Paul L. Caron

Friday, October 12, 2012

Income-Based Student Loan Repayment: A Lifeline for Law School Grads, a Loser for Uncle Sam

The American Lawyer:  Income-Based Repayment: Lifeline for Law Graduates, Certain Loser for Government, by Matt Leichter:

[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. ...

The 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.

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A very useful if scary posting. I would add one detail - average undergraduate debt was in 2010 about $23,000 and apparently rising. Can you perhaps revise your graph to show data labels at $103,000 and $143,000.

This would move I think the 15% income limit to about $100,000 and $150,000 and the 10% to about $145,000 and $215,000.

These are astonishing numbers. First, given what the BLS reports for lawyer incomes for all lawyers, including those long qualified it would seem that the vast majority of the class of 2011 will be in IBR, even those who land the coveted BigLaw associate position. This seems to be ludicrous.

Moreover, one has to question the political acceptability of having someone earning over $200,000 per annum - or even $100,000, having student loans paid by the state. A household income of $180,000 puts someone in the upper 5% of US earnings - $225,000 puts the household in pretty rarefied levels as only 1.5% of US households earn $250,000 per year. Assuming that most lawyers end up in married households this would be an astonishing income to be still on IBR.

By the way I am not saying that the class of 2011 will make these sort of earnings - I expect them to do quite poorly, I am pointing out that IBR will be hard to defend politically when at least a small number using it are earning by overall US standards very high salaries - especially when much of the money will be flowing to law professors who are by US standards, the level of compensation typical in the legal profession, and average earnings in the communities where the law schools are also quite well paid.

Posted by: MacK | Oct 14, 2012 4:53:52 AM