Why They Can't Just Cut

Most people hear the problem and say the same thing. Just cut.

Revenue falls, so spend less. Fewer students means you need fewer things. A smaller school is still a school.

That’s wrong, and why it’s wrong is the deepest idea in this book, so it gets its own chapter.

3 separate locks stop a law school from cutting its way out, and they stack on top of each other. Once you see all 3, this stops looking like a management problem. It’s a trap nobody meant to build.

Lock 1: The cost floor is a regulatory artifact

Start with something most people don’t know. Olson wrote it down in 2011. The high costs at American law schools weren’t fully a choice. Outside rules forced them.¹

After World War II, the ABA (the national lawyers’ group that approves law schools) set rules that pushed costs up. By 1949, every school had to have a full-time dean. By 1952, every school had to hit a minimum student-to-faculty ratio and a minimum number of faculty. The rules also pushed schools toward tenured, full-time professors instead of cheaper part-time practitioners.¹ Every round of updates since has added more: clinical programs, library minimums, building standards, extra staff.

So the rules set a cost floor. A law school that wanted to run lean, using mostly adjuncts and practitioners, couldn’t get ABA accreditation. No accreditation meant no licensed lawyers. The cheap model was locked out.

And when revenue drops, a school can’t just decide to use fewer tenured professors. Tenure is a contract, and breaking it costs money. Even if a school could work around tenure over time, the ABA’s minimum faculty rules keep the required headcount high while the student body shrinks.

You’re locked into the costs of the school you built.

Lock 2: The university takes its cut first

Before a law school pays for faculty, buildings, and operations, it often owes money to the parent university that houses it.

Tamanaha wrote in 2012 that universities were taking 15 to 30 percent of law school tuition.² Harper found that the University of Baltimore sent 31 percent of its 2010 revenue back to the main university budget. He put the typical university “tax” at 20 to 25 percent of gross tuition.³

This matters a lot for the math. Say a law school collects $25 million in tuition and owes $5 to $6 million to the university. It’s really working with $19 to $20 million. And when tuition drops, that university payment doesn’t shrink at the same rate. The parent has its own bills, and its budget assumes what the law school has always paid. A bad enrollment year leaves the law school short and the parent still expecting the old money.

A freestanding law school owns its problem alone. A law school inside a bigger university carries 2 financial systems at once, and those are the schools most exposed here.

Lock 3: The building might kill you

A lot of law schools, or the universities above them, borrowed big money during the boom. They built new wings, new clinics, new lobbies, new technology, to prove they were investing. When a university borrows that much, it usually does it through revenue bonds. Revenue bonds come with covenants. A covenant is a promise attached to the loan, and the most important one is almost always the same. Tuition revenue has to stay above a set floor every year.

Reynolds noted in 2012 that schools were “borrowing money in the debt markets to support capital improvements, only to face difficulty paying the money back.”⁴ He had the shape right. What he didn’t spell out is the covenant trigger, which turns a slow enrollment decline into a sudden crisis.

Here’s how it works. A lender gives a school $50 million for a new building. The loan agreement includes a maintenance covenant. Tuition revenue must stay at or above, say, $18 million a year, or the school violates the bond. That floor is tied to debt service, the yearly loan payment. The lender needs to know the income can cover the payment.

Now work the math. This is an illustrative composite, labeled as such.

A school with 200 first-year students at a $50,000 sticker collects about $30,000 per student on average, because it discounts heavily to compete. That’s $6 million from the entering class.⁵ With all 3 years in the building, the school collects from about 600 students. That’s the revenue base holding up the budget and the bond.

Then the pool shrinks. The school loses 30 first-year students, down to 170. Fewer applicants means harder competition for each one, so the school offers bigger scholarships. The average collected drops to about $26,000 per student. The entering class now brings in about $4.4 million.⁵

That’s a $1.5 million hole from the first-year class alone. A 25 percent revenue drop from losing only 15 percent of the class. Across all 3 enrollment years, that adds up to a $3 to $4 million gap in a budget built for $25 to $30 million.⁵

Look, a school can survive one bad year. It cuts a few administrators, freezes some hiring, sells an asset if it has one. But this composite school’s problem isn’t one bad year. The demographic cliff and the loan caps keep the pressure coming. The school loses 30 students this year and will likely lose more next year. The smaller applicant pool is built in.

So the cuts begin.

The cascade

Hiring freezes first. Open faculty jobs don’t get filled. Then course sections get cut, because a school can’t run 18-student sections and break even. The student who planned to take Elder Law in the spring finds it’s off the schedule.

Clinics go next. Clinics cost a lot. Small groups, close supervision, professional-liability insurance. They’re the first cut when budgets get tight, and cutting them makes short-term sense.

The irony is that clinics are exactly what the NextGen bar exam tests. The new exam, which starts rolling out in July 2026, moves away from the old memorize-everything format toward applied lawyering skills. Client communication, analysis, practical judgment. Clinics are how law schools teach those skills. So the schools under the most pressure are cutting the programs that would have prepared their students for the bar exam they’re about to face.

Bar passage drops. Worse rates show up in the 509 disclosures every school files with the ABA. Applicants read the 509. They see bar pass rates falling below the state average, employment getting worse, loan defaults climbing. They go elsewhere. Next year’s class is smaller and even more expensive to recruit. The discount rate climbs again. Revenue falls further. More cuts.

The wheel from Chapter 2 spins faster now, and it has a hard deadline attached.

The date problem

This is the part that turns a decade-long slow decline into a closing announced on a Thursday afternoon.

If a school’s tuition drops below the covenant floor, the school is in default. The lender can call the loan, reset the terms, or take action. The credit rating drops. Borrowing costs jump. Other creditors get nervous. The parent university, which was counting on the law school’s payments, suddenly has a financial crisis inside its financial crisis.

A school that was managing a slow slide now has a specific date to hit a specific number. If it can’t, the talk shifts from “how do we stabilize” to “how do we wind down.”

The only move left is to fill seats at any price. Admit weaker candidates. Offer bigger scholarships. Take more students who didn’t meet the old standards. This is the predictable end of every constraint in this chapter hitting at once. The accreditation floor means you can’t cut costs fast enough. The university takes a portion of every tuition dollar first. The bond means you need a revenue floor, not a revenue cut. And the market means the only way to hit that floor is to lower the bar for admission.

Bar passage falls more. Outcomes get worse. The 509 gets uglier. And the school has to decide whether to slowly fail on its own terms or quickly become something it isn’t.

None of this is abstract. The schools in Chapter 1 weren’t badly run. They were built during the boom for a market that existed at one moment. They built to the rules as they stood. The rules required high fixed costs. The capital markets offered cheap money. Enrollment looked permanent. Then 3 of the 9 forces in this book arrived at once. A structure that could survive any 1 of them couldn’t survive 2.

Tamanaha said in 2012 that schools would need per-school loan caps and gainful-employment tests to force a reckoning.⁶ He had the mechanism right. The 2026 budget law is pulling exactly that lever, 14 years later. But he wrote early. The bond markets weren’t involved yet, the demographic cliff hadn’t arrived, and the NextGen bar hadn’t yet created a skills requirement that undercut the one curriculum these schools could still cut in a crisis.

The critics of the early 2010s thought schools would shrink slowly over a long arc. They didn’t see that a covenant has a date on it. Slow decline becomes sudden closing because a contract says it has to.

That’s the cliff, and it isn’t only demographic. There’s a financial one too, built and hidden during the boom, about to be exposed by the 2026 forces.

How a covenant actually trips

The mechanism in Lock 3 runs through a specific contract clause, so let’s slow down and watch a school cross it.

Call this an illustrative composite.

A regional private university issues $40 million in revenue bonds to build a new law school building in 2019. The bonds carry a 5.2 percent fixed rate over 25 years. Annual debt service, the yearly loan payment, works out to about $2.85 million.⁷ The bond indenture, which is the loan contract, includes a maintenance covenant. The law school must keep annual net tuition high enough to cover debt service by a ratio of at least 1.20x. Do the math. To satisfy the covenant, the law school needs to collect at least $3.42 million in net tuition above operating costs and the university transfer each year, just to clear the debt service line. In a law school running on $20 to $25 million in gross tuition, that’s an 11 to 14 percent debt service load before a dollar goes to payroll.

In 2021, the school posts $22 million in net tuition revenue. The university takes its 22 percent transfer, about $4.8 million, leaving about $17.2 million for law school operations. Debt service is $2.85 million. Coverage ratio: $17.2 million divided by $2.85 million is 6.0x. The covenant requires 1.20x. The school is nowhere near default.

Now move to 2027. Applications are still coming in, but the lending caps mean a chunk of the admitted class can’t close their financing. Enrollment falls from 190 first-years to 155. To land those 155, the school has to push average scholarship aid from $18,000 per student to $26,000. Gross sticker stays at $52,000, but the average net collected drops from $34,000 to $26,000. Net tuition revenue: about $12.1 million.⁸ University transfer at 22 percent: $2.66 million. Net available for operations: $9.44 million. Coverage ratio on debt service: $9.44 million divided by $2.85 million is 3.3x. Still above 1.20x. The covenant isn’t tripped.

Then 2028 hits. The demographic cliff arrives in the Midwest region where this school recruits. The entering class falls to 120 students. Scholarship averages climb to $30,000 to stay competitive. Average net collected: $22,000 per student. Net tuition from first-years: $2.64 million. Across all 3 enrolled classes, the total net tuition revenue is now under $9 million. University transfer at 22 percent: about $2 million. Net available: about $7 million. Coverage ratio: $7 million divided by $2.85 million is 2.45x. Still above 1.20x.

But the covenant also includes a second clause that most analysts miss. Net tuition revenue must not fall below $11 million in any fiscal year. That floor was set during the original bond negotiation, calibrated to the enrollment projections the school submitted in 2018.⁹

At $9 million in net tuition revenue, they’ve crossed it.

Once the school is in technical violation, the bondholders can accelerate the debt, call the full outstanding balance, or impose remediation terms. Even if they don’t immediately call $40 million, the violation triggers a rating review. The credit downgrade follows within weeks. Every other creditor notices. The parent university, carrying its own bond obligations, is suddenly in a spot where a subsidiary’s default could cross-reference its own covenant terms. The university’s CFO has a choice. Put cash into the law school to cure the default, or let the law school fail in a way that damages the university’s credit.

That’s the conversation that ends with a closure announced on a Thursday afternoon. A contractual deadline forced the university’s hand.¹⁰

Watch: what losing Grad PLUS means for paying for law school

Trump Cut Grad PLUS Loans | Will Law Schools Finally Lower Tuition?

This chapter is from Anyone Can Beat the Law School Collapse by Steve Schwartz, LSAT Coach and Founder of LSAT Unplugged. I've been coaching the LSAT since 2005.

Published July 28, 2026.