New York Law School - An Example Of When Law Schools Play With Debt

I went to South Texas College of Law.  Not the most prestigious law school in the World, I guess, but when I attended it had one trait that you had to appreciate.  STCL would not build anything, add anything, or pay for anything if it did not have the cash.  I do not mean that it had the promise of donations and it borrowed against those promises.  It was a cash and carry business, so to speak, and the law school did very well.

I do not know if this is still STCL's practice, but I kind of miss that philosophy.  It has somehow been lost among everyone in the last many years.  At least, in my opinion, STCL's attitude about debt was an influence on many of its graduates.

Now, no matter what the intention might have been, you gauge that against the story in the New York Times and the ABA Journal concerning New York Law School.  According to the stories, in 1986 an amendment to the tax code changed to allow all nonprofits, such a law schools, to float tax-exempt bonds.  New York Law School took advantage of this easy money, much the same as homeowners took advantage of easy liar loans, I guess.

New York Law School apparently not only took to borrowing money, it started playing around with some of the more risky alternatives out there to say maybe a percent or so in interest.

For example, New York Law School sold its library on prime Manhattan real estate for $136.5 million, added the money to its endowment, and then borrowed money for construction in 2006 by floating $135 million in auction-rate securities, which are sold at weekly auctions that establish the interest rate, but this type of auction dried up last year because of the credit crunch.

Why did New York Law do such a crazy thing?

Much for the same reason that homeowners took out crazy adjustable rate loans with teaser interest rates, that they knew they would have to refinance every year or so.  According to the Times article, the law school’s dean, Richard Matasar, stated that interest on the securities was originally under 4%, compared to 5.5% the school would have paid on ordinary fixed-rate bonds.

Now, however, the law school has had to convert its securities into a variable rate note secured by a letter of credit at a higher interest rate, and its endowment has fallen by 20%.

Of course, here is the problem.  During good times law schools in general raised their tuition much faster than the rate of inflation, and they did so with impunity.  There was no project or one scheme too small for which they could not demand that law students borrow even more money and give it to the school.  But, that greed was not enough, so New York Law School sold its building and borrowed over a hundred million dollars on some kind of debt that resembled something similar to a giant credit card.  Now this gambling will likely result in law students being requested, now in bad times, to borrow even more money to bail the law school out.  Law students will be indebted for nearly a lifetime because of New York Law's Enron-like behavior.

Why are people not demanding that all of the rascals associated with endangering the law school leave?

Comments

[PerGynt]

The more I read stuff like this the more I like my little Northern Plains state-owned law school on the priarie.
The one that is always 3rd of 4th tier in the rankings that turns out to be a major feeder school for federal judicial clerkships.
It's also the one in a 125 year old building that doesn't have enough bathrooms. We're saving up.
I sure do love these simple little schools from nowhere. They sure turn out some good lawyers too.

[Jeff Crossman]

When choosing a law school, prospects should be encouraged to look beyond the "name brand," especially in these bad times. Fortunately, I was lucky enough to get this advice and took this rout--choosing to go to a state school, which cost 1/4 the price of the more prestigious 1st tier school I was also accepted into. This gave me FREEDOM! Freedom from overwhelming debt obligations, freedom to choose any practice area I wanted, and freedom to choose a firm that met my requirements and not just my financial needs. Perhaps U.S. News & World Report should add another column in its rankings next to average LSAT score and that's average debt each student has when they graduate. That might open some eyes and help students make more informed decisions.