Paul L. Caron

Tuesday, July 9, 2013

Tamanaha: The Problems With Income Based Repayment

IBRFollowing up on this morning's post, Will the Income-Based Repayment Program Enable Law Schools to Continue to Provide 'Harvard-Style' Legal Education?:  Brian Tamanaha (Washington U.), The Problems with Income Based Repayment, and the Charge of Elitism: Responses to Schrag and Chambliss, 26 Geo. J. Legal Ethics ___ (2013):

Critics of Failing Law Schools have focused on two main points: 1) Income Based Repayment (IBR) solves the debt problem for law students, and 2) the differentiated legal education system I propose is elitist and will create a division within the legal profession. These two critiques are articulated by Philip Schrag [Failing Law Schools—Brian Tamanaha’s Misguided Missile] and Elizabeth Chambliss [It’s Not About Us: Beyond the Job Market Critique of U.S. Law Schools], respectively, in a symposium on the book in the Georgetown Journal of Legal Ethics. This essay responds to both arguments. (I do not respond to two other reviews in the symposium, which I find persuasive.)

I accept Schrag’s argument that the new version of IBR/PAYE — implemented after the book was published — substantially reduces the financial burden on heavily indebted law graduates (with a major caveat about the tax bomb that awaits them when the debt is cancelled). For reasons I explain, however, IBR potentially has perverse consequences. It was intended as a debt relief program for graduates in financial distress (which I support), but as Schrag argues, it works as a subsidy for legal education. Now law schools have begun pitching IBR, telling prospective law students not to worry about taking on huge debt. This distorts the purpose of IBR and, by rendering the size of the debt irrelevant, exacerbates the warped economics of legal education.

In her review, Elizabeth Chambliss declares: “Tamanaha’s own critique and prescriptions are professionally self-serving and dangerously, outrageously, elitist.” She argues that I focus too much on the financial plight of law students and recent law grads and not enough on clients. A few other critics of the book have echoed her arguments. In response, I show that Chambliss distorts my position, ignores the reality of the legal job market, and avoids the heart of the problem: a substantial number of law schools take in large numbers of students, load them down with huge debt, and send them off to horrendous job prospects.

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Complaints about the difficulty of discharging student loans in bankruptcy, and the so-called "section 108 CoD tax bomb," utterly miss the point. The marketplace is saying that law schools are overcharging for the product they sell to students, and lubricants like IBR, bankruptcy relief, and CoD relief will not lessen the pain of recognizing the fact.

Posted by: Jake | Aug 10, 2013 11:24:47 AM

Hello, I haven't read the other responses yet, but I did want to say that in my conversations with law students at a top law school, they have brazenly told me that they have no qualms about racking up $200,000 in debt because they know that someone else will repay it, and that they don't see it as their responsibility to pay it.

Posted by: fed up | Jul 10, 2013 6:38:12 PM

Seems like you can tie IBR/GradPlus to debt repayment. If an institution doesn't produce grads with a sufficient payback rate, just cut it off. Or, yes, just kill the programs all together. If we go the private route, I would hope that we end this policy of making student loans difficult to discharge in bankruptcy. We just need to realize that these changes have consequences that reach beyond legal education. I'd wager that higher education becomes less available all together. There's ripple effects here that we're probably not considering.

As for the Section 108 CoD tax bomb, I it's important to note the insolvency limitation contained within Section 108(a)(1)(B), (3). To be honest, I am not sure how it would play out and I bet Tamanaha has addressed this somewhere. Even so, relying on an insolvency limitation to reduce the taxable income from CoD is a sad state of affairs.

Posted by: HTA | Jul 9, 2013 4:43:33 PM

Professor Tamanaha,

What do you think of the forces afoot to repeal either the income-based repayment plans or GradPLUS loans? It would seem that a successful elimination of either of those policies would have a much swifter and far-reaching impact on legal education than any of the can-kicking half-measures by the ABA, state bar associations, or law schools themselves.

Prof. Crespi argues fairly ably in a recent Taxprof/ssrn post that IBR/PAYE can be considered contractual rights that cannot be taken away from debtors already enrolled in such programs. While I have neither the inclination nor the time* to pile together a refutation, I would note that I have spoken to several attorneys who graduated in the mid-2000's who were told by law schools and administrators that the erstwhile bankruptcy protections on private student loans - which comprised the overwhelming majority of law school loans in the pre-GradPLUS era - were also bedrock contractual rights. Until Congress said otherwise in 2005, anyways. I see little reason why IBR couldn't be eliminated simply by repealing the entire College Cost Reduction Act of 2007. If I recall correctly, a Representative Pietre [sp?] already introduced a measure in the House to kill PSLF because it is "too generous for public service folks," or something to that extent, and I do recall various Republican presidential nominees talking about killing IBR/PAYE during primary season.

As for GradPLUS itself, those unlimited, unchecked vehicles which really are the lynchpin upon which the legal academy survives, several influential parties want them killed. The Gates Foundation has been accepting white papers all year concerning the overhaul of higher ed financing; several of those papers recommend ending GradPLUS as a moral hazards for setting absurd tuition levels. The Lumina Foundation, the other mega-higher ed foundation, also advocates for the end of GradPLUS, probably because it was funded by Sallie Mae, who wants to kickstart the SLABS market back into high gear. And Senators Simpson and Bowles, who recommended killing GradPLUS loans to increase the level of Pell Grant funding in, on page 35 of that pdf.

How would law school application fare if we were to revert to the old days of $61.5k in federal lending (the Stafford limits) and $100k to $200k of private student loans, which are not eligible for IBR, PAYE, or PSLF? That is, even assuming that private lenders are willing to lend $190k for someone to attend Whittier or NYLS or Cooley. I'm not so sure they would, even with the current absence of bankruptcy protections and the temptation to turn those loans into new SLABS to sell to pension funds and college endowments (there's a perversity for you!). How would law school administrators respond if SLM and Citi required the schools themselves to guarantee those loans? I wonder.


Unemployed Northeastern, one of America's tens of thousands of un/underemployed law school grads

*I probably do have the time; I just don't want to.

Posted by: Unemployed_Northeastern | Jul 9, 2013 12:10:44 PM