Bust out

o'brien

Following up on yesterday’s Boston Globe story regarding the situation at New England School of Law, here are some hard figures regarding exactly how this confidence scheme institution of higher learning is an almost completely taxpayer subsidized operation, on both the front end, in the form of federal loans, and the back end, in the form of what will surely be a very high rate of soft default and quasi-bankruptcy via Income Based Repayment:

Revenue, expenses and federal loan funding at New England School of Law, July 2010-June 2011

Nominal Tuition Collected: $41,546,619

Actual Tuition Collected (i.e., tuition minus “scholarships,” i.e, discounted tuition): $32,841,264

Total Nominal Revenue: $43,423,500

Total Real Revenue: $34,718,145 (Revenue minus tuition discounts)

Total Nominal Expenses: $33,945,288

Total Real Expenses: $25,239,933 (Tuition discounts are listed as expenses)

Net Real Revenue Over Real Expenses: 37.6%

Legally speaking, NESL is a “non-profit” institution, which means among other things that this surplus is not subject to federal or state taxes.

Federal Loans Disbursed to NESL Students, July 2010-June 2011

First Quarter:

Subsidized Staffords: $3,944,156

Unsubsidized Stafford: $5,515,978

GRADPLUS: $9,716,434

Second Quarter:

SS: $68,137

USS: $103,697

GRAD: $386,136

Third Quarter:

SS: $3,957,473

USS: $5,471,922

GRAD: Unreported, but since GRADPLUS originated $19,276,698 in loans during the first quarter destined for distribution to NESL students, and almost exactly half of that sum was distributed in that quarter, we can assume the remaining sum was distributed in the third quarter, i.e, $9,560,264

Fourth Quarter:

SS: $145,510

USS: $44,192

GRAD: $1,139,055 (The GRADPLUS loans distributed in the fourth quarter were used by students enrolled at least half time in summer school, or NESL’s summer abroad law program, which I’ll have more to say about soon).

Total federal loans distributed to NESL students in FY 2010-11: $40,052,965

A few additional points:

94.6% of NESL’s revenue comes from tuition.

NESL students took out 22% more in federal loans than NESL collected in tuition. Slightly more than half of those loans were GRADPLUS, which feature an interest rate of 7.9% and an origination fee of 4%.

NESL produced 308 graduates in 2011, of which 17 had jobs with law firms of more than ten attorneys nine months after graduation. Four of these people had jobs with law firms of more than 50 attorneys. 34% of the class was reported to have a full-time long-term job requiring bar admission. 14.2% of these positions were graduates who listed themselves as having begun a solo practice.

NESL tuition in 2004: $22,475

NESL tuition in 2012: $42,490

From Merriman-Webster:

Definition of BUSTOUT

slang

: a confidence scheme in which an established business is taken over, a large stock of merchandise is purchased on credit and quickly sold, and the business is then abandoned or bankruptcy is declared

45 comments on this post.
  1. Cody:

    Can one of you smart lawyers define to me what a “Non-Profit” is?

    Generally, when I see a non-profit company I become suspicious. They all seem to produce large profits.

    This law school is a non-profit, so it’s profits are non-taxed, but where do they go?

  2. RedSquareBear:

    Definition of BUSTOUT
    slang
    : a confidence scheme in which an established business is taken over, a large stock of merchandise is purchased on credit and quickly sold, and the business is then abandoned or bankruptcy is declared

    So, venture finance then?

  3. Anonymous:

    Paul, you showing an $8.7 million difference between nominal and real expenses. It would help this reader to understand what is going on if you’d would explain the difference, just as you did for revenues.

  4. Paul Campos:

    Edited OP to clarify.

    I’m subtracting tuition discounts from both nominal revenue and nominal expenses.

  5. loganbacon:

    Sorry, folks, but I have to disagree. Law schools in general are pumping out graduates in huge numbers, and except for the top tier schools (which NESL is not), all of them are having difficulty placing their students in full time law firm positions. The less prestigious the school, the poorer the employment prospects. However, the more prestigious schools also have much higher tuition. So schools like this don’t only attract less able students, but also students with less money. I don’t recall offhand, but I thought NESL also had an evening program, which few schools have – but I would have to check. I went to Boston University more than 20 years ago, but NESL was around then, and plenty of students went there. I don’t think it’s a con game.

  6. Paul Campos:

    However, the more prestigious schools also have much higher tuition.

    This isn’t true. NESL’s tuition is only about 10% lower than BU’s and BC’s and 15% lower than Harvard’s. In addition, Harvard gives out a great deal of need-based grant money (NESL gives out none, as all its discounts are “merit based”), so the cost of attendance at HLS is actually lower than at NESL, and this is especially true for students who come from more modest economic backgrounds.

    20 years ago tuition at NESL was about half of what it is today in real dollars, and job prospects for attorneys were much better.

  7. loganbacon:

    I wish to retract my statement. I misread your piece because I had not read the Globe article. That situation is outrageous. Completely insane. Under no circumstances is a salary like that justifiable, and the combination of increased tuition and larger student body just boggles my mind for a school like NESL.

  8. Malaclypse:

    Can one of you smart lawyers define to me what a “Non-Profit” is?

    I’m an accountant, not a lawyer, but a “non-profit” is a tax status. Usually, but not always, an organization set up under Section 501(c)(3).

    This law school is a non-profit, so it’s profits are non-taxed, but where do they go?

    That is a very interesting question. There is nothing inherently wrong with a 501(c)(3) running a surplus in good times, so as to be able to weather bad times. I’d need to see more complete financials to know if that is what is happening here.

  9. sibusisodan:

    Um, wow. That looks…interesting. Especially the exciting rates hike between ’04 and ’12.

    Silly question from a non-American: are student loans in the US expected to cover living costs (at least partially, like in the UK), or are they for fees only?

  10. Paul Campos:

    The federal government allows graduate and professional students to borrow the full cost of attendance (tuition plus “reasonable” living expenses), as determined by the program in which the student is enrolled. These loans are subject to no actuarial controls, nor can they be discharged in bankruptcy except under very rare circumstances.

    You can readily imagine what effect this system has on prices.

  11. sibusisodan:

    Yikes. So colleges can charge anything ‘the market’ can bear, and by ‘the market’, I’m referring here to the salary preferences of senior administrators, with almost no risk to themselves.

    Sounds lovely.

  12. L2P:

    What do they do with the extra $10k a student? Under 501(c), none of the profits from this venture can accrue to anyone. Where’s the money going? Do they have a bunch of “loans” from founders? Is the cash sitting in an account somewhere?

    If any recent law grads are out of work, they might want to look into filing a false claims act against these guys. Can you do that to recover federal income taxes?

  13. L2P:

    This is close to WTF territory.

  14. (the other) Davis:

    Harvard gives out a great deal of need-based grant money (NESL gives out none, as all its discounts are “merit based”), so the cost of attendance at HLS is actually lower than at NESL, and this is especially true for students who come from more modest economic backgrounds.

    I’ll just add to this that Harvard has a very generous definition of “modest economic backgrounds” for this determination. I was making over $40K/year as a single person with no dependents before I started at HLS, and that put me at or near the top of need-based support scheme—by Harvard’s standards, I think I counted as “socioeconomically diverse.”

  15. Malaclypse:

    Do they have a bunch of “loans” from founders?

    Would be loans to, not loans from, but I wonder the same. I also wonder if “the school” owns mansions that the dean, or other principles, happen to live in rent-free.

    Can you do that to recover federal income taxes?

    If the organization engages in an excess benefit transaction with a person having substantial influence over the organization, an excise tax may be imposed on the person and any organization managers agreeing to the transaction.

  16. (the other) Davis:

    I’m not a tax expert, but my understanding is that 501(c)(3) status precludes paying out anything that looks like a return on investment to the folks who fund the organization. But it doesn’t preclude paying enormous salaries to the people who “work” there.

  17. Paul Campos:

    You can look up their Form 990 on Guidestar (you have to register but it’s free and takes about a minute).

    I’d be very interested to hear what people who are more knowledgeable about non-profits than I am would make of it.

    Edit: As near as I can make out from the form, all the excess revenue was invested into stocks. The school’s stock portfolio grew from $47 million to $65 million, and it appears eight million of this was in the form of giving to the endowment and appreciation on it. Is this kosher?

  18. Scott Lemieux:

    “They go through it like termites!”

  19. Malaclypse:

    Without having looked at the specifics, well, Harvard’s endowment tends to grow most years.

    And my non-prof experience in the last decade involves doing the books for a teeny-tiny writers workshop. I’m definitely not what you would call an expert.

  20. Malaclypse:

    But it doesn’t preclude paying enormous salaries to the people who “work” there.

    Actually, it does (see below). But what exactly constitutes “excess” is, shall we say, vague.

  21. Paul Campos:

    Mal, their 990 lists the appreciation in their endowment, which grew by about three million, while another five million was added to it from fund raising. That leaves ten million unaccounted for, which is the difference between their revenues and expenses for FY 2010-11. Is it OK for a non-profit to take excess operating revenues and invest them into its endowment?

  22. (the other) Davis:

    Ah thanks, I didn’t see your post below before I added my two cents. But presumably a 501(c)(3) like NESL could look at what comparable institutions are paying as salaries, take the top number, and pay that or a bit more. Would that comply with your understanding of the “excess” rule?

  23. Malaclypse:

    Well, you need to do something with the excess of revenue over expense. And in theory, the endowment allows you to do things like fund scholarships (stop snickering).

    Now, is a net excess of 35-40% appropriate? Especially given that it looks like that amount seems consistent? I honestly don’t have a point of comparison.

  24. cpinva:

    as another accountant, with some experience in the non-profit area, from what i’ve seen (assuming legitimate non-profit), surpluses (profits) tend to be either dedicated (that is, set apart for capital needs, for example), or put in a “rainy day” fund, for use in years where they have a deficit (loss).

    the majority of non-profits are either churches, or schools, neither of which (on average) tend to run much in the way of surpluses. when they do, they usually have a use for them.

  25. Malaclypse:

    Now, the interesting part of their balance sheet is something L2P guessed at – line 5 Recievable for officers, etc – $590K. And damn, they own a lot of land/buildings.

  26. Monday Night Frotteur:

    Why don’t progressives get the ball rolling on eliminating the tax preferences for “non-profits?” Treat all entities alike.

  27. cpinva:

    not only is it ok, it would be the fiduciary responsibility of the board of directors to do so.

    “Is it OK for a non-profit to take excess operating revenues and invest them into its endowment?”

    my guess would be that the by-laws require it do so, as most do. as long as the employee’s aren’t being paid excessively, and benefit doesn’t inure to an individual, beyond their reasonable salary, non-profits are pretty much free to do as they will, with their revenues, assuming they continue to do what they stated they were doing, when they applied for/were granted non-profit status.

  28. cpinva:

    very similar to what teaser-rate ARM’s have on home prices, really.

    “You can readily imagine what effect this system has on prices.”

  29. cpinva:

    the shrieking, wailing, gnashing of teeth and rending of garments would be nearly unbearable.

    “Why don’t progressives get the ball rolling on eliminating the tax preferences for “non-profits?” Treat all entities alike.”

  30. Malaclypse:

    Treat all entities alike.

    1) We don’t treat all for-profit entities alike. See, for example, sole proprietors/partnerships/LLCs/LLPs/S Corps/C Corps.

    2) Do you really want your kid’s Brownie Troop leader to suddenly be responsible for hiring an accountant to fill out a Form 1120 every year? How about your local homeless shelter?

  31. Bijan Parsia:

    The very thought of 2 makes me break out in a cold sweat.

  32. Anna in PDX:

    I worked at an educational nonprofit for several years in Egypt (a US based 501C3 that had branches all over the middle east) and remember being shocked that their budget every year called for, what were in essence, profits. True they went into an “endowment” or “foundation” or something like that so in essence it was a rainy day fund, but it felt weird to me and I could not fathom why it was so big (it was a couple million at the time as I remember, total in the fund, not yearly). Also they were based in Washington DC and salaries for their higher ups were pretty darned high by my reckoning – but I guess being in an expensive city like that, it was legit. I was still shocked, though.

  33. Bloix:

    Thanks.

  34. catclub:

    Having seen the Colbert items on what 527′s can do,
    I can imagine excesses of income over expenses being absorbed by grants to other, lower profile organizations.

    Now if it turned out that those organizations happened to be run by relatives of the dean, nobody would really need to worry about that.

  35. Malaclypse:

    Payments to other organizations in excess of $100K/year get itemized on the 990.

  36. L2P:

    Would be loans to, not loans from, but I wonder the same.

    Actually, I was talking about a a bigger game.

    The Founders “loan” money to the 501(c)(3). The loan is actually “undervalued” stocks (games with par/market value), cash that doesn’t exist, or something more elaborate. The point is, the 501(c)(3) shows “loans” from the Founders for *lots of money.*

    Then, when the 501(c)(3) has a surplus, they buy off the “loan.”

  37. Western Dave:

    I have a hard enough time keeping track of cookie sales and I am not the cookie parent. That said, in much of the Northeast cookie sales start next week. Our troop gets about 50 cents out of every box and our council gets 2$ (I think that’s what I was told) National gets another dollar. Please help keep costs down for Girl Scout Camps (and Girl Scouts in general) and buy until your teeth decay.

  38. Malaclypse:

    Okay, so I’m a nerd, and this bothered me. I’d love if cpinva or another accountant weighed in, but the way they are reporting (grossing up both revenue and expense) looks to me to be bad GAAP.

  39. M.:

    Oy. 2011 NESL (or NELB as they’re calling it now) graduate delurking here.

    The only thing scarier than knowing than knowing that only 1/3 of my class got lawyer jobs w/i 9 months is knowing that I am included in that 1/3. I was lucky enough – and I do mean lucky, considering the alternatives – to get a 2-year fellowship to work at a legal aid organization for … just enough money to narrowly avoid qualifying for services at said legal aid organization. A few of my classmates are in the same program, along with graduates of other lawschools from all over the prestige spectrum. I’m assuming all the NESL grads in my program counted toward the 1/3 legally employed, which is technically true, but I doubt many non-law-school graduates would look at my income and call it a success story, even for public interest.

    The only thing I can say in defense of the school is that I got a pretty good education there. A couple classes were terrible, but most were not, and I had some professors who were pretty awesome. However: The idea of any school, but especially one with NESL’s employemnt stats, increasing enrollment and lowering standards which were not very high to begin with is, well, sickening. They should be cutting enrollment in half and lowering tuition while they’re at it. Not that I can really complain about tuition since I got a full “scholarship” – which at the time I thought meant they were taking extreme measures to boost their rankings. Now I wonder why they bothered, since they’ve clearly given up on that. It’s pretty surreal to feel like a rube for avoiding going 150K into debt for the same product you can get for “free,” but I guess that’s law school.

  40. cpinva:

    if it’s what i think it is, you are correct mal, it isn’t GAAP. it’s what known as “Fair Market” (items reported at current FMV, not historic cost) accounting, although ordinarily this would only be on the balance sheet, not the income (profit & loss) statement. i assume they don’t have audited financials, because those would never get a “Clean” opinion.

    are you sure that isn’t the balance sheet your looking at? if you could provide a link for me, let me take a peek at it, and see what they’re doing.

  41. cpinva:

    if the entity is a non-stock corporation (non-profit), they have to complete an annual F990 anyway, and they need to keep a separate set of books, bank accounts, etc. most wouldn’t even meet the minimum balance sheet requirement, to fill that out, in the F1120. nor would they be completing an M-3, unless they’re really big. i doubt your daughter’s girl scout troop has $10,000,000 in assets. unless they sold one heck of a lot of cookies.

  42. Malaclypse:

    No, I’m talking about the P&L, from their Form 990 (which, as campos guided me to, you can see on guidestar with a free registration). They report “full value” (i.e gross) tuition, then call scholarships and financial aid an expense. So it looks to me as though they are inflating both revenue and expense (by exactly offsetting amounts, so no bottom-line impact). Campos’ off-the-cuff adjustments look to me to be something required under GAAP.

    And the Form 990 is signed by Grant Thornton. Not sure if they are auditing as well. Since total accounting expense was under 100K, I’d doubt it. But I don’t see how this survives even a review.

  43. Malaclypse:

    Under 50K in revenue, and the requirement is a 990N, not a 990.

  44. Hogan:

    That was my plan anyway.

  45. ChrisS:

    Thankfully, seven years ago, I opted out of going to law school and took a job that involved spending a large proportion of my time on active investigation/remediation at hazardous waste sites. I can wear disposable tyvek to keep that sludge off of me.

    I probably make more annually now than I would have had I gone to law school (targeted graduation in 2008 just in time for the economic collapse) with $200k less debt.

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