Monday, May 02, 2011

Rankings, Tuition and the Antitrust Exemption

By Mike Dorf

Recently, a friend of my niece (who is a college senior) sought advice about which of two law schools to which she had been admitted she should go to: what I shall call Law School A and Law School B.  Both are good schools at which the young woman would receive excellent legal training but A does a little better in the (apparently all-important) US News rankings, whereas B was offering her much more in the way of financial aid, so that her net cost would be substantially lower.  Absent the money, she had a slight preference for A, but she says she wants to be a public interest lawyer and that the higher cost of A made B seem like a better deal.  I advised her to investigate each school's loan repayment assistance program to figure out what the real difference in cost would be.  She did, she found that B was still a much better deal financially, and accepted at B.  I wished her well.

Here I want to explore the underlying phenomenon whereby law schools increasingly use substantial portions of their financial aid budgets to "buy" students.  This is a relatively recent phenomenon.  When I was applying to law school 25 years ago, very few schools gave financial aid to students without financial need (as defined by the standard criteria of family wealth and income).  As recently as the late 1990s, Columbia (where I was then a faculty member) was considering getting into this game because it was beginning to see some of its students poached in this way.  As I recall, a majority of the faculty opposed the idea of playing the game, but the dean and the professional admissions staff thought it necessary to play it.  Similar discussions were occurring at other schools and by now nearly all schools that can afford to buy top students in this way do so.

There are two sorts of problems with this phenomenon.  The first has to do with how the schools define top students: Mostly by reference to the criteria--LSAT scores and college grades--that give them the most bang for their buck on USNews rankings.  Thus, a law school that admitted a student based in substantial part on other factors (e.g., interesting work experience; geographic, racial or other diversity; etc) may deem that student less crucial to the class than one with higher numbers.  As a consequence, even though the all-things-considered judgment of the school may be that the more "interesting" student makes a more important contribution to the class, and even though the more interesting student has greater financial need, the student with the better numbers may well be offered more money.  Thus, rankings distort not only admissions decisions but also financial aid decisions.

But even apart from the effect of rankings, the move to pay students based on how much the law schools want them is unfortunate.  When nearly all schools do this, it ends up having very little effect in terms of schools actually getting the students they want.  My family friend is an example.  She was offered a big tuition break by school B because she is in the more desirable portion of school B's pool of admittees, whereas she was probably in the middle of the pack at school A.  That meant that she went to school B, which is a bit different from the outcome if no one "bought" students, but only a little bit.  B is able to poach students from schools in striking distance but not from schools much farther up the food chain, who are bribed by other schools higher up than B.  The result of all of this competition on price is essentially a wash in terms of the resulting student bodies for the schools, but redistributes money that in the past would have gone to students with financial need to students regardless of need.  Systemically, that is a regressive move with no real benefit.

What's the solution?  This is a classic collective action problem and the solution is therefore for the law schools all to agree not to buy students.  Prima facie, that would be an antitrust violation: Indeed, some years ago the Justice Department went after elite universities for colluding on financial aid, and they had to stop.  But the result of the litigation was a federal statute, now found in the notes to the antitrust law, which provides, in pertinent part, as follows:

It shall not be unlawful under the antitrust laws for 2 or more institutions of higher education at which all students admitted are admitted on a need-blind basis, to agree or attempt to agree -
(1) to award such students financial aid only on the basis of demonstrated financial need for such aid;
The law defines an "institution of higher education" in a way that covers any law school that is part of a university that also offers undergraduate education, so nearly all major American law schools would be covered, even though when Congress passed this provision it probably didn't have law schools in mind.  Were I a law school dean chafing under the need to give "merit-based" rather than need-based scholarship money, I would investigate whether there was interest among other deans in taking advantage of this provision.  For the cooperation to be successful, it would have to be universal and verifiable (to avoid defection per the prisoner's dilemma character of the problem).  Assuming enough buy-in I would then bring a federal declaratory judgment action for approval of that course of action.  I'm not a law school dean, of course, but perhaps this post might spark some interest.


Shelley said...

Thanks for this post. I just turned down one of these merit scholarships for a higher-ranked school that I preferred on every metric except the financial one. I think I based my decision on "rational" factors, but it certainly occurred to me that the scholarship could have gone to much needier students, and that the underlying motivation was to boost the school's USN&WR ranking.

I would add another dimension to your analysis: the issue of who is likely to accept these scholarships. At many top schools, loan-forgiveness programs are generous enough such that committed public interest lawyers can expect essentially a deferred scholarship, as it were. So the value of a straight-up merit scholarship is reduced for them. But for those who want to go into Big Law, these scholarships are worth exactly what they say they are---that's money that goes right into the bank and would be wasted if they went to school elsewhere.

Finally, most schools will give financial aid to needy students, so again, the real value of a merit scholarship is reduced for them. So you end with this: Not only are the targets of merit scholarships likely to be "good on paper" types, but those who accept these scholarships are likely to be relatively wealthy people who are striving to become even wealthier. Is that a good use of law schools' resources? I don't think so.

tjchiang said...

While you are largely right that the largest effect is redistributive (and regressively so), it is not the only effect. All of economics happens at the margins. Here, we would also expect to see the shift from need to merit scholarships to mean: (1) slightly more scholarship spending and (2) slightly higher quality students overall (when quality is defined by the same LSAT and GPA measures).

Education is not the only sector where market efficiency and other preferences conflict. Economists often make the mistake of pretending that distributive concerns are irrelevant or do not exist. It would equally be a mistake to ignore the efficiency effects of competition here.

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doubledee said...

This is a great article by the way. You made a really great point about law schools buying out student. Reading your post that is definitely the case I see.This post would certainly help a lot of aspiring law students to pick the school that would best serve their interest as well as taking into consideration the other people. Regards from Boston Market Coupons

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