Paul L. Caron

Monday, September 21, 2015

Department Of Education's New Loan Repayment Program Punishes Law School Grads

The American Lawyer:  A Loan Repayment Plan That Punishes Law Grads, by Matt Leichter:

Despite plummeting law school applications and a glut of highly indebted, underemployed law school graduates, Washington appears to believe that its student loan reforms treat law grads too gently.

After promoting the Pay-As-You-Earn (PAYE) repayment plan to ease debt burdens, the Department of Education is pulling back. In July 2015, the department posted the latest addition to its list of income-sensitive repayment plans: Revised Pay-As-You-Earn (REPAYE). As the new plan’s name implies, the government is dissatisfied with PAYE, which was itself intended to improve upon the Income-Based Repayment (IBR) option. The department hopes to make REPAYE available by Dec. 31, 2015.

REPAYE differs notably from its predecessor by demanding more from graduate and professional students, who tend to borrow more than undergrads. Instead of cracking down on tuition or curtailing its lending programs, the department proposes to extract more from the students. Unfortunately, most law school debtors do not have the large incomes necessary to fully repay their loans. And because law students make up a large proportion of the borrowers using federal loans to pay for graduate education, they will likely bear the brunt of REPAYE's graduate-student-unfriendly changes.

Consequently, most law-school debtors will still be better off under PAYE, but probably not the older IBR.

Here's a list of the changes that law students should be aware of: ...

To assess the impact REPAYE will have for law school debtors, here is a table of outcomes for a debtor on PAYE, REPAYE, and IBR. The debtor's situation is based on these assumptions:

  • Loan principal of $130,000, with an interest rate of 6.2 percent (roughly the current average rate for this academic year).
  • Income of $45,000 that grows by 5 percent each year. These assumptions may be generous for the typical law grad.


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Yes, you are correct. IBR is really just a prolonged bankruptcy, period. Feel free to promote the fact that under the present system (subject to change of course), student debtors can essentially file for bankruptcy in 25 years. That will really get them swarming to your school.

Posted by: JM | Sep 24, 2015 6:20:47 AM


Yep, nothing like being insolvent at age 45-50 to highlight those successful law school outcomes...

Posted by: Unemployed Northeastern | Sep 24, 2015 4:32:51 AM

Loan forgiveness is taxable income only to the extent that the debtor is solvent.

Posted by: Jack Bogdanski | Sep 24, 2015 3:51:08 AM


1) Student loans are not dischargeable in bankruptcy, regardless of whether they are federal or private loans.

2) One can make the argument that PAYE and IBR are greatly protracted Chapter 13 bankruptcy plans but with an enormous tax bomb at the end instead of a fresh start. You see, interest keeps building on the principal while in these plans, and when the loans are forgiven after 20/25 years, the IRS considers it taxable income.

Posted by: Unemployed Northeastern | Sep 22, 2015 8:09:16 AM

There should be no debt forgiveness on student loans unless (a) the debtor goes through bankruptcy and has all assets used towards repayment of the debt and (b) any remaining unpaid debt becomes a liability of the institution at which the loan was used to pay tuition.

Posted by: Kevin | Sep 21, 2015 12:59:49 PM

Another point in the negative column for those considering the pros and cons of law school.

Posted by: ruralcounsel | Sep 21, 2015 11:35:22 AM

Basically, law schools are trying to use this as an unlimited permanent subsidy, and the DOE is not going to let them do that.

Posted by: Barry | Sep 21, 2015 8:04:28 AM

PAYE was a big taxpayer soak, and the Dept of Ed sees the writing on the wall.

Notwithstanding all the horsefeathers from faculty about how valuable a law degree is, its value disappears when you factor in cost of Education.

It is bad policy for taxpayers to subsidize law schools via the tuition conduits (ie, students).

Law is overcrowded and compensation has fallen. What possible policy justification exists for taxpayers to hand Joanny Lawstudent (or more precisely, her school), $130,000 under PAYE, where she will repay only $106,000? The taxpayers are out $24,000, and that's before any interest is considered.

PAYE is not a great deal for law students; rather, it is a raw deal for taxpayers.

Posted by: Jojo | Sep 21, 2015 4:26:01 AM