CBO Projects Additional $1.3 Trillion in Student Loan Debt by 2024

…And that’s just the government loans.

Forget Erwin Chemerinsky’s and Carrie Menkel-Meadow’s NYT op-ed, the real news is the Congressional Budget Office’s baseline projection of the federal student loan program for FY 2014-2024. Notably, it thinks that over the next 11 years the government will lend out another $1.3 trillion in direct loans and that it’ll even make $1.10 per dollar lent. $115 billion of that will be Grad PLUS loans (9 percent).

Federal law requires the CBO to account for student loans by comparing the net present value of federal loans to investing in government debt. It doesn’t make a lick of sense, and the CBO would rather use fair-value accounting to evaluate the loan risk, so its hands are tied behind its back.

…But that doesn’t mean we can’t laugh at its absurd projections for Grad PLUS loans, about 30 percent of which go to ABA law school law students.

For one, the CBO believes that the government will make more than $1.30 on the dollar from Grad PLUS loans.

2014 Student Loan Baseline Projections (2)

(Click to Enlarge)

In the real world, most people who take out large balances of Grad PLUS loans will use IBR and then cancel their loans after 20 years. I’d be very surprised if non-law graduate and professional students counterbalance the losses the government will take on these loans. Another prediction I don’t think will pan out is the increase in the average amount borrowed and the number of borrowers.

The other fantasy is subtler: The CBO expects interest rates to spike over the next few years. By 2018, students will be borrowing at the maximum legal interest rates because either the economy will recover magnificently, or the bond vigilantes will finally come and stop lending the government money. (Then, of course, there would be a run on the dollar, export demand will spike, and we’ll return to full employment, but that’s off-topic.)

2014 Student Loan Baseline Projections (5)(Click to Enlarge)

If you do the math, on a 10-year repayment plan (which is used for calculating 20-year IBR monthly payments), law students entering today will pay a maximum additional 5.3 percent in interest for their 3L Grad PLUS loans over their 1L ones this fall. In other words, the CBO predicts law school’s costs will increase even as schools flatten or cut tuition.

I wonder if law professors writing op-eds agree.

GUEST POST—Don’t Go to Law School (Unless) (Flow Chart Edition)

(Connecticut attorney Samuel Browning obtained permission from Paul Campos to create a flow chart version of the book Don’t Go to Law School (Unless). Mr. Browning’s herculean effort is displayed here as a single graphic taken from his spreadsheet with only some proofreading on my part. I have not read the book, so any unclear points and errors are the author’s own.)

Browning--DGTLSU Flow Chart (2.0)

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CFPB’s Math on Student Loans Ain’t Pretty

Rohit Chopra, “A closer look at the trillion,” CFPB.

I’m not a fan of the three-year cohort default rate as the metric for the vitality of the student loan program. It’s about as unhelpful as the unemployment rate, which can hide people who left the labor force, are underemployed, left the jurisdiction, etc. Just as the definition of “unemployed” is slippery (like, any job search activity in the previous four weeks), so too is “default,” which is no payments whatsoever over the previous 270 days. The CFPB has released, to my recollection, the first ever breakdown of federal student loans by repayment status (billions of dollars):

In-school Grace Repayment Deferment Forbearance Default Other Total
Direct 133.8 (24%) 40.4 (7%) 237.4 (42%) 75.6 (13%) 48.3 (8%) 30.5 (5%) 3.2 (1%) 569.2 (100%)
FFEL 12.2 (3%) 6.6 (2%) 256.3 (60%) 46.5 (11%) 42.8 (10%) 58.8 (14%) 6.3 (1%) 429.5 (100%)

I get 30 percent of all federal student loan dollars in deferment, forbearance, or default. Only 49 percent of the total are in active repayment. I’d love to see a comparison to credit cards, but aside from class concerns, I think it’d tell us that the federal loan program has been a spectacular, embarrassing failure.

Here’s the same thing for borrowers (millions):

In-school Grace Repayment Deferment Forbearance Default Other Total
Direct 7.9 (28%) 1.9 (7%) 10.8 (39%) 3.2 (12%) 1.8 (6%) 2.1 (8%) 0.1 (0%) 27.8 (100%)
FFEL 0.9 (4%) 0.5 (2%) 12.9 (56%) 2.3 (10%) 1.6 (7%) 4.4 (19%) 0.3 (1%) 22.9 (100%)

I’m not going to do the same calculation because there’s certain to be some overlap between DLP and FFELP borrowers, but I direct your attention to the FFELP’s default rate: 19 percent. That’s a better long-term indicator of where the DLP is headed, and remember, once you’re in default, there is no IBR. People in those circumstances will have to negotiate with their lenders, but my guess is that debtors who are old enough can beg for mercy from bankruptcy judges (and federal court judges dealing with the inevitable appeals).

Another interesting factoid is that the average balance by repayment status table (omitted) shows that the average amount owed by people who are in default is less than $15,000 for both DLP loans and FFELP loans. I expected the figure to be much higher based on the belief that people would default when their loan balances are hopelessly high. It’s probably weighted-down by people who borrowed a small amount of money to go to a for-profit and then dropped out or couldn’t find a decent-paying job.

The CFPB also gives a table of repayment plan choices for direct loan borrowers (not FFELP):

Outstanding balance
Billions of dollars
Recipients
Millions of recipients
Average balance
Thousands of dollars
Standard 10-year plan 139.9 9.84 14.2
Plans based on income 72.3 1.58 45.8
Income-contingent repayment 20.1 0.63 31.9
Income-based repayment 50.9 0.91 55.9
Pay as you earn 1.3 0.04 32.5
Plans not based on income 107.4 3.35 32.1
Extended repayment 62.1 1.63 38.1
Graduated repayment 27.8 1.27 21.9
Extended graduated repayment 17.5 0.45 38.9
Other alternative repayment plan 4.4 0.23 19.1
Total of loans in these plans 324 15 21.6

Note that the average balance for the 910,000 people on IBR is $55,900. This is certainly a bellwether for law school debt and other graduate or professional school programs that rely heavily on Grad PLUS loans. Going forward, student loan debtors, including undergraduates, will be on the better-publicized PAYE, which will reduce the average amount borrowed.

LSTB Is on Holiday

I’m taking a rare vacation, which may hamper blogging. In the meantime, outgoing Illinois State Bar Association president John E. Thies has written a letter to the editor at The Am Law Daily criticizing my article on state bar association proposals, “State Bar Proposals Fail to Address Law Students’ Woes.”

The good news is I have little quarrel with Thies as even he recognizes at the end of his letter. We agree on some of the means to reform but not the reasons, which is important but not important enough to dedicate an enormous number of mental clock cycles in rejoinder, and since I didn’t make any material misstatements of fact in my article I’ll spare The Am Law Daily any corrections. (They can thank me later.)

(1)  My argument was indirect, but I think my examples illustrated that the Special Committee claimed debt created a price floor. In fact, its report said “EXCESSIVE LAW SCHOOL DEBT DECREASES THE QUANTITY AND QUALITY OF LEGAL SERVICES AVAILABLE TO THE PUBLIC.” That sure sounds like a price floor to me. Then in his third paragraph, Thies agrees with me that the “public’s ability to pay” is keeping lawyer earnings down, which makes the rest of his letter confusing. Is he agreeing with me or not?

(2)  As for Thies’ examples of attorneys’ employment choices due to debt. They should have access to IBR/ICR (more on that below), and in some situations it sounded like the employers wanted experienced lawyers, not recent graduates.

(3)  Thus, Thies presents an economic theory stating that low-skill lawyers are discouraged from the profession by debt, creating a long-term shortage of high-skill lawyers. It sounds to me that when demand is slack for lawyers, new graduates don’t get hired. Indeed, this has been going on for a while as the profession is graying. As Thies and I agreed (I think), poor people are poor. This causes lawyer unemployment.

(4)  Regarding IBR and interest capitalization, 20 U.S.C. 1098e(b)(3) says that so long as the debtor has a “partial financial hardship” interest does not capitalize onto principal, which applies to the lawyers Thies mentions. Once someone no longer has a PFH, then the interest gets capitalized, but that’s when IBR essentially turns into a 10-year repayment plan. If anything, Thies’ lawyers would be better off staying at lower-paying jobs to prevent interest capitalization. (I guess the trick is to defer compensation until after the loans are canceled. Talk about bad incentives.)

The Department of Education prints this too. Only Illinois’ three public law schools’ graduates had less than $100,000 in disbursed debt on average at graduation as of 2012. Even U of Illinois’ was $95,830. These debtors will have to fork out $8,500 per year on a 25-year repayment plan unless it’s a graduated plan. Good luck to them if they can afford it, but they’ll almost certainly choose IBR since they’re either unemployed or it costs them less in the long run thanks to cancelation.

(5)  My fear isn’t of the John E. Thieses of the world but of the kinds of people who will be whispering the Philip Schrag (or worse Simkovic and McIntyre) argument into legislators’ ears that we’re wrong about student loan debt so keep shoveling the law schools money. (Better yet, pay the law schools up front and the government will recoup the costs by income taxes.)

(6)  It’s asking a bit much of the Special Committee, but why do graduates from NIU and SIU have less debt yet poorer outcomes than other Illinois law school grads? If that’s so, then it’s time to consider shutting them down because they’re unnecessary. And if U of Illinois is going to charge $38,500 (2012) for in-state students and defraud the ABA just to maintain its place in the U.S. News rankings, then it’s abandoned its public mission and should be shut down too.

Now for some ROCK AND ROLL!!!!!

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Okay it’s soul, but the video is genius.

The Economic Value of the 58,000th Minute of Law School

…Is totally what I would’ve titled my Am Law Daily article on “The Economic Value of a Law Degree” if I didn’t have to waste words explaining it. Instead you’re getting:

Paper on Law Degree’s Value a Non Sequitur

There are two things, among many others, I wanted to add to the article that didn’t make it to the final cut:

(1) On page 44, it says,

Thus, on average and ignoring obvious behavioral changes, the federal government would hypothetically profit from legal education even if it provided legal education free at the point of service.

This is about the moment that I opened to the possibility that “Economic Value” was a hoax like Alan Sokal’s famous “Transgressing the Boundaries: Toward a Transformative Hermeneutics of Quantum Gravity,” because it’s the exact kind of absurd policy proposal that a satirist would put into an article claiming law school is worth the money. Just hedging my bets. (Please be a hoax. Please be hoax. Please be hoax.)

(2) Otherwise, “Economic Value” is the “Reinhart and Rogoff” of legal education. I’m surprised I haven’t seen the parallel made elsewhere, and we really should have seen it coming. Sure, it’s probably not going to contain any MS Excel errors or strange weightings, but it’s causal theory is equally nonsensical and should not be taken any more seriously than “Growth in a Time of Debt” is taken today. If anything it should be less so given that we can find graduates and drop outs who did not benefit from law school even as we can find countries that struggle with debt and low growth.

‘State Bar Proposals Fail to Address Law Students’ Woes’ on The Am Law Daily

State Bar Proposals Fail to Address Law Students’ Woes

My favorite part of this article is the delicious line about the Luddites.

Brief correction: In the article I referred to one of the reports as coming from the “California Bar Association,” it’s actually the “State Bar of California.” Two different organizations. My mistake. I apologize.

The Census Bureau Strips Speculation From the Housing Vacancy Rate

I went to a lecture at the Henry George School in late June, given by an Episcopalian minister who spearheaded the squatting movement in New York City in the 1970s and 1980s (and, I guess, today). It was really inspirational stuff. He said—and I’m not going to verify this—that there were 120,000 vacant housing units in New York City and 40,000 homeless people in 2012. The reason for the mismatch is exactly what you’d expect: Private landowners are holding their property off the market. Georgist economist Mason Gaffney argues this occurs because landowners behave as a cartel, refusing to supply land to those who need it to increase the price.

If you want to verify whether land speculation causes higher prices throughout the United States, you’ll be disappointed to find that the housing vacancy rate in the U.S. is dropping, though it’s still higher than it was in the late 1990s. In an era of concentrated wealth, one would expect landowners’ land-hoarding to cause the vacancy rate to rise, based on all the foreclosures we hear about.

Annual Rental and Homeowner Vacancy Rates

Yet, Dean Baker tells us that residential construction is depressed because of the high vacancy rate. Who’s right?

Here’s how the Census Bureau calculates the vacancy rate.

If you look for the data in Historical Table 8 that Baker links to, though, you’ll find that the vacancy rate’s denominator is not the entire housing inventory. It excludes “seasonally vacant units” and units that are “held off the market.” In other words, if speculation is going on, the vacancy rate deliberately excludes it.

Here’s the total vacancy rate, the held-off-the-market rate, and the composite vacancy rate (it’s the weighted average vacancy rate for owner-occupied units and rentals because Census doesn’t separate “rented but awaiting occupancy” and “sold but awaiting occupancy).

Actual Vacancy Rate, 4-Qtr Moving Average

What’s obvious here is that since about 2010, the Census Bureaus’ vacancy rate has dropped while the held-off-the market rate has not. Meanwhile, total vacancies are down slightly from their peak over 14 percent during the housing bubble, but it’s still well above the 11-12 percent range from the 1990s.

Now, you ask, how is “held off the market” defined? You get three answers:

(1)  Occasional Use

(2)  Usual Residence Elsewhere (URE)

(3)  Other

There is but a slim difference between “occasional use” and URE, if any. “Other,” has a more nuanced *cough* definition:

Other vacant. Included in this category are year-round units which were vacant for reasons other than those mentioned above: For example, held for settlement of an estate, held for personal reasons, or held for repairs. Below are the definitions for the other vacant categories presented in Historical Table 18.

  • Foreclosure – [Q1, 2013 = 10.8%]
  • Personal/Family Reasons – [19.6%]
  • Legal Proceedings – [6.0%]
  • Preparing to Rent/Sell – [6.2%]
  • Held for Storage of Household Furniture – [7.8%]
  • Needs Repairs – [15.3%]
  • Currently Being Repaired/Renovated – [8.5%]
  • Specific Use Housing – [1.4%]
  • Extended Absence – [6.0%]
  • Abandoned/Possibly to be Demolished/Possibly Condemned – [5.9%]
  • Other Write-in/Don’t Know – [12.5.%]

Table 18 would be enormously useful, except it only goes back to … 2012. Heckuva job Census.

Held-Off-the-Market Rates

Importantly, though, “Foreclosure” includes units that are “bank owned,” meaning if banks want to hold them off the market, then they’re in “foreclosure,” even if it’s actually for naked real estate speculation.

You might ask “Why is this important?” I’ll tell you: Think about all those times you read about how student loan debt “delays important milestones like marriage, family formation, and home ownership.” If the banks were forced to put their housing inventory up for sale or rent, then there’d be a large wealth transfer from the hyper-wealthy banks to real-life human beings. The long-run problem of student loan debt, even with IBR, is a generation of Americans that will lack the earning power to buy homes from aging boomers.

I was going to stop there, but if you want more evidence, take this super-downer article from The Japan Times, “Pity the Generation That Can’t Retire Before 80,” July 6, 2013. Here’s a taste:

“Mr. B” is a 56-year-old junior high school teacher. His son studied hard, was a good student, got into a good university and graduated with distinction. He sent out 50 job applications and was invited to 30 interviews. But the expected offers didn’t materialize — not a single one. The young man grew seriously depressed. He hinted at suicide. His parents had to watch him constantly. The strain was too much for Mr. B’s wife. It wore her down. Though far from elderly, she showed symptoms of Alzheimer’s. They got worse. She had to be institutionalized. Her son blamed himself. His depression deepened. And so it goes.

At least in Japan, 40 percent of people under 30 don’t have student loan debt. The Japanese government is trying to reflate the economy, and it’s not championing credential inflation. The U.S. isn’t so lucky.

Now you understand why I think young Americans should all be Georgists.

The LSTB’s Unauthorized Guide to State Bar Reports on the Legal Profession’s Problems

…Because really, who would authorize a guide on state bar reports?

As of last week, we now have at least four state bar association task forces/special committees/working groups/whatever offering their opinions on what’s wrong with legal education, law school debt, lawyer licensing, and the legal profession. Here is a list of the reports and links to my posts on them:

The two biggest themes, as far as I’m concerned, are what the task forces/committees/working groups/etc. thought about (1) student loan debt, specifically whether it’s passed onto clients and whether it should be dischargeable in bankruptcy, and (2) revising legal education and law licensing requirements to include more skills training over theory-heavy classes and whether that will result in better employment opportunities for new lawyers.

The NYSBA Task Force’s report didn’t say that student loan debt is passed onto clients, and it even chided lawyers who claim they want practice-ready law graduates but hire from elite law schools anyway. Most of the Task Force’s recommendations were tentative, but they did include changing licensing requirements to include assessing professional skills, adding a sequential licensing system, and adopting the Uniform Bar Exam. Instead, they got mandatory pro bono requirements. The quality in reasoning in subsequent state bars’ reports goes downhill from here.

Massachusetts’ Task Force determined—okay that’s being generous, it really assumed the conclusion—that poor training causes new lawyer underemployment because medical and dental schools require a lot of skills training and their graduates aren’t underemployed. Its report neglected to mention that those professions thrive with practitioner shortages or that aging boomers will need regular medical checkups. The Task Force said very little on student loan debt, and it advised transforming the third year of law school into a residency-type experience ala medical and dental school.

The Illinois Special Committee claimed that salaries for new lawyers are too low to support their student debts, public interest employers have difficulty paying new lawyers enough to cover their debts and suffer high turnover, and underpaid lawyers don’t serve the poor or “middle class” in favor of higher-paying lawyer positions or leaving law practice altogether. The Special Committee also believed that lack of practice-readiness also contributed to underemployment. Its recommendations on reforming federal student lending, however, were fairly reasonable.

Finally, California’s Task Force subtly concurred with the Illinois Special Committee’s reasoning on student loan debt, but it leaned more heavily on the practice-readiness problem by claiming that firms unfairly pass their new lawyers’ training costs onto clients. Better training would make new lawyers more productive (raising their incomes to repay their student loans) and simultaneously reduce costs to clients (I’ll discuss this nonsense later). The Task Force recommended requiring more skills courses and pro bono work of law students and new lawyers. This report is easily the most poorly thought-out of the four.

Law School Debt

Contrary to what I may have implied last week, none of the state bars’ reports explicitly say that law school debt is directly passed onto clients. However, the Illinois Special Committee report effectively makes that argument with its gathered testimony as listed in its executive summary (1-2):

  • Small Law Firms Face Challenges Hiring and Retaining Competent Attorneys

“Many small law firms are unable to pay the salaries new attorneys need to manage their debt. As a result, turnover at such firms is high, forcing those firms to spend additional time and resources training new attorneys (compounded by the problem of inadequate readiness for practice upon graduation).”

  • Fewer Lawyers are Able to Work in Public Interest Positions

“Attorneys with excessive debt are less able to take legal aid or government jobs which, in Illinois, have starting salaries between $40,000 and $50,000 per year. Public interest offices that raise their salaries to accommodate debt and attract talented lawyers are unable to hire as many attorneys, reducing the services these offices can provide.”

  • New Attorneys Have Too Much Debt to Provide Affordable Legal Services to Poor and Middle Class Families and Individuals

“Salaries among law firms primarily serving the legal needs of middle class individuals and families are also inadequate to support the debt loads of new attorneys. … Because debt makes it difficult for attorneys to survive at that salary level, young attorneys move quickly to higher paying legal sectors if possible, and, if not, many leave the profession.”

  • As Fewer Attorneys Find Sustainable Jobs in the Private Sector, More Attorneys Enter Solo Practice

[Note: This contradicts the first point on small practices being unable to hire lawyers. It's a lot cheaper to work for a small firm than start a small practice.]

  • Attorneys Report that Debt Burdened Lawyers are Less Likely to Engage in Pro Bono Work
  • Debt Drives Young Attorneys Away from Rural Areas

“Already, rural areas of Illinois have significantly fewer lawyers per capita than more populated areas, because it is more difficult for lawyers to service significant debt in rural areas.”

[Oh God, don't abuse attorneys per capita again…]

  • Heavy Debt Burdens Decrease the Diversity of the Legal Profession

[Because there's nothing minorities need more than low-paying legal work.]

  • Threats to Professionalism

The quotations dramatize the Special Committee’s arguments effectively, but it applied good facts (I’m assuming) to bad theory. Imagine you’re a public interest firm and you have to raise your salary offers to $50,000 to attract lawyers to help them pay off their debts. This reduces the funds available to hire more attorneys, reducing the total quantity of legal services provided. Thus, it’s an indirect lawyers-pass-their-student-loans-onto-clients argument. It looks like this:

Student Loan Debt's Impact on Legal Services (Silly)

(The crayoned stars are included for illustrative clarity and because they’re cute.)

This is your garden variety price floor, the same kind that haunts minimum wage arguments. The red area that gives state bar associations frowney faces is the legal transactions, and hence, lawyer employment, that would be possible without student loan debt but are lost because of it. Remove the debt, and suddenly lawyers can happily work in low-paying jobs.

But there are at least three problems with this argument as characterized in the public interest example: (1) On page 3, the Special Committee stated that “Funding for public interest jobs is unstable,” indicating that such jobs are neither as plentiful nor as secure as the testimonials claim; (2) there are plenty of underemployed law school graduates who would love to take those kinds of jobs at $40,000 to $50,000 per year, like the solo practitioner on page 22 who made only $15,000, and we’re not told why they’re not; and (3) my criticisms of IBR notwithstanding, the Special Committee basically said that IBR doesn’t work because lawyers are scared to use it, even though for public interest lawyers the loans would be canceled after 10 years without any tax penalty. Indeed, trivializing IBR is really the only way the Special Committee could claim student debt reduces quantity of legal services.

Actually, I put up all those quotes just to show that they’re not so much evidence of student debt’s impact on the profession but are really just evidence of low demand for lawyers and low wages’ impact on the profession. In other words, even without student loan debt, these problems would still exist. No one complains that McDonald’s has low pay and high turnover—if anything, that’s built into its business model—but when lawyers dare to take higher-paying jobs than serving the poor and “middle class,” or worse, abandon their law careers, then it’s an insult to the profession. How dare they rationally choose higher-paying work? Don’t they realize that they’re lawyers?

Yes, they do realize it, but they also realize that working in law doesn’t pay very well, and they’re better off doing something else that pays more. I might be overselling this since I’m not the one gathering testimony (the new lawyers I’ve talked to have all said they’re on IBR—without reservations), but it’s unlikely that student debt is the substantial factor in lawyer underemployment here. I certainly concede that it doesn’t help.

Skills Training

I don’t want to spend too much time rehashing the argument from last week, but training costs are baked into all prices for final goods and services (i.e. not second-hand stuff). Normally, if you make the workers pay for the training—even if it’s good training—in theory they won’t pay for it if it won’t raise their incomes. The fact that lawyers’ incomes aren’t high is due to lack of demand for lawyers and the fact that some occupations might be more productive than law, not want of skills training. The theory the state bars (save New York) rely on here is identical to the one they use for student loan debt, except they’re substituting training costs with debt.

Training Costs' Impact on Legal Services (Silly)

For example, returning to the California bar’s task force report:

We emphasize, above all, that we expect future improvement in practice-readiness will prepare new lawyers for the changing legal job market far better than they are today, which will help them become productive lawyers with the capacity to begin repaying educational debt at the earliest opportunity, and ultimately will lower costs to clients, who, in today’s legal market, are too often forced to bear the costs of training young lawyers, either in the form of increased fees or ineffective lawyering. (17)

Let’s think this through: If lawyers are trained well, they will be more productive, so they will serve more clients effectively than poorly trained lawyers. So far so good. It won’t necessarily reduce costs to clients, both because they’re already “forced to bear the costs of training young lawyers” and because they’d be charging market-rate prices. However, if lawyers are selling their services at the market rate, then skills training won’t raise their wages much to help them to pay off their loans, and it certainly won’t result in all law school graduates being employed as lawyers. J.D. overproduction and all that.

I add again that better training is good, but it won’t create jobs as the California, Illinois, and Massachusetts bars believe.

Poverty

I think I’ve discredited the theories the state bars are working under. Here’s mine: Demand for legal services is low during a depression and is also income elastic, meaning rich people lavish money on lawyers for the same reason that they lavish money on shiny rocks and pieces of canvas that some European splattered paint all over hundreds of years ago. Similarly, poor people spend less on lawyers because they need shelter, food, clothing, medical care, etc. more urgently. Yes, America is in fact a very poor country.

Here’s what I mean:

Income Elasticity of Demand for Legal Services (Silly)

(Again, illustrations included for clarity.)

The red portion that gives the LSTB a frowney face is due to poor people being poor. That’s bad, and it also means they won’t hire lawyers. Note also that the slope of the line is greater than 1, which is to show that I’m theorizing that legal services are a “superior good,” which means that when income increases the quantity purchased increase more quickly. If we want poor people to afford legal services, then the state must pay for it.

Thus, in the real world, when people lose their jobs or their incomes fall due to our leave-no-rentier-behind policies, they do not hire lawyers. State bars should stop internalizing external causes of lawyer unemployment, and should admit that there are too many law schools. And if you think I’m a pessimist, then what does that make the authors of these bar reports that treat poverty as a permanent, unsolvable blight on humanity?

On The Am Law Daily: ‘IBR May Not Bar Some Student Debtors From Shedding Debt’

IBR May Not Bar Some Student Debtors From Shedding Debt

Been busy recently, mainly inputting Official Guide data into spreadsheets. Interesting stuff. Will write more on it.

Grad PLUS Loan Disaster Sidelined by Stafford Interest Rate Hikes

If you didn’t know already, the Higher Education Act is up for renewal this year, but you have to dig deeper to get news about anything other than the Stafford loan interest rate hike that will destroy the lives of the undergrads or something. For those curious about law school tuition, here’s what’s been going on.

For one, you have the Bill and Melinda Gates Foundation dropping $3.3 million in grants on 14 organizations to produce policy papers aiming to improve college completion rates by changing the federal loan program. (How about, “Don’t send people to college who are unprepared or can be expected to fail, and create living wage jobs for young people instead”? Now can I get my slice of that $3.3 million?) I don’t know about Melinda’s education (and I don’t care), but I think it’s pretty funny that a wildly successful college dropout is trying to increase completion rates. Those Redmond engineers have to learn coding somewhere.

The policy paper that probably carries the most weight is the New America Foundation’s “Rebalancing Resources and Incentives in Federal Student Aid,” which tackles the graduate-level debt disaster with several proposals:

(1)  Terminate the Grad PLUS loan program.

(2)  Restore bankruptcy protections to private student loans.

(3)  Raise graduate and professional students’ annual Stafford Loan limit to $25,500.

(4)  Set all federal loans’ interest rates to the 10-year Treasury rate plus 3.0 percent.

(5)  Encourage debtors with guaranteed loans to switch them to direct loans with a one percent interest rate reduction.

(6)  Make Income-Based Repayment the sole repayment plan, revise it to protect against high debt, high-income debtors making a windfall.

If these six policies were enacted, it’s certain that average private law school tuition would drop, and it’s clear that the New America Foundation now realizes that IBR isn’t so much the problem as Grad PLUS loans. Recall that the foundation expended much effort last year arguing that an undetermined number of high debt, high income graduate and professional students would benefit most from the changes to IBR (an already generous program compared to the debtors with cosigned private loans that have to come up with four-figure monthly payments or else a megabank will foreclose on their parents’ houses) by showcasing a fly-by-night accounting firm’s advertizing that targeted graduates from a law school with awful employment outcomes.

As you can imagine, I still don’t understand the New America Foundation. Not its policy proposals, those are very crisp and largely unobjectionable, but it doesn’t seem to have much of an ideology, i.e. a coherent set of beliefs that explain why the social order should be one way and not another. “Let’s tweak these programs really well” is not an ideology beyond modifying the edges of an existing social order, which is what you’d expect from a paper using “rebalancing resources and incentives” in its title. This surprises me as its co-founder, Michael Lind, regularly writes reliably lucid liberal (anti-neoliberal!) articles for Salon, including not one but two contemplating taxing land values as a response to advancing technology.

Thus, I draw your attention to point (3), raising the annual loan limit to $25,500. It’s utterly inconsistent with the foundation’s goal of reducing graduate-level tuition:

[Unlimited Grad PLUS loans], especially when coupled with loan forgiveness and Income-Based Repayment, can discourage prudent pricing on the part of institutions and prudent borrowing by students.

“Prudent pricing” here is thinktankspeak for a tuition bubble. As for “prudent borrowing,” I don’t know about other programs, but in the law students’ defense there’s been no evidence that Grad PLUS loans plus IBR has led to an increase in law school applicants who are cynically trying to screw over the government.

Applicants, Admitted Applicants, 1Ls (2013)

(Source: LSAC)

That’s not to say that law schools and students don’t depend on Grad PLUS loans, but I think it’s more one-sided than the New America Foundation indicates. There are fewer law students but not fewer law schools. (Yet.)

We continue:

However, policymakers should increase the annual limit on Unsubsidized Stafford loans for graduate students from the current $20,500 to $25,500 to replace some of the borrowing ability graduate students will lose when the Grad PLUS loan program is eliminated. Although [eliminating the Grad PLUS loan program] will likely push some graduate students into the private loan market, this could ultimately be beneficial in addressing the high costs of graduate schools. If institutions can no longer rely on PLUS loans to fund their high-tuition programs and if the private market is responsive to the ability of borrowers to repay (based on changes to bankruptcy law recommended later), then graduate schools may have to set their pricing based, in part, on students’ expected earnings.

If uncapped Grad PLUS loans discourage prudent pricing, why would raising the cap on Stafford loans encourage it? If the private sector is more responsive to borrowers’ ability to pay, which still doesn’t mean they’re more productive thanks to their educations, then why replace the lost borrowing ability with non-underwritten loans? I don’t really expect the New America Foundations of the D.C. think-tank circuit to argue for doing away with the Stafford Loan Program entirely—there’d be less to tweak!—but without a theory of what causes tuition increases and how people can wind up taking on more debt than they can afford to pay, there’s an obvious contradiction.

The only reason I can think of for the $5,000 Stafford loan increase is to ensure that the proposal looks like it’s saving money. Otherwise, it’d much more consistent to leave the Staffords as they are because eventually the $25,500 loan limit will be eaten by inflation anyway, and the paper doesn’t discuss pegging any of the loan limits to inflation. The other problem with Stafford loans is that universities can increase their haul by setting their tuition at the loan limit and enrolling more students.

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Since the New America Foundation’s proposal is probably the most comprehensive one out there (I didn’t read the others, but I can live with it), then how is it faring against Congress’s dysfunctions?

Enter The Chronicle of Higher Education‘s Kelly Field, “House Panel Approves Market Approach to Student Loan Interest Rates,” May 17, 2013.

Here’s the outline:

  • Obama proposes setting the interest rates on various student loans as follows:
    • Subsidized Staffords: 10-year Treasury note + 0.93 percent, with no cap
    • Unsubsidized Staffords: 10-year Treasury note + 2.0 percent, with no cap
    • Grad PLUS and Parent PLUS: 10-year Treasury note + 3.0 percent, with no cap
  • The Senate is working on the “Student Loan Affordability Act,” which would hold the Stafford loan interest rate at 3.4 percent for two more years.
  • The House will vote on a bill that sets interest rates as follows:
    • Subsidized & Unsubsidized Staffords: 10-year Treasury note + 2.5 percent variable rate, capped at 8.5 percent
    • Grad PLUS and Parent PLUS: 10-year Treasury note + 4.5 percent variable rate, capped at 10.5 percent
  • The alternative Senate bill would set interest rates for all student loans at the “bond equivalent” of the 91-day Treasury note, capped at 8.25 percent. I have no idea what “bond equivalent” means in this context, probably taking the 91-day rate to the 40th power or something like that to align it with a 10-year rate.

In short, expect more Grad PLUS loan carnage and more tuition hikes where they can be had.

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