Paul L. Caron
Dean


Tuesday, January 27, 2015

Cutbacks Are Looming for Law School Income-Based Repayment Programs

IBRFollowing up on this morning's post, NY Times: Has IBR Solved the Student Loan Crisis?:

New York Times, A Quiet Revolution in Helping Lift the Burden of Student Debt:

The change in college financing has a potentially serious drawback when it comes to college pricing. Income-based repayment programs in Australia and Britain work in part because national governments keep tuition low. Public universities are, to different degrees, legally obligated to hold down tuition prices in exchange for financial support from state governments. But that system has been eroded by state budget cuts, driving tuition and borrowing up, and there are no price restraints attached to the federal IBR system.

This is less a problem for undergraduate programs, for which traditional students are allowed to borrow only up to $31,000 in total. Graduate students, by contrast, can borrow up to the full “cost of attendance” — tuition, fees, room and board. For medical and law schools, this can run into the hundreds of thousands of dollars, all potentially forgivable under IBR. This creates a strong incentive for graduate and professional schools to raise prices and pass federal taxpayers the bill.

To counter such practices, the Obama administration has proposed moving the forgiveness threshold for students with large graduate debts to 25 years from 20, and capping public service loan forgiveness at $57,000.

Above the Law, A Final Warning To Those Who Enter The Law School Black Hole:

Don’t expect income-based repayment plans to stay in its current form.

Income-based repayment plans like IBR and PAYE were introduced with the purpose of temporarily helping people minimize or defer their payment obligations until they found a decent job. And PSLF was introduced to provide loan forgiveness to those who work for a tax-exempt organization or in public service for ten years. Nowadays, people are going to school with no intention of paying the loans back in full and banking on eventual loan forgiveness. Enrollment in IBR/PAYE has grown year after year.

The federal government has noticed this and changes may be made in the future to prevent abuses. As part of the 2015 budget, the president has proposed capping PSLF loan forgiveness to $57,500 with any amount above that being subject to a 25-year payment plan. Also, Marco Rubio has proposed an alternative income-based plan ...

Right now, both of these proposals are not likely to gain traction politically. But it is a signal that student loan reform is coming and not in a good way. So if your financial plan is to take out a large student loan and hope to PAYE it off in 20 years or work for your mother’s almost defunct tax-exempt entity and bank on PSLF forgiveness, you may want to think it over. If you take out a large student loan now and in the future, you will either pay the loan back in full or go through many years of financial pain in order to qualify for loan forgiveness.

https://taxprof.typepad.com/taxprof_blog/2015/01/cutbacks-are-looming.html

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Comments

It simply must be mentioned that the momentum for these income-based repayment reductions are largely the result of *studies* funded by the Lumina Foundation, which itself was solely funded by Sallie Mae, who is both the main competitor of federal student lending AND whose recent spinoff Navient is the largest federal student loan servicer, administrator, and collector (and may take over Accenture's contract to disburse and track new federal student loans to boot). This whole shebang is about reopening the door to large scale private loans by making federal student loans and payback less appealing (next step: the reduction or repeal of GradPLUS loans; see Lamar Alexander's plan for HEA renewal as well as any number of policy papers by New America Foundation). It has not one iota to do with taxpayer exposure or slowing tuition growth.

Posted by: Unemployed Northeastern | Jan 27, 2015 11:04:09 AM

“Right now, both of these proposals are not likely to gain traction politically”. As someone in the industry who owns a “Document Preparation firm” to help students consolidate their loans under federal programs,you could have stopped right here. Student Loan Forgiveness programs are perceived as another middle class entitlement; they have become equivalent to the mortgage and church tax deductions by the middle class. There will never be enough political support to change the Income Based Repayment program from its current status. Furthermore, to ask congress to limit the Public Service Loan Forgiveness program is akin to asking Santa to leave fewer toys under the tree. Why should he? Why should Congress? The reality is that the ruling “elites”, however you choose to define it, expects that this benefit is just one of their expected benefits. The pressure that would come to bear on a Congressman or Senator from their social and political peers would be too much to bear and of no political benefit.
As a citizen, and someone who paid for school, over 15 years, with cash and the GI Bill, I dislike the idea of having the taxpayers pay the debt of someone who should be capable of paying it themselves. As a realist/cynic, I expect to make a substantial amount of money helping people, that are working at Starbucks or serving as an elementary school teacher, pay off their student loans that they took out for a degree in Gender Studies.

Posted by: robert Smith | Jan 27, 2015 12:44:39 PM

these things never change retroactively (and there are constitutional questions of whether they can). so if you get in now you would likely be ok. but starting school and getting it canned for year two three or whatever of any program would suck

Posted by: rrrt | Jan 27, 2015 2:58:24 PM

"As a citizen, and someone who paid for school, over 15 years, with cash and the GI Bill, I dislike the idea of having the taxpayers pay the debt of someone who should be capable of paying it themselves. As a realist/cynic, I expect to make a substantial amount of money helping people, that are working at Starbucks or serving as an elementary school teacher, pay off their student loans that they took out for a degree in Gender Studies."

Awesome! Let's decrease the cost of college and raise the minimum wage to the inflation-adjusted norm it stood when you were in college, shall we? And by the way, gender and ethnic studies comprised a massive 9,100 of the 1.73 million college graduates in 2010-11. That's one-half of one percent.

Posted by: Unemployed Northeastern | Jan 27, 2015 3:02:33 PM

If the default-by-another-name programs fail to mask defaults, then the defaults will be properly named and counted against higher education institution's cohort default rates. Go ahead, make my day.

At some point the severe economic and legal discrimination against the younger generation - against a generation that when it's entering undergrad hasn't even had the token participation of a vote yet - will no longer be tolerated.

Blacks did not tolerate systematic, unequal rights. Women did not tolerate systematic, unequal rights.

Gen Y and Millennials, the persons who've been on the receiving end of "mar-kits" fundamentally warped by governmental intervention and the intentional, progressively worse, discriminatory economic laws to protect a cottage industry will rip this this 'system' apart. 74 million millennials alone. Try and fight us.

Posted by: Bring It | Jan 27, 2015 3:52:19 PM