[UPDATE: My mistake, California Western is a non-profit law school. Western State, on the other hand is.]
Andrew Martin, “Well-Off Will Benefit Most From Change to Student Debt Relief Plan, Study Says,” New York Times
Before I get started, there were two errors in my discussion of IBR last week.
One: Unpaid interest on IBR loans is not capitalized onto principal but it isn’t eliminated (except for the first three years for Subsidized Stafford Loans—not an issue for law school debt anymore). Unpaid interest accrues and is counted separately from principal, which I’ve never heard of before. Thus, the growth in debt is linear (unpaid principal plus unpaid interest) and not exponential (interest capitalized onto principal). Interest is capitalized when the debtor is no longer eligible for IBR, so don’t make a lot of money all of sudden after being on IBR for a while. As a result, large unpaid professional school debts can leave large tax burdens for debtors when the loan is forgiven.
Two: Readers will recall last week that I posted a chart showing the minimum income necessary to stay on IBR for a given debt level. That was based on the belief that the average interest rate IBR uses is not weighted. I think it is, in fact, so it looks something like this instead:
The difference is actually quite minor between the strict and weighted averages, but today’s post exists because I wasn’t the only one surprised by the gains debtors made by reducing the discretionary income percentage from 15 percent to 10 percent. The New America Foundation, via the New York Times, just released a report criticizing the changes to IBR—for unusual reasons.
“[T]he changes would provide big benefits to middle- and high-income borrowers, particularly for those seeking a graduate degree, the authors found. The report says that at least one financial planning company is telling law school students that the changes could allow them to write off $100,000 in student debt.
‘If left unchanged, the program is set to provide huge financial windfalls to people who, far from being in need, are among the most financially well-off graduates in today’s job market,’ the report says.”
Good news all you lawyers! You’ll make massive salaries even on IBR!
Law grads are a very bad example, and it’s unfortunate that the New America Foundation chose America’s most expensive and least lucrative professional degree to show how the rich are getting more benefits under the new rules. It’s one thing if Ben Bernanke’s son gets to be a doctor with $400,000+ of student loan debt, but it’s not like he went to the umpteenth tier trash pit Roger B. Taney Law Center in Annapolis, MD and couldn’t get a job, which is much more common than the New America Foundation cared to research.
Worse, the Times drew the wrong conclusion from the study: The problem isn’t that high-income law grads can write off large amounts of debts after 20 years instead of 25; rather, it’s that law schools are enticing applicants into doing so because it helps their bottom line, not because the educations they sell are needed or will produce the kinds of incomes necessary to pay off the loans.
Wait a sec, just which “financial planning company” is the Times referring to?
Why, the one that owns California Western Law School, one of the four for-profit law schools that are facing disproportionate scrutiny due to the newly enacted (and watered-down) “Gainful Employment Rule” that might limit the amount of Direct Loans their students can access.
The New America Foundation’s report has a few good suggestions for revising IBR that would help poorer debtors, and it’s right that the proposed changes to the program will benefit high-debt/high-income debtors, but that’s primarily because IBR’s debt-to-income ratios already scale upward.
The more significant criticism is that there aren’t that many high-debt/high-income debtors out there (I don’t think the report gives an actual number of high income debtors or their share of the total on IBR), which makes the New America Foundation’s arguments like those for means testing Social Security. Sure, we could reduce the amount that Warren Buffet gets when he retires (if he does), but the savings that come from specifically sculpting the policy to ensure that he doesn’t get any Social Security don’t outweigh the costs of implementing them.
Likewise, IBR doesn’t recognize that high-income debtors benefit from scaling effects of their incomes on their living standards. $80,000 in discretionary income is plenty to live on no matter what debts you have. The problems are why that much debt came into being in the first place, whether it’s payable in the long term, and how big the shortfalls will be. The aforementioned Bernanke fils might be doing just fine for himself, but he’s probably not better off than a doctor who graduated from his same med school in 1992. That’s the problem.
The fact that a few high-income grads benefit from a change a law that’s already generous to low-income debtors isn’t that big a deal. I stand by my conclusion that IBR shouldn’t be a protracted, bureaucratic, Chapter 13 bankruptcy. Just give debtors the real thing and eliminate the Direct Loan Program.
I’d like to stop there, but I have to set the record straight: California Western is a terrible example of IBR free-booting. The New America Foundation writes:
“Sure, having $100,000 in debt forgiven while you earn $70,000 a year sounds like a get-rich-quick scam. After all, the most the federal government will provide college students is $22,200 over four years through the Pell Grant program, which is targeted to only the neediest undergraduate students. Surely the federal government doesn’t have a program that would give over four times as much aid to law school graduates with starting annual salaries of $70,000 who go on to earn much more over their careers? Except, this turns out to be true.” (1)
Law school graduates do not have $70,000 starting salaries. Even NALP says that’s a distorted figure. The median starting lawyer salary (not just JD-holders, guys) in 2011 was $61,500 for 15,999 of 45,495 graduates reporting (PDF).
Speaking of graduate outcomes, just what happened to California Western’s?
Last year 26.7 percent of its graduates were either unemployed or didn’t even bother returning their employment surveys. Only 60 percent were “Employed Bar Passage Required,” and 21.8 percent reported working in solo to 10-firm positions full-time/long term. Only 8.4 percent landed in larger firms.
This is not a graduating class that’s “having $100,000 in debt forgiven while earning $70,000 in a get-rich-quick scam.” It’s a graduating class with an average of $153,145 in debt that requires more than $80,000 annually to reduce its loan principal under the current IBR, an income few of California Western’s 285 graduates will have any time soon. Implying that these law grads are scamming the government based on advertising from a for-profit law school is shoddy research, and the “Narrated Borrower Example” of Robert the Law School Grad is unreasonably unindicative of the majority of outcomes California Western Law School students can expect. Many of them will be paying 10 percent of their discretionary incomes for 20-25 years for degrees they will never use, and the government will end up canceling large amounts of their law school debts.
On the bright side, at least California Western pays for a fraction of that in corporate income tax.