A Hypothetical Class of 2014 Law Student’s Journey into Debt

[UPDATE: Unpaid interest on IBR does not capitalize onto loan principal. Calculations below are, regrettably, mistaken.]

Recently, Inside the Law School Scam’s LawProf discussed the amount of law school debt a student may expect to take on and provided NALP figures of starting salaries as a comparison. LawProf used some research I provided, and I’m grateful for his linkback to the LSTB. Unfortunately, some of what I sent him was inaccurate due to my own error (esp. how much Stafford Loan borrowing is possible), so I’ve decided to create a detailed hypothetical of law school loan repayment based on current, applicable law. To that end, I taught myself the dark art of loan amortization—something they should teach in junior high school, not that I blame mine. This post will show us how much law school debt a class of 2014 student might reasonably take on given a few assumptions. They are:

  1. No undergraduate debt (ha!)
  2. No scholarships
  3. No savings, job, income, work-study, family connections, etc.
  4. Full-time status maintained throughout law school and graduation within three years
  5. Eligibility for all relevant loans
  6. Attendance at New York Law School. Why? Not to beat up on it, but because its tuition guarantee program removes the tuition increase variable from the calculation. Indeed, I freely admit that NYLS’s unusually high price tag and high cost of living skew the results towards significantly more debt than a typical 1L will start taking on this year. That said, accuracy is important to this project, and as you’ll soon see, the interest and repayment rates are so high that it doesn’t really matter.
  7. Interest accrues monthly, which in reality is not true. Interest on student loans actually accrues daily, but it won’t cause too much inaccuracy in the hypothetical.
  8. …And every other common sense assumption required to make this work.

Law students are eligible for three types of loans: Subsidized Stafford Loans, Unsubsidized Stafford Loans, and Grad PLUS Loans (for professional students). Subsidized Stafford Loans are limited to $8,500 per year, though this will change next year when provisions of the Debt Ceiling Bill go into effect and make law students ineligible for Subsidized Stafford Loans. Unsubsidized Stafford Loans cover an additional $12,000 of tuition, up to $20,500 total. Both types of loans have an annual interest rate of 6.8% and a fee of 1.0%, which is taken out of the loan at the time of origination. Interest does not accrue on Subsidized Stafford Loans while the student is enrolled at least part-time. Unsubsidized Stafford Loans accrue interest immediately. Both loans can be deferred until graduation, after which they are eligible for a six-month grace period during which interest accrues but payments are not demanded. The grace period means that from the time of the last set of disbursements (we’ll assume in August before the 3L year begins and graduation is in May) until repayment first occurs, fifteen months will transpire. This means the grace period ends in the November after graduation, and the first payment will be due in December.

Grad PLUS loans are similar to Unsubsidized Stafford Loans except their annual interest rate is 7.9% and the origination fee is 4.0%. Grad PLUS loans now make it possible for law students to finance not only their full law school tuition minus available Stafford Loans but also to provide for living expenses. The government’s rationale behind this is that professional education is rigorous, so students shouldn’t have to work outside of class. Its heart is in the right place but the results are grotesque.

Because there’s a limit to the amount one can borrow in Stafford Loans each year ($20,500), we’ll go through three scenarios of Grad PLUS Loan borrowing based on how much the student borrows for living expenses: living alone, with family, and not using Grad PLUS loans for living expenses at all. I’ll also include repayment plans except the graduated repayment plan (10 years) and the extended graduate repayment plan (25 years) because I have no idea how to calculate them. You can use ED’s website for that if you are interested. Student debtors are ineligible for extended repayment plans (fixed or graduated) if the principal on their debts is below $30,000, which will pose a problem for the Subsidized Stafford Loans in our example.

I will also give two examples for each scenario placing our graduate on Income-Based Repayment (IBR). IBR calculates a monthly payment based on gross income, family size, total loan principal, their average interest rate, and cost of living. I do not know when the repayment rate is calculated or recalculated each year. After 25 years, the government cancels the loans, leaving the student debtor to pay income tax on the forgiven sum. Thanks to the Health Care and Education Reconciliation Act of 2010, new borrowers in 2014 will have their loans forgiven after only 20 years. I interpret this to mean that people who begin borrowing in 2014 will have the shorter IBR time frame. The government covers interest on subsidized loans for the first three years of repayment if the graduate’s monthly repayment rate does not. I am fairly sure this applies to three years of payments and excludes the grace period. While the monthly payment is partly determined by the average interest rate of all the loans, I believe the payments are distributed among the loans in proportion to the loans’ share of the total remaining principal, and interest on the loans accrues according to their listed rates, not the average.

In the first sub-scenario, our hero will live alone, earn the mythical Biglaw $160,000 starting salary at month zero, and live within the continental United States for cost of living purposes. In the second sub-scenario, our hero will be married to a spouse with no IBR-eligible debt, file jointly, have two children, earn a combined gross income of $70,000 to start, and also live within the continental United States. Yes, I’m assuming the kids will live with their parents for at least 25 years (unless our hero had some combination of two kids and parents living under the same roof over that time period). It won’t save them a whole lot of money, but it is a perverse incentive to keep kids at home just to have cheaper IBR payments.

I will not use IBR’s complementary program, Income Contingent Repayment, which cancels loans after 10 years for graduates who work in the public interest (though income tax on the forgiveness isn’t required). In normal economic times, incomes grow, so I will give our hero a two percent raise every year.

Here’s an outline of what happens to our hero.

I. Grad PLUS Goes to Living Expenses (Alone)

A. Standard Repayment Plan: 10 Years

B. Extended Repayment Plan (Fixed): 25 Years

C. IBR

1. Biglaw ($160,000)

2. Middle Income ($70,000)

II. Grad PLUS Goes to Living Expenses (w/ Family)

A. Standard Repayment Plan: 10 Years

B. Extended Repayment Plan (Fixed): 25 Years

C. IBR

1. Biglaw ($160,000)

2. Middle Income ($70,000)

III. Grad PLUS Goes to Tuition Only

A. Standard Repayment Plan: 10 Years

B. Extended Repayment Plan (Fixed): 25 Years

C. IBR

1. Biglaw ($160,000)

2. Middle Income ($70,000)

IV. Conclusion

I. Grad PLUS Goes to Living Expenses (Alone)

TUITION YEAR TOTAL SUB’D STAFFORD LOANS TOTAL UNSUB’D STAFFORD LOANS GRAD PLUS (TUITION) GRAD PLUS (LIVING EXPENSES) TOTAL GRAD PLUS LOANS (w/FEES)
$47,800 1L $8,415.00 $11,880.00 $27,505.00 $23,323.00 $48,794.88
$47,800 2L $8,415.00 $32,982.84 $27,505.00 >$23,323.00 >$101,444.56
$47,800 3L $8,415.00 $55,520.67 $27,505.00 >$23,323.00 >$158,253.56
GRACE $8,705.19 $60,431.80 >$174,622.22

*****

YEAR TOTAL
1L $69,089.88
2L >$142,842.40
3L >$222,189.23
GRACE >$243,759.22

A. Standard Repayment Plan: 10 Years

LOAN PRINCIPAL INTEREST RATE MONTHLY PAYMENT TOTAL INTEREST TOTAL PAID
SUB’D STAFFORD $8,705.19 6.8% $100.18 $3,316.35 $12,021.54
UNSUB’D STAFFORD $60,431.80 6.8% $695.45 $23,022.40 $83,454.20
GRAD PLUS $174,622.22 7.9% $2,109.43 $78,510.04 $253,132.26
GRAND TOTAL → $243,759.22 $2,905.06 $104,848.78 $348,608.00

B. Extended Repayment Plan (Fixed): 25 Years

LOAN PRINCIPAL INTEREST RATE MONTHLY PAYMENT TOTAL INTEREST TOTAL PAID
SUB’D STAFFORD $8,705.19 6.8% $100.18 $3,316.35 $12,021.54
UNSUB’D STAFFORD $60,431.80 6.8% $419.44 $65,400.42 $125,832.23
GRAD PLUS $174,622.22 7.9% $1,336.22 $226,239.37 $400,861.59
GRAND TOTAL → $243,759.22 $1,855.84 $294,956.14 $538,715.36

C. IBR

1. Biglaw ($160,000)

Here, our hero’s income grows to the point that after nine years of IBR, he or she is kicked into a standard repayment plan. Moreover, the original minimum payment, $1,795, covers the interest on the Subsidized Stafford Loans for the first three years, meaning our hero does not benefit from the government’s IBR interest subsidy.

PRINCIPAL AVERAGE INTEREST RATE MONTHLY PAYMENT END INCOME TOTAL INTEREST TOTAL PAID
$243,759.22 7.35% $1,795.00 – $2,173.03 $233,502.37 $229,099.26 $472,858.47

2. Middle Income ($70,000)

In this scenario, our hero’s family’s income never grows to the point of kicking them off IBR. Consequently, the government saves $1,212.26 by subsidizing the interest on Subsidized Stafford Loan for three years. Nevertheless, the Department of Education stands to lose more than a million dollars by financing our hero’s legal education and living expenses. The term for this? “Negative amortization.”

PRINCIPAL AVERAGE INTEREST RATE MONTHLY PAYMENT END INCOME TOTAL INTEREST PAID TOTAL PAID
$243,759.22 7.35% $455 – $995 $115,170.51 $211,380.00 $211,380.00

*****

AMOUNT OF INTEREST SUBSIDIZED REMAINING SUB’D STAFFORD LOAN PRINCIPAL (REMAINING SUB’D STAFFORD LOAN PRINCIPAL W/O SUBSIDY) GOV’T SAVINGS DUE TO 3-YEAR INTEREST SUBSIDY FORGIVEN PRINCIPAL AFTER 25 YEARS TOTAL GOVERNMENT LOSSES
$1,212.26 $27,074.69 ($31,174.55) $2,887.60 $1,063,628.12 $1,064,840.39

II. Grad PLUS Goes to Living Expenses (w/ Family)

TUITION YEAR TOTAL SUB’D STAFFORD LOANS TOTAL UNSUB’D STAFFORD LOANS GRAD PLUS (TUITION) GRAD PLUS (LIVING EXPENSES) TOTAL GRAD PLUS LOANS (w/FEES)
$47,800 1L $8,415.00 $11,880.00 $27,505.00 $10,474.00 $36,459.84
$47,800 2L $8,415.00 $32,982.84 $27,505.00 >$10,474.00 >$75,800.01
$47,800 3L $8,415.00 $55,520.67 $27,505.00 >$10,474.00 >$118,248.05
GRACE $8,705.19 $60,431.80 >$130,478.82

*****

YEAR TOTAL
1L $56,754.84
2L >$117,197.85
3L >$182,183.72
GRACE >$199,615.81

A. Standard Repayment Plan: 10 Years

LOAN PRINCIPAL INTEREST RATE MONTHLY PAYMENT TOTAL INTEREST TOTAL PAID
SUB’D STAFFORD $8,705.19 6.8% $100.18 $3,316.35 $12,021.54
UNSUB’D STAFFORD $60,431.80 6.8% $695.45 $23,022.40 $83,454.20
GRAD PLUS $130,478.82 7.9% $1,576.18 $58,663.15 $189,141.96
GRAND TOTAL → $199,615.81 $2,371.81 $85,001.90 $284,617.70

B. Extended Repayment Plan (Fixed): 25 Years

LOAN PRINCIPAL INTEREST RATE MONTHLY PAYMENT TOTAL INTEREST TOTAL PAID
SUB’D STAFFORD $8,705.19 6.8% $100.18 $3,316.35 $12,021.54
UNSUB’D STAFFORD $60,431.80 6.8% $419.44 $65,400.42 $125,832.23
GRAD PLUS $130,478.82 7.9% $998.43 $169,048.72 $299,527.53
GRAND TOTAL → $199,615.81 $1,518.05 $437,381.30 $237,765.49

C. IBR

1. Biglaw ($160,000)

Same results as I.C.1., except this time, our hero’s lower starting debt level means that he or she will be kicked off IBR after only four years.

PRINCIPAL AVERAGE INTEREST RATE MONTHLY PAYMENT END INCOME TOTAL INTEREST TOTAL PAID
$199,615.81 7.35% $1,795.00 – $1,973.63 $211,299.27 $126,412.61 $326,028.42

2. Middle Income ($70,000)

Readers will note that our hero pays the exact same amount living with family as living alone, though the government still loses three quarters of a million dollars.

PRINCIPAL AVERAGE INTEREST RATE MONTHLY PAYMENT END INCOME TOTAL INTEREST PAID TOTAL PAID
$199,615.81 7.35% $455 – $995 $115,170.51 $211,380.00 $211,380.00

*****

AMOUNT OF INTEREST SUBSIDIZED REMAINING SUB’D STAFFORD LOAN PRINCIPAL (REMAINING SUB’D STAFFORD LOAN PRINCIPAL W/O SUBSIDY) GOV’T SAVINGS DUE TO 3-YEAR INTEREST SUBSIDY FORGIVEN PRINCIPAL AFTER 25 YEARS TOTAL GOVERNMENT LOSSES
$1,081.86 $24,168.33 ($27,445.98) $2,195.79 $753,381.79 $754,463.64

III. Grad PLUS Goes to Tuition Only

TUITION YEAR TOTAL SUB’D STAFFORD LOANS TOTAL UNSUB’D STAFFORD LOANS GRAD PLUS (TUITION) GRAD PLUS (LIVING EXPENSES) TOTAL GRAD PLUS LOANS (w/FEES)
$47,800 1L $8,415.00 $11,880.00 $27,505.00 $0.00 $28,651.04
$47,800 2L $8,415.00 $32,982.84 $27,505.00 $0.00 >$59,565.52
$47,800 3L $8,415.00 $55,520.67 $27,505.00 $0.00 >$92,922.23
GRACE $8,705.19 $60,431.80 >$102,533.47

*****

YEAR TOTAL
1L $48,946.04
2L >$100,963.36
3L >$156,857.91
GRACE >$171,670.47

A. Standard Repayment Plan: 10 Years

LOAN PRINCIPAL INTEREST RATE MONTHLY PAYMENT TOTAL INTEREST TOTAL PAID
SUB’D STAFFORD $8,705.19 6.8% $100.18 $3,316.35 $12,021.54
UNSUB’D STAFFORD $60,431.80 6.8% $695.45 $23,022.40 $83,454.20
GRAD PLUS $102,533.47 7.9% $1,238.60 $46,099.02 $148,632.49
GRAND TOTAL → $171,640.47 $2,034.23 $72,437.77 $244,108.23

B. Extended Repayment Plan (Fixed): 25 Years

LOAN PRINCIPAL INTEREST RATE MONTHLY PAYMENT TOTAL INTEREST TOTAL PAID
SUB’D STAFFORD $8,705.19 6.8% $100.18 $3,316.35 $12,021.54
UNSUB’D STAFFORD $60,431.80 6.8% $419.44 $65,400.42 $125,823.23
GRAD PLUS $102,533.47 7.9% $784.59 $132,843.24 $235,376.71
GRAND TOTAL → $171,640.47 $1,304.21 $201,560.01 $373,230.48

C. IBR

1. Biglaw ($160,000)

By using Grad PLUS loans for tuition only, our hero is kicked off IBR after only two years.

PRINCIPAL AVERAGE INTEREST RATE MONTHLY PAYMENT END INCOME TOTAL INTEREST TOTAL PAID
$171,640.47 7.35% $1,795.00 – $1,807.50 $203,020.87 $88,649.12 $260,319.58

2. Middle Income ($70,000)

Readers should take note of this scenario because in better economic times and less severe law graduate oversupply, it would probably be the one most similar to graduates from $45k/year law schools on IBR. Again, the graduate pays the exact same amount as if he or she had borrowed the full amount of Grad PLUS Loans. Despite our law graduate’s frugality, the Department of Education will lose more than half a million dollars after 25 years.

PRINCIPAL AVERAGE INTEREST RATE MONTHLY PAYMENT END INCOME TOTAL INTEREST PAID TOTAL PAID
$171,640.47 7.35% $455 – $995 $115,170.51 $211,380.00 $211,380.00

*****

AMOUNT OF INTEREST SUBSIDIZED REMAINING SUB’D STAFFORD LOAN PRINCIPAL (REMAINING SUB’D STAFFORD LOAN PRINCIPAL W/O SUBSIDY) GOV’T SAVINGS DUE TO 3-YEAR INTEREST SUBSIDY FORGIVEN PRINCIPAL AFTER 25 YEARS TOTAL GOVERNMENT LOSSES
$962.80 $21,441.58  ($24,049.84) $1,645.45 $558,587.96 $559,550.76

IV. Conclusion

I have five points:

(1) Much rending of garments and gnashing of teeth accompanies the notion of 21 year-olds taking on law school debts without understanding their implications. Although law students have only one set of circumstances on which to base their repayment decisions rather than the twelve the hypothetical depicted, I found this particular project unusually difficult, and this comes from a guy who enjoyed doing integration by parts problems in his high school calculus class. In other words, calculating loan repayment plans, total interest, types of loans available, interest on loans in school or after a grace period, subsidized interest for three years on IBR, projected income increases, etc. to within one month of repayment is hard even for adults who don’t blush at math and spreadsheets. At least with cars or mortgages, borrowers already have an income and know what they can afford (to say nothing of at least some bankruptcy protections). However, as I’ve written on several occasions in the past, even if law graduates were required to be implanted with graduate employment tracking chips in the bases of their skulls to receive their diplomas, there is still almost no way a prospective law student can know ex ante what his or her income will be starting out, much less over the course of a law career—except that it’s certain to be far less than what’s necessary to cover a monthly payment on a Standard Repayment Plan. Additionally, the fact that Congress can and does capriciously change the terms of student loans throws a wrench into current students’ borrowing plans.

(2) There is nothing remotely standard about the Standard Repayment Plan. In all three scenarios, our hero was paying at least $2,000 per month. That’s $24,000 per year and would require at least $160,000 in income to constitute only 15% of his or her gross income. Congress and the Department of Education must know that most law graduates do not make this kind of money, yet they allow the lending to go on. How can university administrators not know either? It shocks my conscience. Even without using Grad PLUS loans for living expenses, an NYLS 1L can expect to cough up $1,304.21 each month (15% of a $104,338.40 salary) for 25 years on an extended repayment plan, which at least will be somewhat eroded with 25 years of inflation.

(3) It occurred to me that Grad PLUS loans are the government’s way of trying to help grad and professional students avoid taking on private loans. The changes to the bankruptcy law made private student loans death traps in 2005, and Grad PLUS loans came into being soon afterwards. It may’ve been part of the BAPCPA too, but it only just now occurred to me. As you can see with green blobs on the graphs, Grad PLUS loans were by far the largest component of law school debt. Not as bad as private loans, but certainly not as good as the lower interest Staffords.

(4) The most surprising thing I found is that unless a law graduate gets a Biglaw starting salary—which I believe will soon deflate rapidly—how much they borrow ultimately won’t matter. Once a fledging lawyer’s initial salary fails to produce a payment that covers the monthly interest, he or she might as well have borrowed as much money from the government as possible and spent it. That’s not to say I condone it, and I absolutely discourage people from taking on this kind of debt just because IBR exists. Not only does Congress flip-flop on student lending laws, but borrowing that kind of money is simply irresponsible for those who know better. The moral hazard IBR creates is even worse than I imagined.

(5) Speaking of which, don’t get me wrong, IBR is far better than loan repayment without it. Although, once a lawyer fails to make Biglaw or a Biglaw salary, the government has already made a bad loan. What does all this mean exactly? Not that the government literally spends an extra million dollars on high-cost law degrees when it cancels their debts but that it could’ve spent that money on something more practical. Under the current system, the Department of Education stands to lose roughly one billion dollars per 1,000 to 2,000 law students who attend law schools charging $45,000 in tuition per graduating class when the loans are canceled. As I wrote at the beginning, using NYLS’s tuition guarantee program does mean using a law school whose tuition is unusually high, just outside the first standard deviation of average private law school tuition, so in hindsight it’s not the best case for broad analysis, even if the purpose of the hypothetical is accuracy. However, the tuition bubble pauses for no one, even when incoming enrollments are dropping, and today’s second standard deviation will be the average in four years according to my projections. As a footnote, law schools charging what is now below average private school tuition, $35,000 per year, cost the government one billion dollars in “middle income” IBR cancellations per 4,500 to 5,000 students per graduating class, and yes, the law graduate will still pay the same $211,380 as everyone else.

While these analysis didn’t account for inflation and increased income tax revenue from lawyers, if any, legal education will cost the republic tens of billions of dollars for far less value than it provides.

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15 Responses

  1. Wow!!!!

    This is really good. You may actually be more anal-retentive than me when it comes to numbers:).

    A few questions (please forgive me in advance if I missed it in the article):

    1. If the gummint is taking away subsidized loans for graduate/professional student after 07/01/12, why include them in your calculations after 2012?

    2. I always felt as though IBR was a glorified default. After all, not paying down the regular prin on any repayment repayment plan is in fact a default. Why are your thoughts on this subject? Should IBR be included in the federal default rate?

    3. How do law schools sell this lemon to the masses-aside from US News BS? Even if Biglaw is achieved, the debt is deadly…..

    • Steve,

      Here’re my responses:

      (1) Why include subsidized loans after 2012? I don’t! I only use the exclamation point because I was set to publish the post earlier when I realized that I gave the student three years of subsidized loans without accounting for the debt ceiling bill and had to redo everything. So: Subsidized loans still exist this year. The columns in the tables beneath the headers showing the loans with fees (e.g. “Total Sub’d Stafford Loans”) are cumulative. Like a bowling frame. Students can borrow $8,500 in Sub’d Staffords in 2011-2012 and no more. If you look in the subsequent repayment plan tables, the graduate only has $8,705.19 in Sub’d Stafford Loans after three years of law school.

      (2) I look at IBR as a prenegotiated Chapter 13 wage earners plan. The government’s pretty much conceding that it won’t get paid back for the loans, yet it refuses to allow a discharge. I don’t think it’s a default per se because genuinely defaulted loans are ineligible for IBR, so I bet they’re still considered “in repayment.” To your second question, I don’t think it should be included in the default rate. The more important question is how the Congressional Budget Office scored the IBR program before it began in 2009. I can see it calculating that “average” college debt (~$23,000) is ultimately paid down under an IBR plan with median family income, but professional programs are almost all a loss to the government. What’s weird is that according to the Washington Post, when the health care bill reduced IBR from 25 to 20 years, the CBO recorded a 1.5 billion dollar loss. The government loses less money canceling bad loans earlier, so I’m curious how the CBO thought this would lose the government money. Were they all good undergrad loans? The real trick is to see what kind of debt the Middle Income earner could take on and still pay it down within 25 years on IBR; it’d almost certainly be lower than what your typical law/med/dental student takes on.

      (3) They come up with irresponsible research showing that only 1.5% of lawyers are unemployed. Or, they rely on research that’s not so much performed in bad faith but that contains embarrassing methodological flaws, specifically: equivocation (conflating JD-holders and employed lawyers) and fallacies of composition (all professionals earn a three million dollar premium on their degrees, JD-holders are professionals, therefore JD-holders earn a three million dollar premium on their degrees). Beyond that, my question is when will the ABA wake up and realize debt-financed legal education has created a shameful catastrophe for the profession?

  2. You forgot the Non-profit 10 year repayment model.

    1. Work at Non-profit for very low salary to qualify for IBR.

    2. Make the absolute lowest payment available every month.

    3. Complete 10 years of non-profit employment.

    4. All remaining principal on federal loans discharged.

    If you have mountains of debt and legal knowledge, you should team up with other lawyers to create non-profit entities to employ each other, and legally discharge the impossibly high debt. It’s a way for the non-big law set to have a chance at retirement one day, maybe even make a social difference helping others.

    • I will not use IBR’s complementary program, Income Contingent Repayment, which cancels loans after 10 years for graduates who work in the public interest (though income tax on the forgiveness isn’t required).

      • Woops, Matt you are so smooth

      • I should add that you make a good point about ICR-eligible grads creating their own nonprofits. My gut tells me that the ED and the IRS won’t like them a whole lot though.

    • KO, the classic problem from what I gather is that non-profits were always in a tight position, and have had to ratchet down quite a few notches. In most cases, they don’t have the money to pay enough to live on. Also, because of the chance of loan forgiveness, those jobs are in strong demand. Finally, there are a number of people whose families can afford to subsidize them for a few years, who want to do public interest law – more than enough to take all of the nominally-paid positions.

  3. Matt,

    Excellent Post. I have a question I don’t believe you touched on.

    So, under your analysis, the government loses a billion dollars (less in present value terms) per several thousand graduates. These are the “bad loans” you mentioned in your post. However, the government is going to also make some “good loans,” i.e., ones which are timely serviced on the standard repayment plan. What is the total “net” gain to the government accounting for the “good” and “bad” loans? I realize you don’t have the data for this, but I’d be curious if you might come up a rough figure to see how much money the government is really losing.

    • On the standard repayment plan? Sill negative billions, I’d guess.

      I think the only law graduates who go onto the standard repayment plan have little law school debt (whether due to scholarships, savings, part-time work, family connections, etc.) and a decent job lined up or went to a dirt cheap public law school like University of D.C. I seriously doubt anyone is on a 10-year repayment plan that doesn’t have an unusual situation, and that’s beyond being employed in a law career in the first place. The problem with comparing IBR to standard repayment is a “tempo” issue: 15 years worth of standard plans will give the government a positive return before one year’s worth of IBR loans is canceled. For 25 years everything will look hunky-dory and then the government will start logging cancellations on its books. The question I could answer but don’t have time right now is: what is the maximum amount of debt the Middle Income family can put onto IBR and still pay it down within 25 years? Short answer from the post: Less than what private law schools currently charge.

      In a partly off-topic way I can better answer your question: the government uses “accrual accounting” for all direct loans (including things like HUD loans) when it should be using “fair-value accounting” to fully include direct loans’ risks. Whenever the CBO scores student loan law according to fair-value accounting, the current system is already a negative return to the government. I explain this better on this page.

  4. This is fascinating. Thanks for this analysis.

    In scenario C-2, our hero has over $1 million in loan principal forgiven at the end of year 25. Does he count this as ordinary income in the year in which it is forgiven? This could create a horrible tax burden for him and his family. Is your sense that people who embark on this plan are aware of the tax implications?

    • Yes, it’s considered ordinary income. To answer your second question, a recent law grad commented a while back, “Well, IBR saved my ass. I’ll worry about the tax implications in 25 years.” I am not a tax expert, but I think there is some kind of insolvency exemption people can claim, but otherwise, by the time people finish law school and the choice is between paying $2,000+ per month and IBR, they’ll take IBR and hope for some student loan reform in the future.

  5. Really intresting post here…one question though how is the tuition bubble new? i.e. over the past 4 decades tuition at my alma mater has outstripped inflation by the following rates: 1970-80 40% 1980-90 33.5% 1990-2000 37.5% and 2000-2010 28%.

  6. Matt, this ought to be read by every single prospective law student BEFORE they sign up for the LSAT, or apply to their first school. Your work is excellent. I hope that you publish a book on the subject.

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