty members in the room.) Stone told Frakt to stop “insulting” the faculty, and asked him to leave. Startled, Frakt requested that anyone in the room who felt insulted raise his or her hand. When no one did, he attempted to resume his presentation. But Stone told him that if he didn’t leave the premises immediately, security would be called. Frakt packed up his belongings and left.

What had happened? Florida Coastal is a for-profit law school, and in his presentation to its faculty, Frakt had catalogued disturbing trends in the world of for-profit legal education. This world is one in which schools accredited by the American Bar Association admit large numbers of severely underqualified students; these students in turn take out hundreds of millions of dollars in loans annually, much of which they will never be able to repay. Eventually, federal taxpayers will be stuck with the tab, even as the schools themselves continue to reap enormous profits.

There are only a small number of for-profit law schools nationwide. But a close look at them reveals that the perverse financial incentives under which they operate are merely extreme versions of those that afflict contemporary American higher education in general. And these broader systemic dysfunctions have potentially devastating consequences for a vast number of young people—and for higher education as a whole.

Florida Coastal is one of three law schools owned by the InfiLaw System, a corporate entity created in 2004 by Sterling Partners, a Chicago-based private-equity firm. InfiLaw purchased Florida Coastal in 2004, and then established Arizona Summit Law School (originally known as Phoenix School of Law) in 2005 and Charlotte School of Law in 2006.

These investments were made around the same time that a set of changes in federal loan programs for financing graduate and professional education made for-profit law schools tempting opportunities. Perhaps the most important such change was an extension, in 2006, of the Federal Direct PLUS Loan program, which allowed any graduate student admitted to an accredited program to borrow the full cost of attendance—tuition plus living expenses, less any other aid—directly from the federal government. The most striking feature of the Direct PLUS Loan program is that it limits neither the amount that a school can charge for attendance nor the amount that can be borrowed in federal loans. Moreover, there is little oversight on the part of the lender—in effect, federal taxpayers—regarding whether the students taking out these loans have any reasonable prospect of ever paying them back.

This is, for a private-equity firm, a remarkably attractive arrangement: the investors get their money up front, in the form of the tuition paid for by student loans. Meanwhile, any subsequent default on those loans is somebody else’s problem—in this case, the federal government’s. The arrangement bears a notable resemblance to the subprime-mortgage-lending industry of a decade ago, with private equity playing the role of the investment banks, underqualified law students serving as the equivalent of overleveraged home buyers, and the American Bar Association standing in for the feckless ratings agencies. But there is a crucial difference. When the subprime market collapsed, legislation dedicating hundreds of billions of taxpayer dollars to bailing out the banks had to be passed. In this case, no such action will be necessary: the private investors have, as it were, been bailed out before the fact by our federal educational-loan system. This situation, from the perspective of Sterling Partners and other investors in higher education, comes remarkably close to the capitalist dream of privatizing profits while socializing losses.

From the perspective of graduates who can’t pay back their loans, however, this dream is very much a nightmare. Indeed, it’s easy to make the case that these students wind up in far worse shape than defaulting homeowners do, thanks to two other differences between subprime mortgages and educational loans. First, educational debt, unlike mortgages, can almost never be discharged in bankruptcy, and will continue to follow borrowers throughout their adult lives. And second, mortgages are collateralized by an asset—that is, a house—that usually retains significant value. By contrast, anecdotal evidence suggests that many law degrees that do not lead to legal careers have a negative value, because most employers outside the legal profession don’t like to hire failed lawyers.

How much debt do graduates of the three InfiLaw schools incur? The numbers are startling. According to data from the schools themselves, more than 90 percent of the 1,191 students who graduated from InfiLaw schools in 2013 carried educational debt, with a median amount, by my calculation, of approximately $204,000, when accounting for interest accrued within six months of graduation—meaning that a single year’s graduating class from these three schools was likely carrying about a quarter of a billion dollars of high-interest, non-dischargeable, taxpayer-backed debt.

And what sort of employment outcomes are these staggering debt totals producing? According to mandatory reports that the schools filed with the ABA, of those 1,191 InfiLaw graduates, 270—nearly one-quarter—were unemployed in February of this year, nine months after graduation. And even this figure is, as a practical matter, an understatement: approximately one in eight of their putatively employed graduates were in temporary jobs created by the schools and usually funded by tuition from current students. InfiLaw is not alone in this practice: many law schools design the brief tenure of such “jobs” to coincide precisely with the ABA’s nine-month employment-status reporting deadline. In essence, the schools are requiring current students to fund temporary jobs for new graduates in order to produce deceptive employment rates that will entice potential future students to enroll. (InfiLaw argues that these jobs have “proven to be an effective springboard for unemployed graduates to gain experience and secure long-term employment.”)

As for those InfiLaw graduates who actually have full-time, long-term legal jobs—approximately 36 percent of the 2013 graduating classes—how many of them have a salary large enough to justify having taken on more than $200,000 in educational debt? Financial advisers often caution students not to take on more educational debt than the anticipated annual salary of their first post-graduation job, and they almost universally agree that taking on debt levels that are more than double one’s anticipated salary is a very bad idea. Although the InfiLaw schools make very little of the salary data they collect public, they do publish statistics regarding what types of jobs their graduates obtain, so it is possible to come up with some rough estimates.

In recent years, legal jobs for new law-school graduates have fallen into a markedly bimodal salary distribution. Most such jobs pay between $40,000 and $65,000, with the exception of associate positions at the largest law firms, which generally pay about $160,000. (The high-five-figure-salary jobs that many prospective law students imagine they will settle for if they aren’t hired by a big firm basically do not exist.)

One can estimate how many of a school’s graduates got jobs with six-figure salaries—that is to say, jobs that make the accrual of a six-figure educational debt a reasonable investment—by adding together the number who were hired on a full-time, long-term basis by firms of more than 100 attorneys and the number who obtained federal judicial clerkships, which are often precursors to such jobs. At Columbia Law School—an exceptional school by any measure—this number amounted to 78 percent of the 2013 graduates, according to the school’s report to the ABA. Nationally, the figure for graduates of ABA-accredited schools is about 16 percent, but at low-ranked law schools that figure is sometimes radically lower.

Among students who graduated from InfiLaw schools in 2013, for instance, the percentage who obtained federal clerkships or jobs with large law firms was slightly below 1 percent—0.92 percent, to be exact. In other words, the odds of a graduate of one of these schools getting a job that arguably justifies incurring the schools’ typical debt level are essentially 100 to 1.

Matt Dorfmann

InfiLaw does not disclose its finances, but law schools have traditionally been highly profitable enterprises. The reasons are straightforward: law schools are, or at least ought to be, relatively cheap to operate. The traditional lecture method of teaching allows for a high student ratio, and there is no need for expensive lab equipment or, at free-standing law schools like InfiLaw’s, other costly features of university life, such as sports teams, recreational centers, esoteric subjects pursued by an uneconomical handful of students, and so forth. Indeed, until relatively recently, many universities treated their law schools as cash cows whose surplus revenues helped subsidize the institutions’ other operations.

Thus, Sterling Partners seems to have calculated a decade ago that all it needed to make its new law-school venture profitable was large numbers of prospective law students eligible for federal student loans. What the firm must have seen at the time was, from the perspective of a profit-maximizing enterprise, a very large untapped market. Only slightly more than half of the almost 101,000 people who applied to ABA-accredited law schools in 2004 were admitted to even one of these schools. With unlimited federal educational loans available to cover the full cost of attendance at any accredited school, this meant billions of dollars of taxpayer-supplied law-school tuition revenue were being left on the table.

Over the next few years, the InfiLaw schools did their best to obtain as much of that revenue as possible. Florida Coastal, which had existed for eight years prior to its purchase by InfiLaw, nearly doubled in size, growing from 904 students in 2004 to 1,741 in 2010. Phoenix—now Arizona Summit—grew at a still faster rate, increasing from 336 students in 2008 to 1,092 just four years later. Charlotte likewise expanded, from 481 students in 2009 to 1,151 in 2011. Despite across-the-board declines for the past few years, all three schools remain among the largest law schools in the country.

The InfiLaw schools achieved this massive growth by taking large numbers of students that almost no other ABA-accredited law school would consider admitting. InfiLaw was—and remains—up-front about this. Its self-described mission is to “establish the benchmark of inclusive excellence in professional education,” by providing access to a traditionally underserved population consisting “in large part of persons from historically disadvantaged groups.” Yet this means accepting many students who, given their low LSAT scores, are unlikely to ever have successful legal careers. In 2010, for example, two of the three InfiLaw schools admitted entering classes with a median LSAT score of 149, while the third had an entering class with a median score of 150. Only 10 of the other 196 schools fully accredited by the ABA had an entering class with a median LSAT score below 150. (By 2013, some 30 additional institutions had joined these schools.) An LSAT score of 151 is approximately the average among everyone who takes the test. A score of 149 puts test-takers in the 41st percentile. And it is worth noting that a large number of those who take the LSAT do not end up enrolling in law school. (InfiLaw says it does not rely as heavily on the LSAT as other schools do, because “it is not the best determinant of success as a lawyer and clearly has racial bias.” The company says it has instead developed a tool that is “demonstrably superior to the LSAT.” Called the AAMPLE program, it involves applicants’ passing two classes prior to admission.)

The InfiLaw schools’ rapid expansion was greatly aided by the fact that, until two years ago, the vast majority of law schools published essentially no meaningful employment information. Schools reported “employment rates” that included everything from a six-figure post at a large firm to a part-time job at Starbucks. They revealed little or nothing about what percentage of their graduates were working as lawyers, let alone what salaries they were earning.

This began to change when, inside and outside legal academia, the law-school reform movement began to demand that schools disclose accurate employment information, as stories of desperate law-school graduates, saddled with enormous debt and no way to pay it off, filled the national media. Dozens of Web sites dedicated themselves to exposing what came to be called “the law-school scam.” (In August 2011, I started a blog to bring attention to these efforts; within 19 months, it received more than 40,000 comments, many from unemployed and underemployed recent graduates.)

In 2011, Senators Barbara Boxer and Chuck Grassley each sent polite but pointed letters to the ABA implying that the Senate was watching. Before long, the traditionally torpid organization’s Section of Legal Education and Admissions to the Bar began energetically backing a proposal to publish meaningful school-specific employment data. Meanwhile, many individual schools began posting such data on their Web sites unilaterally, in anticipation of the ABA’s new requirements.

Not surprisingly, the sudden availability of something resembling actual employment information contributed to a collapse in the number of law-school applicants, from nearly 88,000 in 2010 to approximately 55,000 this year. And that collapse led to, among many other things, David Frakt’s aborted presentation to the Florida Coastal faculty this April.

David Frakt was a finalist for the deanship of Florida Coastal School of Law. But when his presentation to the faculty touched a nerve, he was told to leave the premises immediately. (Ben Van Hook)

The drop-off in applications hit the InfiLaw schools hard. In total, the three schools received 12,754 applications in 2010; three years later that total had fallen by 37 percent, to 8,066. At Florida Coastal the decline was particularly severe, with applications falling by more than half. In his presentation to the faculty, Frakt made clear that the school’s administration—by which he meant the management of InfiLaw, and ultimately that of Sterling Partners—had reacted by drastically cutting the school’s already very low admissions standards.

Florida Coastal’s 2013 entering class had a median LSAT score of 144, which was in the 23rd percentile of all test-takers. Fully a quarter of the class had a score of 141 or lower, which meant that they scored among the bottom 15 percent of test-takers. (The entering classes of Charlotte and Arizona Summit had identical median and bottom-quarter LSAT scores, suggesting that these numbers were chosen somewhere high up on the corporate ladder.)

Frakt pointed out to the faculty that the LSAT scores of entering students correlate fairly strongly with the probability that those students will eventually pass a state bar examination, which is of course a prerequisite for actually becoming a lawyer. He noted that according to statistics from the Law School Admission Council—the organization that administers the LSAT—scores higher than those in the 60th percentile correlate with a low risk of failing to eventually pass a bar exam. Scores ranking from the 60th to the 40th percentile, by contrast, correlate with a moderate but rapidly increasing risk of failure. Scores below the 40th percentile correlate with a high risk of failure, and scores below the 25th percentile correlate with an extreme risk of failure, to the point where it is quite unlikely that someone with an LSAT score below 145 will ever pass a bar exam.

In the class Florida Coastal had just admitted, then, more than half the students were unlikely to ever pass the bar. But Frakt emphasized that the actual situation the school’s eventual 2017 graduates would face was likely to be even worse than this. In each of the past two years, about 20 percent of Florida Coastal’s first-year class transferred to other law schools. These students essentially made up the top fifth of their classes in terms of law-school grades. This is significant because high law-school grades have an even stronger correlation with passing the bar than high LSAT scores do. In other words, if only half an entering class had a decent chance of eventually passing the bar, and nearly half of those students wound up transferring elsewhere …

Lawyers may be notoriously bad at math, but this equation was simple enough. The ABA requires schools to maintain certain bar-passage rates, or they risk losing their accreditation. Indeed, the ABA’s standards state that “a law school shall not admit applicants who do not appear capable of … being admitted to the bar.” By admitting so many students who, upon graduation, seemed unlikely ever to pass the bar, Frakt pointed out, Florida Coastal was running a serious risk of being put on probation and eventually de-accredited, which would put the school in a financial death spiral. (A loss of accreditation would make it impossible for students to receive federal loans and, crucially, would prevent students from taking the bar exam in many states.)

It was at about this point in Frakt’s presentation that Dennis Stone, the school’s president, entered the room and told Frakt that if he didn’t leave immediately, security would be called. (When The Atlantic reached out to InfiLaw for comment, the company said that Frakt’s presentation was “based upon clearly erroneous information about the school’s accreditation status and key data points,” and that Stone decided “to end the presentation rather than put up with further insults to the faculty and school from a candidate who had no chance to obtain the position.”)

But the salience of Frakt’s analysis is hard to deny, and his conclusions appear to apply equally well to the other InfiLaw schools, which are also admitting hundreds of students that no law school would have admitted until very recently. For the reasons Frakt noted, moving to a de facto open admissions standard is the law-school equivalent of eating the seed corn, since even the generally feckless ABA will not tolerate the sort of bar-passage rates that the InfiLaw schools seem likely to produce.

So why has InfiLaw—or, more accurately, Sterling Partners—gone down this route? A Florida Coastal faculty member who is familiar with the business strategies of private-equity firms told me that, in his view, the entire InfiLaw venture was quite possibly based on a very-short-term investment perspective: the idea was to make as much money as the company could as fast as possible, and then dump the whole operation onto someone else when managing it became less profitable. (As of this writing, InfiLaw is attempting to acquire the Charleston School of Law, which could be read as evidence either of its commitment to stay the course long term or of a hedge against the possibility that one or more of its current schools might lose accreditation.) For its part, Sterling Partners notes that it has been an investor in InfiLaw for more than 10 years, and that this can “hardly be described as short-term compared to industry standard.” The firm says that it takes a long-term view of its investments in higher education because “producing quality outcomes for students takes time,” and it notes that InfiLaw funds are reinvested in the schools rather than being used to subsidize a university.

Whatever InfiLaw’s intentions, one advantage of this sort of investment is that it features very few long-term capital costs. A law-school building can easily be converted into something else, and the only other significant operating cost—the school’s labor force—can be eliminated overnight. Indeed, last summer, in the face of declining enrollment, Florida Coastal essentially fired 20 percent of its faculty in one stroke, according to a faculty member familiar with the terms of the arrangement. The school offered the faculty members a buyout package and implied, according to sources, that if they declined it, the school would declare a financial exigency, allowing it to fire them without any compensation. When I asked, around the time of the buyouts, about what had taken place, InfiLaw’s former general counsel, Chidi Ogene—who had just been named Florida Coastal’s interim dean—explained to me that “some of our faculty members have indicated their interest in resigning, retiring, or continuing in a different role with the school.” Around the same time, I was told by a different faculty member that the school is negotiating to buy out the contracts of another 10 percent or so of the remaining faculty. (InfiLaw declined to comment, based on confidentiality agreements, but it denied any coercion.)

It is important to note that while InfiLaw’s abuse of the student-loan system may be egregious, it is far from unique. Ultimately, this story is about not only for-profit law schools, or law schools, or even for-profit higher education. It is about the problematic financial structure of higher education in America today. It would be comforting to think that the crisis is confined to for-profit schools—and indeed this idea is floated regularly by defenders of higher education’s status quo. But it would be more accurate to say that for-profit schools, with their unabashed pursuit of money at the expense of their students’ long-term futures, merely throw this crisis into particularly sharp relief. To see why, consider the regulatory and political mechanisms that have allowed InfiLaw to make such handsome profits while producing disastrous results for so many of its “customers.”

Students at the InfiLaw schools are able to receive federal loans and take the bar exam after they graduate because the schools have been accredited by the ABA. But why would this organization accredit such brazenly profit-driven ventures, which seem to have so little regard for whether the level of debt students incur has any rational relationship to their future job prospects?

The answer is that the accrediting committee purports to certify only the educational quality of the experience provided by these institutions, not whether they are rational investments from the perspective of their students. And the reason for this level of circumspection is evident if we consider the identity of those behind the accreditation process. The ABA’s accreditation arm was historically dominated by law-school deans and faculty. For tax purposes, almost all law schools are nonprofits. But apart from their tax status, many low-ranking ones are almost indistinguishable from for-profit schools such as Florida Coastal, Arizona Summit, and Charlotte.

What, after all, is the difference between the InfiLaw schools and Michigan’s Thomas M. Cooley, or Boston’s New England Law, or Chicago’s John Marshall, or San Diego’s Thomas Jefferson? All of these law schools feature student bodies with poor academic qualifications and terrible job prospects relative to their average debt. In recent years, as law-school applications have collapsed, all of these schools have, just like the InfiLaw schools, cut their already low admissions standards. And, like Florida Coastal, Arizona Summit, and Charlotte, all of these schools now have a very high percentage of students who, given their LSAT scores, are unlikely to ever pass the bar. Ultimately, what difference does it make that none of these schools produce profit in the technical (and taxable) sense, because they are organized as nonprofits?

The only real difference between for-profit and nonprofit schools is that while for-profits are run for the benefit of their owners, nonprofits are run for the benefit of the most-powerful stakeholders within those institutions.

Consider the case of New England Law, a school of modest academic reputation that for many years produced a reasonable number of local practitioners at a non-exorbitant price. Like many similar schools, New England Law has spent years jacking up tuition and fees by leaps and bounds—after nearly doubling its price tag between 2004 and 2014, the school now costs about $44,000 a year—and graduating invariably large classes, even as the demand for legal services, and especially the legal services of graduates of low-ranked law schools, has contracted radically.

A glance at New England Law’s tax forms suggests who may have benefited most from this trajectory: John F. O’Brien, the school’s dean for the past 26 years, whom the school paid more than $873,000 in its 2012 fiscal year, the most recent yet disclosed. This is among the largest salaries of any law-school dean in the country. (By comparison, the dean at the University of Michigan Law School, a perennial top-10 institution, was reported to make less than half as much, $420,000, in 2013.) Meanwhile, the school’s graduates are burdened with crushing debt loads and job prospects only marginally less terrible than those of InfiLaw graduates. Approximately 41 percent of the students in New England Law’s 2013 graduating class had jobs as lawyers nine months after graduation, and nearly 20 percent were unemployed. (Patrick Collins, a spokesman for New England Law, said in an e-mail that, while the school does not publicly discuss its employees’ salary amounts, O’Brien “has voluntarily reduced his salary by more than 25 percent.” Collins also noted that, among last year’s employment statistics for the eight law schools in Massachusetts, New England Law’s ranked “in the middle” in terms of graduates who were “employed in full-time, long-term, JD-required positions within nine months of graduation.”)

O’Brien’s résumé reveals that he has served recently as the chair of both the Council of the Section of Legal Education and Admissions to the Bar, which oversees the ABA’s accreditation standards, and of the Section’s Accreditation Committee. In short, a better example of what economists and political scientists refer to as “regulatory capture”—the takeover of administrative oversight mechanisms by the very interests those mechanisms are supposed to be regulating—would be hard to find.

The odds of a graduate getting a job that justifies incurring the schools’ typical debt are essentially 100 to 1.

To be fair, O’Brien is far from the only recent example of a dean who has played a prominent role in debates about law-school regulation and reform while at the same time pulling down a gargantuan salary as the head of a law school with catastrophic employment outcomes for its graduates. For instance, Richard A. Matasar, a former dean of New York Law School, was, until his resignation in 2011, quoted regularly in the national press about the need to reform the structure of legal education, even as he collected more than half a million dollars a year from a school with employment statistics nearly as poor as those of New England Law and the InfiLaw schools.

None of this is to claim that greed and other selfish motivations are the only—or even the principal—drivers of the problematic trends in American higher education. Across the ideological spectrum, it is almost universally assumed that more and better education will function as a panacea for un- and underemployment, slow economic growth, and increasingly radical wealth disparities. Hence the broad support among liberal, moderate, and conservative politicians alike for the goal of constantly increasing the percentage of the American population that goes to college. Behind that support seems to lurk an inchoate faith—one that is absurd when articulated clearly, which is why it almost never is—that higher education will eventually make everyone middle-class.

That faith helps explain many economic features of American higher education, such as the extraordinarily inefficient structure of federal loan programs, the non-dischargeable status of student debt, and the way in which rising college costs that have far outstripped inflation for decades are treated as a law of nature rather than a product of political choices.

This past April, the Congressional Budget Office projected that Americans will incur nearly $1.3 trillion in student debt over the next 11 years. That figure is in addition to the more than $1 trillion of such debt that remains outstanding today. This is the inevitable consequence of an interwoven set of largely unchallenged assumptions: the idea that a college degree—and increasingly, thanks to rampant credential inflation, a graduate degree—should serve as a kind of minimum entrance requirement into the shrinking American middle class; the widespread belief that educational debt is always “good” debt; the related belief that the higher earnings of degreed workers are wholly caused by higher education, as opposed to being significantly correlated with it; the presumption that unlimited federal loan money should finance these beliefs; and the quiet acceptance of the reckless spending within the academy that all this money has entailed. These assumptions enabled InfiLaw’s lucrative foray into the world of for-profit education. But they have just as surely shaped the behavior of nonprofit colleges and universities.

The result is a system that has produced an entire generation of overcredentialed, underemployed, and deeply indebted young people. Just as the law-school reform movement has exposed the extent to which law schools have overpromised and underperformed, similar reform movements are calling into question the American faith in higher education in general, and all its extravagant promises regarding the supposed relationship between more (and more expensive) education and increased social mobility.

Two aphorisms from economists sum up how the story of InfiLaw, despite its idiosyncrasies, illustrates in a particularly sharp way why American higher education cannot continue down the path it has been on for more than half a century—a path of endlessly increasing costs, enabled by an unlimited supply of federal student loans. The first is Herbert Stein’s insight: “If something cannot go on forever, it will stop.” The second is Michael Hudson’s observation: “Debts that can’t be paid, won’t be.”

The applicability of these almost Zen-like adages to the structure of higher education in America helps explain why the Harvard Business School professor Clayton Christensen predicted in 2013 that as many as half of the nation’s universities may go bankrupt in the next 15 years. And it also helps explain why Florida Coastal kicked a dean candidate off campus in the middle of his presentation to the faculty. The alternative was to let him discuss frankly the ways in which the school, like so many of America’s institutions of higher education, is based on a fundamentally unsustainable social and economic model.