Less Debt, Fewer Defaults, and More IBR

…Is everything you needed to know about last week in the world of federal student loans.

We have The Wall Street Journal‘s Morning Editorial Report … um … editorializing on the “Surge in Student Debt Forgiveness.” The whole article is subscription required, but it appears the WSJ is continuing its biased reporting on IBR by sloppily characterizing it as a loan-forgiveness program rather than a program whose intended purpose is to reduce monthly payments. That’s not to say I don’t think IBR will cost the government a lot of money or that the average amount borrowed is high enough to indicate that a lot of these debtors borrowed Grad PLUS loans, but this is pretty shrill. Like, how dare an income-based repayment program base people’s repayments on their incomes? What’s next Social Security securing society from old people starving to death in the streets??

On the other hand, we have The Washington Post, which does a much better job of pondering why student loan defaults are dropping. IBR is part of it, as is slightly better job outcomes for graduates. It even concedes that college graduates are finding jobs that don’t require their degrees. Clearly the author has not gotten the memo on occupations.

Finally we have an article by … me. This very post you’re reading. Recently, the Department of Education released its fourth quarter report of total student loan volumes by institution. The slightly good news is that last year the aggregate disbursement fell below $100 billion.

Aggregate Federal Loans Disbursed (Current $)

The bulk (43 percent) of the $5.9 billion decline is in unsubsidized Stafford loans to undergraduates, and 37 percent were due to subsidized Stafford loans (which now go only to undergraduates). The rest (1/4th) is due to unsubsidized Staffords to graduate students. Grad PLUS loan disbursements grew by half a percent. Can’t win ‘em all, I guess.

As for the amount disbursed per recipient (in current dollars, for loan limits aren’t inflation-adjusted and that’s the benchmark to measure changes against), most of the loan types saw negligible declines, indicating that either fewer people are taking out federal loans or fewer Americans are going to college.

Meanwhile, since the Internet tells us that Thomas Jefferson School of Law is in trouble, I figure it’s time to check in on those freestanding private law schools. TJSL isn’t alone, it just hasn’t managed to find a public university to socialize it yet (see WSJ, there’s your Social Security quip!). Western State fused into Argosy University two years ago, but I heard that was a long time coming. Texas Wesleyan is now Texas A&M, and some of the formers’ graduates want diplomas that say they went to the more reputable latter. Chalk one more up for the signaling hypothesis. Finally, the University of New Hampshire (formerly Franklin Pierce Law Center) is in fact now the University of New Hampshire. Go figure.

Oh, and how could I forget: Thomas M. Cooley is now affiliated with Western Michigan University.

I’ve heard rumors of other mergers going on among the FSP law schools, but that’s four that are adapting to the new world. TJSL just happens to be dealing with its fiscal problems by having a fiscal crisis.

There’s more to be said on this, but I figured I’d leave you with a chart comparing the average amount borrowed per recipient of federal loans at each of these law schools to their total costs for full-time students according to the Official Guide.

Average Amounts Borrowed Over Full-Time Costs at FSP Law Schools (2013-14)

I draw your attention to the fact that at none of these schools can a full-time law student cover his or her tuition with just unsubsidized Stafford loans. (Also, it seems that some law students are cleverly borrowing more than the annual loan limit allows. Hm.) At the average FSP law school last year, 87 percent of students took out Stafford loans; 70 percent borrowed Grad PLUS loans.

Fin.

PAYE for All!

From the Associated Press, “Obama to Announce Expansion of Student Loan Repayment Program.”

Obama on Monday will announce he’s expanding his “Pay As You Earn” program that lets borrowers pay no more than 10 percent of their monthly income in loan payments, the White House said. Currently, the program is only available to those who started borrowing after October 2007 and kept borrowing after October 2011. Obama plans to start allowing those who borrowed earlier to participate, potentially extending the benefit to millions more borrowers.

I didn’t realize Obama could do this via executive action, but there you have it. In fact, IBR was planned to transform into PAYE by 2014 by law all along. IBR as you’ve known it will be gone for good. RIP I guess.

“At a time when college has never been more important, it’s also never been more expensive,” Obama said in his weekly radio and Internet address released Saturday.

We can also expect a larger aggregate amount of student debt to be written off in the next couple of decades.

Obama also plans to announce he’s directing the government to renegotiate contracts with federal student loan servicers to encourage them to make it easier for borrowers to avoid defaulting on their loans. And he will ask the Treasury and Education departments to work with major tax preparers, including H&R Block and the makers of TurboTax, to increase awareness about tuition tax credits and flexible repayment options available to borrowers.

This is unobjectionable. Beyond that, though, the president voiced his support for Sen. Elizabeth Warren’s proposed student loan refinancing scheme, which would allow debtors to take advantage of the low overnight rates the Fed offers banks. Yes, it’s apples-to-oranges because student debts are paid within 10 years or more and not overnight, but it’s a little strange because the reason Congress abolished the guaranteed loan program under the Affordable Care Act was that it would use student loan repayments to pay for health care. With easily refinanced interest rates, that’s unlikely to happen.

The president will continue the push Tuesday in an online question-and-answer session hosted by Tumblr.

Maybe you can ask him how much student debt the OMB expects to be forgiven. I doubt it’s even pondered the question.

Senate Republican leader Mitch McConnell of Kentucky in a statement criticized the Democratic bill for failing to address college costs.

“This bill doesn’t make college more affordable, reduce the amount of money students will have to borrow, or do anything about the lack of jobs grads face in the Obama economy,” he said.

Pretty much.

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.

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