Am Law Daily Original: Government Data Reveal Freestanding Private Law Schools’ Growing Reliance on Grad PLUS Loans

Government Data Reveal Freestanding Private Law Schools’ Growing Reliance on Grad PLUS Loans

While writing this post, I realized that my prior work on aggregate law school “debt-revenue” treated Grad PLUS loan spending on living expenses as revenue to law schools. Aside from campus housing, this isn’t true. What surprises me is that it took me more than a year to realize such a mistake.

Anyway, teenage love made me insane.

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4 Responses

  1. Because of the strong negative subsidy (high profitability) of Grad PLUS loans to the taxpayer, you are not going to get a roll-back of Grad PLUS eligibility unless you come up with some offsetting savings, or a tax increase somewhere. Grad PLUS is basically a private loan program under federal guise.

    Grad PLUS is an example of the pro-lender, pro-college policymaking quite common during the 1995-2006 period. There were no hearings or studies to examine the wisdom of a new loan type. No sunshine on the process. Grad PLUS was apparently cooked up by some young Hill staffers over the Thanksgiving 2005 break.

    While it was enacted during winter 2005-06, the law is clear that the program began with award year 2006-07 (July 1, 2006).

    • Craigie, I’m still waiting on the CBO to tell me how that negative subsidy is calculated. I suspect it assumes that all loans on IBR will be fully repaid, but knowing how people gleefully borrow Grad PLUS loans, I suspect it’s wishful thinking.

      • There’s a reason why since the beginning of civilization people have wanted to start banks. The rules of banking don’t automatically change just because the bank is the government. A lot of people get hung up on that. 1. IBR usage extremely low. 2. “All” is no way nearly essential; the principal and interest on the ones that repay will cover plenty that do not. 3. Why so many assumptions that people wont’ repay, when the lenders and school administrators have been arguing the exact opposite for 20 years: “don’t choose ICR/IBR, you will be paying too much extra interest.”

      • Craigie, I don’t understand what you’re saying here or how it applies to my response.
        However, the CBO directed me to this document on its fair-value accounting models. Fair-Value Estimates of the Cost of Federal Credit Programs in 2013

        In it you’ll find that the subsidy rate for the entire student loan program rises sharply from -32.1% to -4.9%. It doesn’t say, but it’s reasonable to believe that the Grad PLUS loan program is probably a loss to the government that’s still offset by profits on other loans.

        The CBO also cautions:

        But a negative fair-value subsidy could also stem from overly optimistic assumptions about defaults and recoveries, underestimates of the appropriate risk premium because of a lack of good market proxies, or understatement of the true subsidy because administrative costs are shown separately. (7)

        A negative subsidy rate only means that the government is making money on the loans. It doesn’t mean the loans are increasing productivity. The government could loan people money to buy lottery tickets and still have a negative subsidy.

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