Income Based Repayment Helps Law Students, Not the Tuition Bubble

Last week, I wrote:

[The “ABA Economic Recovery Resources” webpage] also contains Resolution 301, a futile (but thanks for trying) request to Congress asking it to convert private student loans to public loans, increased access to loan consolidation and income-based repayment plans, and amusingly, TARP funds.

And I quoted former President Carolyn Lamm’s “Law School Education Debt Has a Manageable Solution”:

Now is the time for modest changes in current federal student loan programs to increase the amount that law students may borrow, and to bring existing private loans into the federal student loan system. [My emphasis]

Reading up on the College Cost Reduction and Access Act of 2007 and its income-based repayment plans (IBR) that entered into force in July of 2009, gave me a better understanding of what the ABA and Lamm had in mind.

IBR lowers monthly student loan payments, capitalizing the interest until 25 years have passed when the loan is discharged.   It applies only to Stafford, Grad PLUS, or federal consolidation loans.

Bearing this in mind, I have three thoughts:

  • Converting private student loans to federal loans would help recent grads discharge more of their debt via IBR later on, which is good.
  • Assuming a law degree can be fully financed by combining Direct Loans with Grad PLUS loans (which are unlimited), current and future law students will not be crippled with debt (provided they don’t miss payments).

Does this change my opinion of the ABA’s goals?  Somewhat. True, when I wrote, “President Lamm: (i) didn’t care if private sector lawyers were underpaid for their degrees or were drowning in debt…” I didn’t consider whether IBR would aid them, and it would.  However, IBR has disadvantages, and those interested should also read Angel’s digest of Angry Future Expat’s thoughts on it.  I’ll summarize and add my own points:

  1. IBR doesn’t cover all loans.  Your private student loans from undergrad with adjustable rates are unaffected.  This is one more reason to support the Fairness for Struggling Students/Student Loan Bankruptcy Fairness Act.
  2. IBR doesn’t apply retroactively.  Older debtors must start the 25-years clock from scratch just as younger debtors do, meaning younger debtors get to save more money in the long run.  This isn’t necessarily unfair—it’s not a bailout—but middle-aged professionals, especially those who already have mortgages and children won’t receive the prospective savings of childless graduates.  The real question is how it affects post-retirement debtors.
  3. Defaulted debtors are ineligible.  This is typical government mispaupery, especially towards older graduates who are already financially crippled by previous default.  Student debt is not evenly distributed among debtors, so if you’ve defaulted, you’ll discharge the loans with your last breath.
  4. IBR is not the default repayment plan.  Obviously the government wants graduates to pay the full monthly payments rather than capitalize the interest only to watch it all evaporate after 25 years.
  5. Affects on graduates’ credit ratings?  None, but if a lawyer isn’t making a lot of money in the private sector it’s plausible the capitalized interest could push the debt into seven figures.  Creditors may elect not to extend loans to graduates with that kind of debt over their heads.
  6. Are dropouts eligible?  I doubt the federal government wants to appear to encourage it.
  7. The effort required to document income sources annually to calibrate payments.  It also means graduates will have to save money in anticipation of salary shocks.  I imagine that someone who (accidently) omits an income source would be punished severely.
  8. Forgiven loans are taxable income in the year they’re discharged, so until that’s modified prepare to take one pretty big hit one year.  Law grads who haven’t made a lot of money in the private sector may end up paying a six-figure chunk in income taxes, wiping out their savings in a student loan judgment day.  Bet your opinion on the Bush tax cuts expiring suddenly switched, huh?

That’s just IBR as it applies to graduates generally.  As far as the law school tuition bubble is concerned, there are specific problems.

  1. IBR does not affect law schools’ cost structures.  Law schools’ primary economic interest is filling seats to pay their instructors’ salaries.  IBR shifts risk from students to the government, meaning taxpayers subsidize the tuition bubble, which is better than permanently impoverishing graduates.  If anything, less risk to students reduces disincentives against going to law school, e.g., “The price tag doesn’t matter because I’ll qualify for IBR.”  Higher education financing reform must shift the risk to the universities.  Presumably (without reform), 24 years from now, the Department of Education will be hit with a titanic shortfall caused by forgiven debt.
  2. IBR does not improve a juris doctor’s market value.  This blog is premised on facts evidencing a decline in a law degree’s value due to excessive tuition and attorney oversupply.  As always, I’m open to those with better information than I proving me wrong on these facts.  However, as the value added of a law degree declines, decreasing debt does not help enough: graduates will still be paying debt on a degree that they either aren’t using or didn’t really need to secure their employment.
  3. Finally, IBR doesn’t repay one for the opportunity cost of going to law school.  That might be nothing today, but then again I also don’t predict a recovery any time soon.

The good thing about blogging is you learn things, and now I don’t worry for current and future law students so much, unless they were ineligible for Graduate PLUS loans to begin with and went the private route.  I’m still incredulous the government intended to completely deregulate graduate/professional schools and allow them to set their tuitions with no regard to quality control, so I am curious whatever the “catch” is, whether it’s a hit to one’s credit score or the tax hit in the discharge year.  I can see why the ABA pushes for converting private loans to public ones, but it still needs to care about the market value of the degrees it accredits.

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4 Responses

  1. IBR is a band-aid solution to someone with a punctured artery. This will have no significant effect on the tuition bubble. Sadly, many lemmings will think, “I can go to law school, and if I don’t land Biglaw, I can work for the government or a non-profit and qualify for IBR.”

  2. At least government and nonprofit work qualifies for Public Service Loan Forgiveness, which has only a 10 year limit until the loans are forgiven instead of 25. As you’ve written elsewhere, these jobs aren’t abundant, less so with the onset of state and local budget cuts.

  3. Absolutely great post. This has been a subject on my mind and your post was very enlightening. Thanks!

  4. [...] a fellow colleague of mine over at The Law School Tuition Bubble has also provided a couple of posts regarding IBR that are well worth [...]

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