[L]aw school debt repayment is no longer a simple "pay-or-else" proposition. The likelihood that a recent law school debtor will default on his or her loans is now very low thanks to the U.S. Department of Education's new repayment option for paying off federal guaranteed and direct student loans: Income-Based Repayment (IBR) and its 10-year public service complement, Income-Contingent Repayment (ICR). ...
With so many law school graduates trying to enter the workforce with six-figure debts and very poor short- and long-term employment prospects, the likelihood that the government will be forced to cancel large amounts of law school debt in 20-25 years is high. As a result, the question floating in the legal education community is just how unpayable are most law school debts?
The Internet's ubiquitous IBR calculators don't answer this question, so
instead I've "cracked" (not a challenge) the IBR formula to show how
much "adjusted gross income" is necessary to claim a "partial financial
hardship" for a given amount of debt. The following chart depicts the
partial financial hardship limit under the current plan (15% of
discretionary income) and how it will change when the reduction to 10% of discretionary income takes effect, whether in 2014 or sooner.
data labels at $80,000 and $120,000 represent the weighted average
public and private law school debt, $82,000 and $119,000, respectively,
for the 37,000 class of 2011 law graduates who financed their legal
educations with debt. ...
Economist Michael Hudson has an apt aphorism: Debts that can't be repaid, won't be.
Most law school debts will not be repaid, and hundreds of thousands of
law graduates will be handing the government 10% of their
discretionary income for degrees that do little to improve their
productivity. Although IBR will keep law graduates out of permanent debt
servitude to the government, it was intended to help college graduates
avoid hardship deferments and defaults. It was not meant to be a
bureaucratic, protracted Chapter 13 bankruptcy repayment plan that
coincidentally allows the Department of Education to conceal the
effective default rate on large federal student loans. A future
deficit-obsessed legislature will probably repeal or at least modify IBR
in several years when the losses become apparent, but a more rational
solution would be restoring bankruptcy protection to all student loans
and permanently ending the madness.