FORTUNE — Oregon Law School Dean Michael Moffitt likely had the best of intentions, but he set off a faculty firestorm just the same.

The dean sought to repurpose money designated for faculty salary increases to fund fellowships at non-profits that could employ Oregon Law graduates.

That didn’t go over so well with Oregon Law professor Rob Illig, who in multiple emails to the dean and colleagues decried the idea, asking in one message if the school-funded fellowships were “some kind of faculty version of white-man’s guilt?”

Oregon Law shelved the plan.

Across the country, law schools are creating fellowships for graduates who aren’t able to land full-time positions. The law school-funded programs typically pay graduates to work at organizations in the public service sector, where they intend to spend their careers.

About 750 members of the class of 2013 ended up taking these positions out of the record 46,767 individuals who graduated law school, but that marked a 50% increase from the previous year, according to Kyle McEntee, executive director of watchdog group Law School Transparency.

MORE: How Warren Buffett helped save Harley-Davidson

Emory University Law School, No. 19 on the U.S. News & World Report’s latest ranking, recorded the highest portion of graduates in school-funded jobs, at 22.9%, accounting for 67 members of its 2013 graduating class. No. 8 University of Virginia Law School reported that 16.2% of its 2013 grads are working at school-funded fellowships; at No. 20 George Washington University Law School, it was 14.8%; at No. 16 UCLA School of Law, it was 13.6%; and at Georgetown University Law Center, No. 13, it was 12.9%.

Schools say that the post-graduate programs they fund help ease graduates into a brutal legal job market and support lawyers interested in public interest law, which is much less lucrative than the private sector. “Law school is more expensive, and so it is becoming more of a financial sacrifice to go into public service,” Paul Mahoney, dean of UVA Law, told Fortune.

These school-funded programs have become increasingly necessary since the financial downturn, says Mahoney, as government agencies that often hire public-interest lawyers have tightened their budgets. “[These agencies] need to take people laterally since they don’t have the resources to train [entry-level lawyers],” he says. “Part of our motivation for ramping up the amount of funding for these programs is the realization that if you get a foot in the door, a year or two years in, you’re an experienced person who can compete with other lateral candidates.”

But schools have added incentives to create these post-grad fellowships: They help schools’ U.S. News & World Report rankings, which treat full-time, long-term school-funded jobs the same way they do jobs that graduates secure at, say, a law firm or district attorney’s office. “You’re helping out graduates with the added benefit of boosting your rankings, or it’s the other way around,” says McEntee.

William Henderson, a professor at Indiana University School of Law, argues that if law schools are trying to game the rankings in this way, they’ve picked an awfully expensive way to do it. “You have to have the cash to give them full-time bar-required jobs,” he says.

George Washington Law’s fellowship program costs a reported $3 million, and UVA Law’s program costs about $2 million, based on the yearly salary of $31,500 and a $2,000 bar exam stipend that each of its 59 participants received last year. Some law schools have endowed fellowships, but others are paid out of schools’ general operating budgets.

The practice raises the question of whether schools should play such a direct role in their graduates’ employment.

A similar phenomenon is taking hold at the undergraduate level, where universities are footing the bill for current students to spend the summer working as unpaid interns. Unpaid internships have come under fire recently, as a slew of former interns have filed lawsuits challenging the legality of such positions. But unpaid gigs are ubiquitous, especially in the non-profit, media, and entertainment sectors.

MORE: When your CEO turns into the awful Chief Ego Officer

The Wall Street Journal reported last year that schools like the University of Richmond, Hamilton College, and Washington & Lee University ponied up stipends for students who secured such positions.

Tim Diehl, director of career planning at Bowdoin College told Fortune that his school began to award donor-funded grants to students with unpaid internships at non-profits about 15 years ago. The grants aimed to ensure that students didn’t miss out on chances to get valuable work experience because they couldn’t afford to work for free. “If you want to be in TV production but getting paid is necessary, you might get left out because there are so many people willing to take [the unpaid position] as a way to earn their stripe,” Diehl said.

Pomona College launched a similar summer program in 2011 with the help of gifts from alumni and parents. It began with nine students. Twenty-four students participated in 2012, and 47 did so last year. “We could possibly double that figure this summer,” says Mary Raymond, director of Pomona’s career development office. Competition for the grants is fierce, she says, and there’s never enough money to go around.

It’s hard to blame law schools and undergraduate programs for their desire to support students. “When students sign up to make this massive investment of money and time, they’re kind of entering into implicit contract that on the other end it will be worth it,” says Heidi Shierholz, an economist at the Economic Policy Institute.

Current students have the misfortune of graduating into a fairly miserable job market for new entrants. The unemployment rate for 2013 grads — defined as those ages 20 to 29 who earned a four-year or advanced degree — stands at 10.9%, according to the Labor Department, well above the national rate of 6.7%.

At the same time, allowing companies to get labor for free undercuts wages overall, says Shierholz. “The thing that helps workers’ bargaining power — in the individual sense — is if they have outside options,” she says.

MORE: It’s time for RadiumOne to fire its abusive CEO

If a worker can go to another company at higher pay, a current employer is incentivized to match those wages to keep that worker from jumping ship. In an environment where people are working for free — even if some of those people have the unique privilege of being compensated by their college or law school — outside options are weak. “It wasn’t that long ago that people would have balked at the idea of hiring someone for free. Now, it’s a widely accepted way to treat college grads,” Shierholz says. “It’s an undermining practice.”

All of this leaves universities stuck, as they try to help students deal with the problem, all while playing a part in sustaining it.