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.

New America Foundation Discovers Law School Debt Disaster

Via Jordan Weissmann of Slate, the New America Foundation (NAF) issued a policy brief titled, “The Graduate Student Debt Review.” It opens with a suspiciously leading question, “Is America’s student debt problem due more to expensive graduate degrees than unaffordable undergraduate educations?” Like, why would it think graduate debt is a bigger problem than undergraduate debt? Hm … If I didn’t know any better I’d say the NAF has it in for Grad PLUS loans…

…Which I have no problem with. If the NAF wants to dress up in camos, put on war paint, and emerge from the lagoon with a machete clenched in its teeth as it hunts down the beast of unlimited student lending, I say have at it. I might even sneak into the theater to watch.

The obvious question, though, is what does the NAF mean by “America’s student debt problem”? I know what I think it means, but the NAF’s justifications appear to be different:

Students, families, and taxpayers invest significant resources in financing “college,” in large part because a bachelor’s or associate degree is a must for anyone who wants to secure a middle-class income. If students are taking on unmanageable debt to earn those credentials, then many would argue that the system isn’t working. We should not, however, draw the same conclusions from debt levels of students who attend graduate and professional school. While a graduate or professional degree boosts a student’s earnings prospects and the economy at large, it is not the foundation for economic opportunity and middle-class earnings that a two- or four-year degree now provides. (2)

My eyes bleed reading such ideology.

So if someone goes to college, doesn’t take out a lot of debt, but ends up among the 20 percent of graduates who earn less than the median high school graduate in the same age bracket, then the higher education system is working? What about the average defaulted federal loan balance being less than $15,000? How is the system working if someone can borrow a lot of money and pay it off even if they learned their skills on the job?

If I were paranoid, I would suspect that the NAF’s goal is to cut off the worst abuses of the student loan program to save it from critics who think higher education is mostly a positional good. That, or it’s innocently confused on the theoretical debate (such as it is in Washington). Recall that the NAF advocated eliminating Grad PLUS loans while increasing the unsubsidized Stafford loan limit to restore students’ lost purchasing power. It reasoned that Grad PLUS loans can “discourage prudent pricing on the part of institutions,” but the mainstay Stafford certainly does not because education is necessary for the middle class and $30,000 of student debt isn’t so bad.

Okay, so the NAF is probably motivated by a (correctly) assumed conclusion, but what about its findings?

The point of the policy brief is to show that graduate and professional students are borrowing more than a few years ago and that their borrowing accounts for a large portion of total federal student loans (40 percent of the evil $1 trillion+ figure). Therefore, we should separate trends in college borrowing from post-college borrowing. As evidence, the NAF sampled a dataset of people who finished several types of graduate and professional programs in 2004, 2008, and 2012 and displayed their median, 75th percentile, and 90th percentile debt levels.

The tables the NAF provides are interesting for what they are, and along with data provided elsewhere they do show that typical grad students’ debt levels are growing more than undergrads’. However, the tables don’t really answer the questions the NAF is asking. If 40 percent of all student loans are owed by graduates and professionals, we’d want to know the distribution of that 40 percent aggregate by course of study. (How much of it went to med school students? Is it really as bad as those law school scambloggers say? Etc.) That way, we’d know if the growth seen in the tables is systemic as the NAF asserts or isolated to a handful of degree fields.

Instead, the NAF tells us median debt levels for graduates in all fields have gone up, but we knew this already because Grad PLUS loans can go to living expenses and relatively few 2008 grads used them. In a sense the NAF equivocated when it asked, “Is America’s student debt problem due more to expensive graduate degrees than unaffordable undergraduate educations?” Are graduate degrees expensive because tuition costs more or because people are borrowing from the government to leave near campus? We can’t tell, but in Weissmann’s post, the brief’s author, Jason Delisle, claimed Grad PLUS loans mightn’t responsible for the increasing medians but probably the increases at the 75th and 90th percentiles. I don’t believe him either, but that’s what happens when you deny the possibility that credentials are positional goods.

One big reason a distribution analysis would have been more useful is that median debt levels in most graduate degree fields grew by less than $10,000 between 2008 and 2012, and the overall median was only $6,854 higher. The median for “medicine and other health sciences” grew by $23,700, but law grads, as always, stole the show: $44,500 more debt in four years. Indeed, very savvy readers will note that at $128,000, the median 2012 law grad’s debt load was way higher than the weighted average grad’s debt (~$107,000 by looking at the number of graduates and U.S. News debt rankings).

If there’s anything to say about graduate students and debt from this policy brief, it’s that the NAF has discovered that legal education is a unique disaster in higher education.

Instead, it lectures:

Students pursuing [graduate and professional] degrees already have an undergraduate degree, and they should be far more informed consumers. Therefore, they shouldn’t need a lot of public support to finance their next credential, which is why there are no Pell Grants for master’s degrees.

I can’t tell if the gratuitous phrase, “should be far more informed consumers,” is a normative statement against the grad students, their undergraduate institutions for failing to educate them properly, or the grad programs for pitching degrees of dubious value. Chalk one more up to the strategic use of the passive voice, I guess. The worst-case scenario is that the NAF believes that everyone who goes to grad school knows about IBR’s loan cancelation feature, so they irresponsibly attend thinking they won’t have to repay their debts even though they make lots of money because they’re so amazingly educated.

If you think I’m being hard on the NAF—well, I am—but the point is that its policy brief is a bellwether. The Grad PLUS Loan Program is not long for this world, and that’s a very good thing. On the other hand, the NAF is not the ally to the working class—sorry, “middle class”—it fantasizes to be. It’s very much enthralled by human capital theory, and it won’t pay any price if people graduate from college and don’t collect any premium.

‘After the JD’ Offers Weak Evidence of JD’s Value

…Is up on The Am Law Daily.

And now ladies and gentlemen, the band called Death.



This band’s interesting story is the subject of a documentary titled, A Band Called Death, that’s on Netflix.

On the Am Law Daily: ‘ABA Task Force Report: Part Good, Part Baffling’

You can find my latest Am Law Daily article here:

ABA Task Force Report: Part Good, Part Baffling

Per the discussion on my first cut at the topic, I added a little bit more on the possibility of limited-licensing programs reducing costs. There’re other changes to the original post.


2013: The Year of Student Loan Delinquency

…Is really all I’ve got to say about the New York Fed’s latest Household Debt and Credit Report, which gave us fourth quarter 2013 data on America’s household debt balances and delinquency rates.

Percent Balance 90+ Days Delinquent

2012 saw the delinquency rate for student loan balances spike above 10 percent, and it stayed there all last year. I’m a little surprised and kinda thought it would’ve dropped more in Q4. Looks like that didn’t happen.

According to the report, student loans accounted for $113 billion in household credit growth last year, 63 percent of the total (I gather the NY Fed’s sample underestimates the data).

According to ED’s portfolio data, 4.4 million guaranteed-loan debtors were in total default at the end of last year, and Federal Direct Loan Program defaulters grew by 300,000 to 2.4 million in the last six months of 2013. There’re certainly some duplicates there, but these loans don’t look like they’re going to be repaid.

I’m surprised we’re still not hearing about this much in the news. It’s like these people don’t exist.

[UPDATE: Even the Times slipped when reporting on the credit update:

Some kinds of debt, like car loans and mortgages, may be a positive sign that people are investing in the future. Other kinds, like student loan debt, can put a damper on the economy by suppressing discretionary spending for years.

So much for the human capital theory.]

NYT Thinks Student Loan Poverty Is Good for the Economy

Natalie Kitroeff, “Loan Monitor Is Accused of Ruthless Tactics on Student Debt,” New York Times, January 1, 2014.

Regular readers of the LSTB might know the Education Credit Management Corporation as the creditor in student loan bankruptcy adversary proceedings (and their inevitable appeals) that demands bankruptcy courts order aged, unemployable debtors to sign on to Income-Based Repayment instead of discharging their loans. In an article about ECMC’s abuses of federal student loan debtors, the Times barfs up this howler.

There is $1 trillion in federal student debt today, and the possibility of default on those taxpayer-backed loans poses an acute risk to the economy’s recovery.

Holy crap there’s a lot wrong with this line.

(1)  Not all $1 trillion in federal student loans will be defaulted on. (Okay, the proportion of balances in default is 11 percent, but that’s because the loans aren’t dischargeable, not because they’re threats to the economy).

(2)  Defaulting on these loans would do the opposite of endanger the real economy for a few reasons. One, poor people who default on their loans will spend money on real goods and services instead of debt. Two, the loans are owed to the government or banks whose loans are guaranteed by the government. The bank bailout is either already in place or the loans are self-bailing out (I prefer “auto-TARPing”).

(3)  If defaults are a problem, then the Times should tell us why IBR is such a great idea. There are many people whose loans are so large that we know ex ante to repayment that they’ll never be paid off, especially law school debt. I guess the economy of 2030 can handle IBR loan cancelations better than it would today.

Then a law prof weighs in:

[Stanford University law professor G. Marcus Cole] added that if it were easy to discharge student loans in bankruptcy, lenders would simply not lend money to students without clear assets or prospects. “We need a standard like that to be able to allow students who can’t afford an education to be able to borrow,” he said.

Why should the government be loaning money to people who don’t have clear assets or prospects?

[In 1990] Lawmakers began arming the Department of Education with a set of unprecedented collection tools, including the ability to garnish debtors’ wages and Social Security, and appropriate their tax rebates.

The changes helped cut default rates from a high of 22 percent in 1990 to around 10 percent in the 2011 fiscal year.

As stated above, the 10 percent default rates are not a benchmark for success.

10.5 Delinquencies Up

Here are some questions to keep in your head for the next couple of decades as the government procrastinates on the federal student debt bubble:

(1)  How much federal student loan debt will have to be written-down because it’s unpayable?

(2)  How much will student debt interfere with people’s living standards and retirement saving?

(3)  How will the write-down come about?

(4)  When will it come about?

(5) Who will pay for it?

(6)  Just how acrimonious will it be?

I can tell you right now that so long as the Times thinks it’s bad for the economy when the government isn’t grinding people into poverty with predatory loans, the procrastination will continue.

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)


Good News: Students Borrowing Less From Education Department

The bad news is that I just updated the LSTB’s student debt data page, but revising it again is my problem, not yours.

For those in the know, the Department of Education (ED) tracks the amount of debt the government lends out each quarter (and each academic year), going back to the late 1990s. Here’s total borrowing by loan program, which includes direct loans and guaranteed loans back when they were around.

Amount of Federal Loans Disbursed

Don’t let the 2012 data throw you. Because Congress stripped subsidized Stafford loans from graduate and professional students, the 2012 bars’ meanings completely changed from previous years. Now all subsidized Stafford loan borrowers are undergraduates only, and ED kindly separated graduate unsubsidized borrowers from undergraduates. Nevertheless, the total amount of Stafford borrowing is dropping. In the 2011-12 academic year it was $85 billion; in 2012-13 it fell to $78 billion.

The declining loan volumes imply that the Office of Management and Budget’s long-term direct loan projections, which are discussed in the aforementioned student debt page) are probably high.

Projected Direct Loan Balance (OMB)

Less money lent out means fewer dollars likely to be lost to the program, so I consider this good news. However, the amount of money lent in 2012-13 is still sky high compared to the middle of the decade, and we don’t know who’s not borrowing, why they’re not borrowing, or whether their parents are just taking out dubious 410(k) loans instead.

Parent PLUS loan borrowing is down as well (-170,000 recipients), but that’s probably due to ED tightening the eligibility requirements on those loans. Grad PLUS loans are down slightly too, with about 18,000 fewer recipients. At most 2,000 of these can be attributed to law school graduates who were not replaced in the 2012-2013 academic year.

Here’s a chart of the number of recipients by loan type:

No. Federal Loan Recipients Per Year

(Note: the data point for unsubsidized undergraduate Stafford borrowers overlaps with the point for all PLUS borrowers in 2012, 6.9 million (left) and 697,000 (right), respectively.)

…And here’s the amount disbursed per recipient:

Amount Disbursed Per Recipient

Splitting graduate unsubsidized Stafford borrowers from the undergrads reveals just how much more graduate and professional students borrow. If grads and professionals go add Grad PLUS loans to their unsubsidized Staffords, they’re taking on more than $37,000 in debt in one academic year. Since there were 335,000 Grad PLUS borrowers last year, we can expect that in the near future, the highest student debt brackets (e.g. >$100,000) that we’re told aren’t really a problem will increase more quickly than the lower brackets. This much is not good news.

I’d give an update on the freestanding private law schools, but for some reason Western State didn’t appear in the data and I’m waiting for an explanation from ED.

Unsave the Date

For those of you paying attention to my Am Law Daily posts, at the bio blurb at the end I would note that I will be speaking on student loan debt at the Henry George School of Social Science in New York City on September 27, 2013. I hadn’t announced it here because it hadn’t been finalized.

…Which is fine because it’s been postponed until a later date for various reasons.

I’ll let y’all know when it is rescheduled.

In the meantime, here’s Martha Reeves and the Vandellas running through an auto plant.



NYT Plays ‘Choose Your Own Higher Education Ideology’

Mass Unemployment

Due to your busy Saturday schedule, you only have time to read one of two opinion articles in The New York Times about education by two university professors.

Turn to page 34 if you think that college pays off but fewer people should attend anyway (Tyler Cowan, “A Dearth of Investment in Young Workers“).

Turn to page 77 if you think we should send more people to college to ensure economic growth (Robert J. Gordon, “The Great Stagnation of American Education“).


Page 34

You choose to read Cowan’s article. Cowan tells you that young people are underemployed because (a) the minimum wage was increased in 2009, and (b) employers are concerned with “overhead,” so they don’t want to invest in training young workers. You imagine yourself telling him that the minimum wage has been destroyed by inflation and that the problem is lack of aggregate demand, and he would respond, “Shut up you filthy Krugmanite!!”

Cowan writes:

“In the legal profession, for instance, there is less interest in hiring junior associates and grooming them for partner status.”

You suspect that in the real world, rich people and corporations may bid up the prices of high-end law firms as they become wealthier, but at some point there are only so many legal services they need, especially when so many of their potential customers can’t afford much of anything.

Real GDP & Legal Sector Value Added (Billions 2005 $)

(Source: BEA)

He continues:

“Young people who are hired often fail to find desirable, high-paying jobs. If we consider four-year college graduates only, average starting salaries, inflation-adjusted, were higher in 2000 than they are today, a decline that started well before the financial crisis. On balance, though, college remains ‘a good deal,’ in part because wages for nongraduates have fallen even more than those for graduates.”

“THESE developments put economic pressure on higher education. If it’s harder to get a good and lucrative job after college, why should students pay ever-rising tuition rates? College doesn’t always prepare students very well for the work force, and most graduates don’t enjoy the relatively rosy job prospects of computer science and engineering majors.”

It occurs to you that this doesn’t make sense, as though Cowan were arguing that the problem with higher education is credential inflation and not credential inflation. Cowan appears to be suggesting that students are paying for a lower likelihood of unemployment, which should bolster college enrollments, albeit for bad reasons. Young Americans don’t really have much of a choice. Cowan’s argument would be a lot stronger if he cited evidence of declining college enrollments and declining employment and wages among college graduates.

Cowan concludes:

“Policy changes to bolster economic growth and employment, whether by simplifying the tax code, repealing some occupational licensing, bringing more rigor to K-12 schooling or accrediting cheaper online education, may help reverse or curb these trends.”

“Yeah, that’ll fill the $1 trillion output gap,” you mutter to yourself as you close your browser.

Then you get a job at Wal-Mart.



Page 77

You click on the link to the Times‘ Opinionator link to read Gordon’s article.

Gordon tells you that education causes economic growth, for over the centuries “American economic growth has gone hand in hand with rising educational attainment.” He remarks that “since 1990, that improvement has slowed to a crawl.” The problem is that more educated people are more productive because demand for technical and communications skills is growing, but demand for unskilled and semi-skilled labor is falling.

You think this is an odd statement. Most of the higher-educator types demand more education because technology has wiped out the mid-range jobs, not menial ones. There will always be demand for manual labor, it just won’t pay much. Therefore, they argue, we should send everyone to college. We need a society of Eloi lawyers, not Morlock material movers, and none of the Morlocks have law degrees—they’re educated!

But that’s only a slight difference in the typical argument.

You also wonder if things like the trade deficit contribute to the decline in employment and wages for lower-income workers because the only way for the economy to run at full capacity is if either the public sector or private sector (or both) is borrowing money from developing countries to buy their cheap-labor exports. The trade deficit tends to lead to debt bubbles, which sap people’s purchasing power and throw the economy into depressions.

But Gordon would tell you you’re wrong:

“There are numerous causes of the less-than-satisfying economic growth in America: the retirement of the baby boomers, the withdrawal of working-age men from the labor force, the relentless rise in the inequality of the income distribution and, as I have written about elsewhere, a slowdown in technological innovation.”

Uh-huh. Men voluntarily leave the labor force. Gordon treats this as an exogenous variable, not an outcome of economic depression. You do like the “inequality of the income distribution,” however.

Gordon writes about the problems with America’s primary education system, which you find agreeable. Then he discusses higher education. Gordon writes that the two problems are “quality” and “affordability.” Relative to other countries, America’s college completion rates are dropping, and the percent of graduates is lower than other countries’. Worse, tuition costs are rising and education debts are rising too. With high debts, it takes longer for college to pay off.

You wonder if Gordon’s international comparisons of completion rates and population-education rates aren’t really helpful. “So what if a smaller percentage of Americans finish college?” you ask yourself rebelliously, “Isn’t it more important if they have jobs?”

Curiously, Gordon agrees with you. One-fourth of recent college grads are underemployed or unemployed. He then adds that “A student who takes out half as much debt but drops out after two years never breaks even because wages of college dropouts are little better than those of high school graduates.”

“But wait a second!” you interject, “You said higher education increased people’s productivity. If employers don’t care about the content of the education but do care about the diploma, then that means higher education is mainly a signaling tool.” To be sure, some human capital is created in college, and it’s possible that historically it created relatively more human capital than today, but Gordon can’t say that we need to send more people to college and then admit that they aren’t actually learning anything employers demand.

Nevertheless, Gordon insists that “Our economic growth is at stake” if America’s college completion rate doesn’t rise to Canada’s.

“I guess stimulus and a weaker dollar are out,” you sigh to yourself.

Then you get a job at Wal-Mart.



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