One of the most significant developments in the law school world over the past few years has been the explosion in so-called “merit scholarships.” The definition of a scholarship can be tricky: traditionally the term was used to describe money generated by endowed funds given to a school for the purpose of offsetting attendance costs, but now it tends to be used more generally to mean any discount off the advertised price of attendance, from whatever source. In fact at present the vast majority of “merit scholarships” offered to prospective law students don’t come from endowment income, but rather from tuition cross-subsidization. (Harvard, Yale, and Stanford, who are in the unique position of not really competing with other law schools for students, claim all their financial aid is need-based. Need-based financial aid at other law schools ranges from skimpy to non-existent. I’m not going to discuss in this post the dubious practice of handing out “merit scholarships” that come with continued eligibility requirements that, because of law school grading practices, guarantee that many recipients will lose those scholarships after their first year).

It works like this: Suppose a school nominally charges $40,000 per year in tuition, and admits 200 students per class. In theory each class pays eight million dollars per year in tuition, but in fact it only pays $6.4 million. This is because the school uses the tuition money it receives from the class to distribute “merit scholarships” equivalent to 20% of nominal tuition to each class. The majority of students pay $40,000 per year, and the vast majority pay more than the “average” (mean) tuition of $32,000. What this means, of course, is that the students who are paying full tuition are subsidizing students who are paying less. Essentially, schools are charging some students to pay some or all of the costs of buying the attendance of other students.

This system, like so many other aspects of contemporary American legal education, has arisen as a consequence of the ratings game. The entrance qualifications of each class, in terms of LSAT and GPA numbers, make up 22% of the USNWR ratings formula, and so schools invest resources in buying students who would otherwise go to higher ranked schools. Unfortunately, the bulk of those resources are extracted quite directly from other students (Merit scholarships in the traditional sense of endowed funds exist, of course, especially at higher ranked schools, but most “scholarships” are simply tuition cross-subsidization).

Since on average a student’s combined LSAT and GPA numbers to some extent predict how well the student will do in law school (with many individual exceptions of course) the upshot of all this is that the students who are the most likely to get good legal jobs, or any legal jobs at all, are those who are paying significantly less, on average, for their law degrees than their classmates who are getting worse jobs, or no jobs at all — and indeed the latter group is paying for much of the legal educational costs of the former.

While this arrangement is no doubt pleasing to Ayn Rand, wherever she may be currently located in plus soul time or minus space time, those of an even mildly egalitarian political bent ought to find it quite troubling.

Another interesting question raised by this system is the extent to which the scholarship game is an efficient market. In other words, to what extent are students who choose to go to School A over School B because School A is much cheaper as a consequence of tuition cross subsidization making decisions that are likely to benefit them in cost-benefit terms? Because of the wonders of the internet, it’s now possible for prospective students to get an excellent sense of how much money they’re likely to be offered in “scholarships,” and to play schools off each other in the application process. Consider this site, which provides 0Ls with an amazing amount of information regarding exactly what schools they can expect to get into, and exactly how much money they can expect those schools to offer them.

Let’s take a look at an applicant from last year’s admissions cycle to see how this game works. Vegenator sported excellent LSAT and GPA numbers — high enough to get her admitted to one T6 school and wait listed at two others, although she was rejected by the top three. She was accepted by most of the rest of the T14 to which she applied, as well by every non T-14 school to which she sent her application.

Eventually, Vegenator had to decide whether to:

(a) Attend Chicago at sticker, meaning she would end up paying around $150K in tuition.

(b) Attend Michigan for $15,000 per year off listed tuition, meaning she would end up paying around $100K in tuition.

(c) Attend Duke for $19,000 per year off listed tuition, meaning she would end up paying $85K in tuition

(d) Attend Texas for $25,333 per year off listed tuition, meaning she would end up paying around $40K in tuition.

(e) Go to WUSL, Illinois, Iowa, or Indiana, pay no tuition, and have most or all of her living expenses during law school covered as well.

(I am omitting a host of various other options she had, as they were by comparison non-starters).

Now, in order to make this decision in a reasonably rational (and therefore “efficient”) manner, what this applicant had to do was to calculate the probable differences on ROI from a law degree from these various institutions. In order to do this, of course, she needed to have reasonably transparent employment and salary data available to her at the time she made her decision, which, given that she made it a year ago, she for the most part did not.

If she were making her decision today, her situation would be somewhat better, but still very far from optimal. As more and more prospective law students get savvier about the fact that they have the choice of either being subsidized by their fellow classmates, or subsidizing them, the pressure on law schools to disgorge the information 0Ls need to make these decisions rationally will build. And that’s all to the good.

Whether the current system of tuition cross-subsidization is defensible in moral and political terms is of course a wholly different question.