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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, September 29, 2017

Law School Student Loan Default Rates

ABA Journal (2014)ABA Journal, Which Law Schools Had Highest Loan Default Rates for Fiscal Year 2014? (Updated): 

Six freestanding law schools recorded student loan default rates greater than 2 percent for Fiscal Year 2014, according to data released Wednesday by the U.S. Department of Education.

The Institute for College Access & Success, a nonprofit group that works to increase the public’s understanding of student debt, designed a sortable spreadsheet with the Department of Education data. Based on that offering, freestanding law schools with the largest percentages of student loan defaults for fiscal year 2014 were:

1. Massachusetts School of Law (4.8%)
2. Thomas Jefferson (3.8%)
3. Appalachian (2.9%)
4. San Joaquin College of Law (2.6%)
5. Thomas Cooley (2.5%)
6. John Marshall (Atlanta) (2.3%)

Update:  ABA Journal, Is Department of Education Data on Student Loan Defaults an Accurate Reflection of Law Schools?:

Among the thousands of schools listed in the U.S. Department of Education’s student loan default data released last week, 23 were law schools, all of which have individual identification numbers for participating in Title IV aid. ...

There could be many more law schools with student loan default rates that aren’t included in the data, says Donald Lively, president of Arizona Summit School of Law.

“Law schools that are part of a university have their default rates aggregated with the university, so it is difficult to determine their default rates. Given that they constitute the vast majority of law schools, however, it could well be that some of them have the highest loan default rates,” Lively wrote in an email to the ABA Journal. His law school had a student loan default rate of 1 percent, according to the data. ...

There may be no way to answer the question of whether any law schools that share OPE ID numbers with affiliated universities have comparable default rates, says Jerome Organ, law professor at the University of St. Thomas School of Law in Minneapolis. Some of Organ’s work focuses on transparency in financial aspects of the decision to attend law school.

http://taxprof.typepad.com/taxprof_blog/2017/09/law-school-student-loan-default-rates.html

Legal Education | Permalink

Comments

Is there an inverse correlation with bar passage rates and JD-required job rates?

Posted by: Andy Patterson | Sep 29, 2017 7:03:52 AM

With the various income based repayment options it is astronomically hard to default on a student loan. The real question is how many graduates are paying back enough money so that the loan is shrinking instead of growing because of the interest.

Posted by: Jacoby Wyatt | Sep 29, 2017 7:48:39 AM

This is strictly because of the existence and usage of income-based repayment plans. Back in the Biglaw *golden days* before the Great Recession, Nomura was advising potential securities purchasers that (among others) Access Group's law school private loans had predicted default rates of 12%. Lord knows how much that rate spiked after the Great Recession hit, hiring crashed, and new lawyers were laid off by the thousands.

Posted by: Unemployed Northeastern | Sep 29, 2017 7:51:10 AM

I wonder what the numbers would be if it included borrowers on an income-based repayment plan that are failing to even cover interest with their monthly payments (e.g. default by another name). Probably 70% rather than 4.8% and like that all the way down.

Posted by: JM | Sep 29, 2017 9:39:28 AM

Default rates for one fiscal year, on graduates from 3 years ago. Imagine what the cumulative figures​ are for the last 15 years!

Posted by: Old Ruster | Sep 30, 2017 12:33:14 PM

This isn't because of income based repayment. If it were, every school in the country would have a default rate of zero, instead of the variation we se.

Law schools had lower default rates than other institutions before IBR was available, and there was no noticeable relative drop for law schools after it was introduced.

Posted by: Not IBR | Oct 1, 2017 1:10:47 PM

Nomura obviously got their prediction wrong.
http://www.markadelson.com/pubs/Student_Loan_ABS_101.pdf

We know with the benefit of hindsight that law students have continued to have much lower default rates than undergraduates.

It's possible that Access was picking up extremely bad risks who couldn't get private or even government loans. You basically have to be a drug dealer or have committed a felony or have already defaulted on your federal undergraduate loans to not to be eligible for federal student loans. If Access was filling the gap by lending to the worst risks, it's not surprising that they'd have a much higher default rate than law students overall.

The same Nomura report predicted very low default rates for Sallie Mae's student loans to law students.

Posted by: Defaults | Oct 1, 2017 1:25:27 PM

The private lenders who have been lending to law students also report extremely low default rates--less than 4%.
http://lending-times.com/wp-content/uploads/2017/07/DBRS-Student-Loan-ABS-Update-Commentary-8.pdf

Posted by: Defaults | Oct 1, 2017 1:30:01 PM

Heh.

"Nomura obviously got their prediction wrong."

Assertion submitted without evidence. If anything, these 2005-era estimates were undercooked, as they were oblivious to the calamity that befell law students and entry-level hiring from roughly 2007 through 2009, the last graduation year we can expect a large number of law students to have borrowed private loans (GradPLUS came about in 2006 but IBR & PSLF weren't around until 2007, so there was no *material* difference between private and federal loans until that latter date).

"It's possible that Access was picking up extremely bad risks who couldn't get private or even government loans. "

Access was giving private loans, dummy. Lest we forget, their original name was Law Access. They started out as a private lender of law school loans jointly owned by the accredited law schools as a membership corporation (and currently fund at least one of our intrepid law school defenders, who may or may not be data/math/stats/default/sundry other Taxprof posting names). 12% predicted default rate in early 2005. I'll repeat that again: 12% predicted default rate on law school loans YEARS before the law school crisis. Fact.

@Not IBR,

If you look at "Default's" link to the Nomura ratings I discussed above, you'll see that Access Group's private law school loans had the third highest default rate of any private student loan offering for any college students, behind TERI's* graduate school loans and a program in Alaska aimed at assisting low-income students attend undergrad.

"The same Nomura report predicted very low default rates for Sallie Mae's student loans to law students"

They were also reporting nearly twice the default rate on Sallie's law school loans as on Sallie's MBA loans.

"The private lenders who have been lending to law students also report extremely low default rates--less than 4%."

1) "Transactions issued from 2006 to 2008, which represent 23% of the DBRS Private SLABS Index, contain borrowers with weaker credit characteristics (as of their related cutoff dates) as compared with post-crisis transactions. Over 95% of existing borrowers from these vintages have already entered repayment and have been exposed to a weak labor market; thus, these vintages have experienced their peak defaults, leaving better-quality loans in outstanding pools." From your link.

2) Your link does not even contain the words "law school" or even "law," so your conclusion is entirely unsupported by your proffer. Whoops. And Access is only mentioned twice; in neither instance is its default rate given.

*TERI later merged with First Marblehead, a group whose lobbying appears to be most directly responsible for making private student loans retroactively nondischargeable in bankruptcy in 2005. (thanks, Open Secrets!).

Posted by: Unemployed Northeastern | Oct 2, 2017 12:46:59 PM

I don't know why this is such a shock. Law schools are least of the high default rate institutions. Check out the proprietary and public community college sectors. Now they have some default rates!

Posted by: E | Oct 2, 2017 2:24:01 PM

Law graduates have been defaulting at much lower default rates than undergraduates because law graduates obtain higher paying jobs. Per the NALP stats, the median salary of all grads in bar passage required, JD Advantage, or other professional jobs was $60,000-$66,000. Graduates with only a terminal bachelor’s degree start at about $50,000 a year. The low default rate is also explained by the shortage of lawyers in this country. Civil courts have seen a rise in pro se litigants in landlord-tenant disputes and family law cases. There are not enough lawyers to represent all these litigants. But graduates of lower ranking schools are handling these simple cases for a substantial amount of money. These graduates are able to repay their student loans in the process.

Posted by: Repayment | Oct 2, 2017 4:05:15 PM

A follow-up on "Not IBR's" supposition that most law students aren't on IBR: here's a hypothetical with real-life data:

Let’s take as an example Seton Hall, the former employer of one of the law school defenders. It’s a fine example both because it is ranked just outside of the top quartile of law schools and because it is only of relatively few non-elite law schools that actually publishes its NALP report.

Per NALP, the median salary for the 87% of its grads who were 1) employed and 2) reported a salary was $51,721. https://www.lstreports.com/schools/setonhall/sals/

Per the school’s very own Form 509, the annual cost of attendance is $74,584. http://www.abarequireddisclosures.org/ The median tuition discount is $25,000 per year, but a quarter of the students pay full boat. Nevertheless, let’s be generous and say that the median student pays $50k per year.

For the sake of simplicity and brevity, let’s assume a blended 6% interest rate for the Stafford and GradPLUS loans (which is incurred while in school) and $10k in bar exam & bar exam living expenses. The interest over three years is $18,000, so after the bar exam, the above-median Seton Hall Law student’s balance (since only 74% of students got a discount) owes $178,000, excluding annual tuition increases and undergrad loans. According to the wonderful loan calculator at finaid.org, that makes for a standard student loan repayment of $1,976.16 over ten years.

Let’s get back to that median income of $51,721 (of the 87% who reported salaries). The NJ income tax bracket is for that salary is 5.525% while the federal rate is $5,183.75 plus 25% of the amount over $37,650. That makes for an after-tax income (excluding FICA taxes) of about $40,162.09, or $3,346.84 per month. So unless you believe that the above median student with the above median salary at a nearly top-quartile law school is stomaching a student loan payment that is 59% of her after-tax salary, then IBR plans are how such people survive. And remember, this is excluding undergrad loan payments, annual tuition increases, and FICA taxes.


Posted by: Unemployed Northeastern | Oct 2, 2017 5:04:26 PM

Aren't UNE and Repayment/Defaults/whatever else the name is on a given day tired of rehashing the same arguments over and over again? I get it, it's like whack-a-mole, and you just need to keep whacking lest the moles wins, but still.

I admire UNE's persistence.

Posted by: bored? | Oct 3, 2017 2:11:20 AM

@Repayment,

And the data collection techniques and fallacies of the NALP are well known (they've even admitted they may skew as high as 12% in any given year). And you and several other comments on this board are conflating default rates with ability to repay with affordability. If someone defaults on a federal student loan, their license(s) can be pulled. Pretty strong incentive not to default. But a low default rate doesn't mean that law school is affordable or that these students COULD make their payments without IBR/PAYE/REPAYE/PSLF. See my Seton Hall explanation above for some hard numbers on the subject.* And did you seriously just promote the fact that the median law school starting salary is just $10k higher than that for four-year undergrads even thought the latter only owe, on average, one fifth of the former? Wow.

*It's actually a pretty good representation of the larger situation: average private law school debt of $150k (exclusive of interest, undergrad loans, bar loans, etc) and NALP median in the low $60's.

Posted by: Unemployed Northeastern | Oct 3, 2017 8:51:04 AM

UNE’s calculations fail to take into account earnings growth and only focuses on starting salaries. Although a graduate may start at $51,721, after several years of experience their salary will approach the national median pay of $118,160. As discussed in The Economic Value of a Law Degree, the “low rates of default for law students cannot be explained by features of federal student loans such as income based repayment...The data suggests that the law degree reduces the risk of distress by reducing the likelihood of unemployment, increasing labor force participation, and increasing expected earnings over the course of a lifetime.” The paper was published in a peer reviewed journal - meaning that the conclusions are fact.

Posted by: Peer Reviewed = Fact | Oct 3, 2017 3:06:17 PM

UNE, I borrowed a lot of money to go to law school and then got a job at a large law firm paying the then-standard 1st year salary. While I could have repaid my loans over 10 years, I extended them out over 30 years without any fuss. I'm not sure why you assume that recent grads making ~1/3 as much as I did when I was an associate would not do the same.

While I don't disagree that IBR plans may be how some people survive, 30 year repayment plans are how others manage it. Frankly, 30 year repayment plans make good sense. It's not clear why 10 years is the default presumption.

Posted by: Matthew Bruckner | Oct 4, 2017 6:23:59 AM

Oh for God’s sakes,

It’s the “FAKE NEWS” argument! “Peer review = fact” is a false, reductive, and frankly stupid argument. I can’t believe I have to explain these things to a lightly disguised law professor. Here’s some reading for you, since you don’t evidently understand what peer review is. You write “The paper was published in a peer reviewed journal - meaning that the conclusions are fact.”

Let’s go to Wikipedia, and I fear even that may be too advanced for you: “Peer review is generally considered necessary to academic quality and is used in most major scientific journals, but it does by no means prevent publication of all invalid research.” https://en.wikipedia.org/wiki/Scholarly_peer_review

Once you have finished mouthing those words, maybe read this:

“Consider a study conducted by BMJ (British Medical Journal), one of the most respected peer-reviewed journals in medicine. BMJ Editor Fiona Godlee and two colleagues took a paper about to be published in their journal and introduced eight deliberate errors. Then they sent the paper to 420 reviewers. The median number of errors detected by the 221 respondents was two. Nobody found more than five, and 16 percent didn't find any errors at all.” http://science.howstuffworks.com/innovation/scientific-experiments/scientific-peer-review4.htm

Perhaps in the wake of that, “Earlier this year, the former British Medical Journal editor Richard Smith called, in these pages, for pre-publication peer review to be abolished.
“Peer review”, he wrote, “is supposed to be the quality assurance system for science, weeding out the scientifically unreliable and reassuring readers of journals that they can trust what they are reading. In reality, however, it is ineffective, largely a lottery, anti-innovatory, slow, expensive, wasteful of scientific time, inefficient, easily abused, prone to bias, unable to detect fraud and irrelevant.” https://www.timeshighereducation.com/features/the-worst-piece-of-peer-review-ive-ever-received#survey-answer

There is also a long, long string of articles and commentaries on the shortcomings of peer review that are just an internet search away, my friend. I’ll leave you a couple here:

Peer Review: a flawed process: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC1420798/
Is Peer Review In Crisis? https://www.elsevier.com/__data/assets/pdf_file/0003/93675/PerspPubl2.pdf
Reproducibility: A tragedy of errors http://www.nature.com/news/reproducibility-a-tragedy-of-errors-1.19264

Let’s put it this way: if peer review were the be all, end all of legitimate research, tectonic plate theory would still be rejected (the discoverer of that theory died a humiliated pariah in his field, only to be absolved decades later).

Your fallback to “THIS ARTICLE IS FACT” is particularly amusing given the existence of multiple reviewers with higher levels of quantitative social science /economics education than the paper’s author who have pointed out numerous flaws, methodological and otherwise, with that paper – Harper (M.S. Economics), Leichter, Scheiber (Rhodes Scholar in Economics & Labor Reporter at the New York Times), etc. And in no way have you begun to actually grapple with the contrary data I have presented. If you were an actual lawyer in a courtroom, this would not go unnoticed by judge or jury.

For that matter, this peer reviewed paper’s bold assertion that it is unpossible for the profession of law to undergo structural change has not stopped, inter alia, the ABA, NALP, numerous law school professors and deans, myriad law firm partners, Altman Weil, Citi Private Bank, Clay Christensen, and sundry other industry observers from observing that law is undergoing structural change.

Sigh.

@Matthew Bruckner,

A couple issues: a few years ago a group called LIMRA found that just $30k in student loans can cut as much as $325k from one’s 401(k) by the time they retire versus their peers with the same salary tracks who did not have student loans. https://www.cnbc.com/2015/12/08/the-long-term-consequences-of-student-loans.html. So imagine what that loss is when we are talking $150k or $200k in law school loans. Similarly, Demos found that a for a couple, “over a lifetime of employment and saving, $53,000 in education debt leads to a wealth loss of nearly $208,000” (against a couple with similar incomes and no student loan debt). http://www.demos.org/what-cost-how-student-debt-reduces-lifetime-wealth. Assuming that these studies scale linearly to law school debt levels, well… yikes.

Oh, and then there’s this: after 30 years of repayment at 6%, that $178k in my hypo turns into $384k. More interest than principal. And a huge chunk of the *factual* law school lifetime wage premium (particularly since those heralded numbers were pretax and those payments are aftertax).

Posted by: Unemployed Northeastern | Oct 4, 2017 2:51:25 PM

I do wonder sometimes if like the taxi industry also has some dyspeptic guy screaming that his old study measuring even older data PROVES that Uber isn't upending the taxi industry and that people should keep lining up to buy NYC medallions for a million dollars.

Posted by: Unemployed Northeastern | Oct 4, 2017 2:54:02 PM

@ Matthew Bruckner, that is an astonishing false equivalence between your situation and the average law school debtor. You earned a high six figure salary, and made a rational choice to extend low interest debt so that (I'm guessing) you could put that money in a higher yielding investment (stocks, bonds, real estate). So even while you will pay more in interest, it will be exceeded by capital earnings and your net worth will increase.

Anyone in the average starting attorney job of course does not have that choice. Extending debt over thirty years rather than 10 is a necessity (not a choice) and only means that they will pay two or three times the amount of interest. If you are extending debt to 30 years without putting significant money into capital investments, then you are signing up for a lifetime of poverty. That is not your situation.

Posted by: JM | Oct 5, 2017 6:25:56 AM

JM - Your point and mine are not terribly dissimilar. It is UNE who is changing (his?) argument and that you are now mirroring. UNE's first post suggested that IBR was the only solution to debt repayment. You and I agree that it's not.

But I disagree that I'm an outlier. There is no prepayment penalty on any of my loans (has this changed?) I extended over 30 years because I could always pay back the loan more quickly, but it's nice not to have to if, as it turns out, I stopped making a high six figure salary after just a few years. I agree with you that I'm an outlier in that I did repay my loans more quickly because I could afford to do so (because i lived in a student apartment as well as earning a good salary).

The second argument, which you adopt, is that longer repayment terms means more interest. I agree. I rarely advise people to go to law school and pay full freight. But if they do go, I advise they extend their loans over 30 years and pay more than the minimum each month (when they can).


Posted by: Matthew Bruckner | Oct 5, 2017 10:35:10 AM

@Matthew Bruckner,

Even on a 30-year extended, non-IBR repayment plan, you are talking nearly $1100/month, or roughly 1/3 of that above-median Seton Hall grad's after-tax salary. Compare to 10% of take-home (over 150% of the poverty line) for PAYE, or about $430/month. It's not even a question. As I was getting at above, when we are talking about such paltry amounts of after-tax income, these things matter. Getting some $ in a savings or retirement account before one's 30's matters. Building home equity matters. They matter massively, as those studies I showed in my last post indicate. It would be madness to spend the extra $600 month on a payment plan of the same duration instead of socking some many away for the purpose of building personal wealth. So IBR/PAYE/REPAYE really is the only logical answer for the great unwashed hordes of law school graduates making $40k to $60k, as the bimodal salary distributions show.

Posted by: Unemployed Northeastern | Oct 6, 2017 7:43:06 AM

UNE Dude,

All of these peer review studies like After the JD (waves I, II and III), and the Economic Value of a Law Degree, Timing Law School, and Returns to Legal Education, and reports by the Government Accountability Office and the Department of Education, and the Bureau of Labor Stats and the U.S. Census Bureau are all coming to the same conclusion. Why are you so determined to fight it?

If these studies are so awful, produce a better peer reviewed study and publish it in a better econ journal.

Posted by: Dude | Oct 8, 2017 10:02:26 PM