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.

(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 40^th 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.

Joseph Stiglitz is Still Soft on Higher Education

…But unlike last time, he’s clear about it now.

Joseph Stiglitz, “Student Debt and the Crushing of the American Dream,” New York Times‘ Opinionator.

Yesterday, Stiglitz argued that student debt is connected to inequality, and it’s “intertwined” with lack of housing demand. He writes:

It’s a vicious cycle: lack of demand for housing contributes to a lack of jobs, which contributes to weak household formation, which contributes to a lack of demand for housing.

I’m dead certain that student loans crowd out homeownership for individual debtors, but I don’t know to what extent that can be imputed to the whole economy. Stiglitz is arguing that but for student loans, people have the income to afford housing. I don’t think this is true. I think most student loan debtors lack the income period. Thus, the “lack of demand for housing” is caused by untaxed land rents, which isn’t related to student loans.

Stiglitz might be right, but I don’t think every student loan debtor is just a few hundred dollars away from homeownership. I do think, however, that he’s wrong about the value of higher education. Cue the Eloi lawyers and Morlock material movers who have law degrees:

Curbing student debt is tantamount to curbing social and economic opportunity … Our economy is increasingly reliant on knowledge-related industries. No matter what happens with currency wars and trade balances, the United States is not going to return to making textiles. Unemployment rates among college graduates are much lower than among those with only a high school diploma.

I have to credit Stiglitz for actually connecting the trade deficit to jobs to student loan debt. This connection is very real, but it’s not made often because economists know nothing about student loan debt, and student debt advocates know nothing about labor economics. Again, I disagree. If we flip the trade deficit, maybe the textile jobs won’t come back—I don’t see why they wouldn’t, the U.S. is still one of the world’s biggest cotton manufacturers—but the lump of labor fallacy doesn’t apply to individual industries. There’s only so much demand for lawyers, brain surgeons, advertisers, fashion designers, and other knowledge workers. At some point, technology will reduce the labor economy to trading simple services that can’t be automated, like haircuts, waiting tables, etc. These jobs will rarely pay well, which is one argument for taxing the land rent and redistributing it as a citizen’s dividend.

The other big problem with the article is that Stiglitz doesn’t believe that over-generous federal lending enables tuition increases. He makes passing mention to slashed government subsidies to public universities, which is correct, but he thinks the rest of tuition increases are due to “the banks’” and not higher educators trying to sell parents on multi-million dollar athletic facilities. Then, as expected, he attacks the for-profits as though nonprofits and public universities are guileless. He also doesn’t point out that for 85 percent of the debt, “the banks” are the federal government either directly or by guarantee.

As a result, Stiglitz’ policy prescriptions are a muddle. Yes, restoring bankruptcy protections is critical, but thanks to IBR, even for-profits won’t post very high default rates, unless they don’t tell dropouts how to fill out the forms. Consequently, they will likely have access to federal funding indefinitely no matter what federal judges say. Slashing interest rates to the Fed’s discount rate (that’s the rate it quotes for its direct lending to the banks) will reduce debt burdens, but it certainly won’t discourage people from taking out loans they don’t need for degrees that have little value.

Stiglitz supports adopting Australia’s income-contingent repayment system, but I think we should take the government out of higher education finance entirely.

In Which I Attempt to Match the Times’ Non-Reporting

Annie Lowrey, “Student Debt Slows Growth as Young Spend Less,” New York Times.

Do yourself a favor and don’t bother reading the piece. No that’s not reverse psychology; it really just rehashes stuff you already know, especially once you get to the bit of propaganda in the fourth-to-the-last paragraph:

On the other side of the equation, many college graduates now in their 20s and early 30s should eventually be able to make up for lost ground. Students who take on debt to pay for higher education commit themselves to paying off huge sums, but they usually lift their lifetime earnings by substantial amounts. And they are in a better position to insulate themselves against economic bad times, given the profound rewards the job market provides to the college-educated.

Four paragraphs earlier, the article states that the average (I think, the article doesn’t say) debt-to-income ratio for households under 35 has grown from 1:1 to 1.5:1 between 2001 and 2010. How lifetime earnings can rise while the young—which, I interject, are people whom society treated as full adults a few decades ago—are spending more on debt service is unexplained.

Okay, I can’t match the Times‘ non-reporting; here’s some value-added:

(1) More Americans have college educations than the past, so logically it’s harder to say that it provides an earnings premium. It could just be credential inflation.

(Source CPS)

(2) Young(ish) college-educated Americans make less money than they used to.

(Source CPS)

I included professional degrees, but the sample’s pretty small. It’s accurate but imprecise. Do not take it for the value of a juris doctor; those probably pull down professional degrees’ values.

To be fair, though, I’m going to give a little credit to the Times because people’s incomes would be higher if the economy were at full employment, and it’s not. In other words, it’s unlikely structural degree oversupply is the primary force depressing college graduates’ earnings. Thus, the 1.5:1 debt-to-income ratio should be lower than it is. But just when exactly will college graduates in their 20s and early 30s “make up for lost ground” after their prime earning years? The Times doesn’t say. You’re supposed to have faith that *it* can’t happen here, *it* being rule by the future-present aristocracy in a democracy-lite.

Liberal Law Professors Shielded by Hostility Towards Lawyers

I read Brian Tamanaha’s “The Failure of Crits and Leftist Law Professors to Defend Progressive Causes,” which castigates politically liberal law professors for participating in institutions that encourage both the class schism in the legal profession and law students to borrow unpayable debts. How could they not know what was going on? Tamanaha writes:

Seduced by the allure of prestige of material comforts, Crits and progressive law professors have become a part of the system they set out to reform. Watching market-thinking become pervasive and the gap between rich and poor in America steadily increase, knowing that on broader economic issues we had lost, we succumbed to the temptation to grab what we could for ourselves and our families. (35)

Ouch. It occurred to me while reading this passage that of all the topics I think or write about, legal education is the one where I think we need more “market-thinking,” so I end up sounding like a perfidious neoliberal. I’m not. Instead I think that what passes for “market-thinking” has largely shielded liberal law professors: Lawyers are regularly perceived as playing outside market rules. They chronically overcharge their clients—a belief that’s readily reinforced by actual instances of file-churning, etc.—and they don’t do enough for the poor given their awesome privilege. For the more conspiratorially minded, they file frivolous lawsuits against one another to drive up business, or they use their dominance in legislatures to enact laws that create yet more work for themselves. Even corporate America is powerless to negotiate lower rates against the almighty leveraged, billable hour.

The public’s uncharitable perceptions aren’t helped by economists who misunderstand the effects of professional licensing. Anyone who reads Dean Baker’s Beat the Press will regularly find the author complaining that free trade advocates are willing to subject manufacturing workers to competition with cheap foreign labor, but they hypocritically use professional licensing regulations as trade protectionism. Never mind that professional services aren’t as fungible as precision-made goods; that lawyers’ contributions to legal matters are usually more valuable than assembly line workers’ to their products; or that most states, including California, New York, D.C., Texas, Illinois, and Florida, allow foreign-trained lawyers to take their bar exams (subject to various other requirements, admittedly) with no evidence of lower lawyer incomes there as a result. For some inexplicable reason, foreign lawyers will be able to topple biglaw in a way that tens of thousands of unranked law school grads cannot.

An even better example is Clifford Winston’s, Robert W. Crandall’s, and Vikram Maheshri’s 2011 book, First Thing We Do, Let’s Deregulate All the Lawyers. The authors calculated that lawyers earned 50 percent more than people who had the same amount of education. They also found that over time lawyers’ incomes increased even though their GPA and LSAT scores did not, and that the number of lawyer jobs created each year is significantly less than the number of people who apply to law schools. Therefore lawyers must be creating a huge deadweight loss to society.

No one pointed out to them that (a) demand for legal services is income elastic, which means rich people and corporations spend more money on brand-name firms as they become wealthier (and they have become wealthier); (b) the wages of lawyers are determined by their marginal product, not their education; and it might just be the case that lawyers are more productive than people who drop out of English PhD programs; (c) incomes for high-test-scoring people have increased generally over the last few decades as credentials from elite universities have led to higher-paying jobs; and (d) demand for legal education is not the same thing as demand for legal services.

One need only read First Thing We Do‘s introduction (PDF) to understand the methodological problems with the authors’ argument:

As regulatory economists, we find it natural to reason that occupational licensing, like other regulations that restrict entry, benefits existing suppliers by limiting competition. Thus its primary effect is to generate earnings premiums to practitioners in a particular profession such as law—earnings premiums that could be inefficient.

In short, it’s an argument from incredulity nestled in a begging-the-question fallacy: We can’t believe the legal profession would allow more people to purchase legal education than there are jobs available for them because that would mean lawyers are bad at creating licensing restrictions, and they would be callously dumping over-indebted, underemployed law graduates onto the labor market and tolerating a massive wealth transfer to law professors that doesn’t directly benefit lawyers. Therefore, the licensing requirements must be restricting supply and raising incomes.

However, the fact is, applicants’ willingness to risk rejection, which indicates they would pay full freight if accepted, increases with tuition. Behold the number of rejected full-time applicants at private law schools (ex. Puerto Rico’s and Brigham Young) and public law schools whose tuition is higher than the average private law school’s.

Those of you who wanted an upward-sloping demand curve, here is your upward-sloping demand curve.

Even in my private life, I’ve encountered two economists (whom I respect) who thought “licensing = labor cartel” applied to lawyers ipso facto. In fairness, it’s not self-evidently untrue, but it shows the heuristics that go into analyzing who’s cheating society and who isn’t.

Okay, I didn’t write this post to rehash First Thing We Do—not that I didn’t savor the empty calories and hope you did too—rather, I brought it up to show that “positions, not interests” explain conventional views about lawyers and law schools:

• Lawyers = cheaters, thieves
• Law students = greedy turds who refuse to serve the poor at lower pay and are whining because they’re bitter they didn’t get to be cheating thieves
• Law professors = tragic figures because despite their liberal agendas, their students still refuse to serve the poor and aspire to be cheating thieves
• Student debt for education = good because education = “upward mobility” = good

Once this framework for the law school debate sets in, it’s no wonder that Tamanaha’s peers call him an outrageous elitist conservative. It takes the ideological equivalent of a spontaneous reversal in the earth’s magnetic field to recognize that law schools have more in common with Bain Capital than they do with Legal Services NYC, which has been working without a contract since July 2012 and might go on strike soon. The dominant liberal story over the last thirty years is that rich conservatives and neoliberals (including cheating thieving lawyers) captured the government to crush labor and redirect incomes from the poor to themselves. Thus, liberal law professors are the types of people we’d least expect to support too-big-to-failist institutions. The fact that conservatives tend to hold anti-higher education and anti-student lending views further warps the discussion along ideological lines.

That law schools were caught fighting on the wrong side of the class war at the same time the banksters wrecked the economy is only a coincidence, but it doesn’t appear that way to the students, who are increasingly seeing a generational war between entrenched, entitled boomers and themselves. Law schools’ legacy will be a severely cynical generation—not something supposedly labor-loving liberal academics see themselves as promoting.

IBR Makes Contact With the Bankruptcy Code

I have a confession to make: I like reading appellate court opinions and thinking about the issues they discuss. Maybe I should’ve gone to law school or something. I don’t collect them like comic books, but it’s a rare perk of blogging that I get to read one every once in a while.

Today’s adventure is Krieger v. Education Credit Mgmt. Corp., (7^th Cir. 2013) (No. 12-3592), a bankruptcy case appealed from federal district court. The district court reversed the bankruptcy court’s finding that denying discharge of plaintiff-appellant Susan Krieger’s student loans would constitute an “undue hardship.” In a compassionate move, the Seventh Circuit sided with Krieger, allowing her discharge.

The opinion was written by law and economics powerhouse Frank Easterbrook, who baldly opens with, “Susan Krieger is destitute.” There are other nuggets like when he echoes anti-neoliberal zealot Michael Hudson (somewhat uncharacteristic of a Chicago-school type):

[I]t is worth recollecting that Educational Credit concedes (as the bankruptcy judge found) that Krieger simply cannot pay. She is essentially out of the money economy and living a rural, subsistence life. She does not have assets or income and, the bankruptcy judge found, is not likely to acquire any. Krieger at 2.

Krieger (53), who lives with her 75-year-old mother, hasn’t held a job since 1986, and before then she’d only earned $12,000 in her lifetime. She owed $25,000 in student loan debt for a paralegal degree she obtained more than a decade ago, and she applied to 200 jobs since then to no avail.

Debts that cannot be repaid, will not be repaid.

This opinion exists because Congress never bothered to define the circumstances constituting an “undue hardship.” 11 U.S.C. § 523(a)(8) (2012). The pertinent statute reads:

(a) A discharge [in chapter 7, 11, 12, and 13 bankruptcy] does not discharge an individual debtor from any debt—

…

(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—

(A)

(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or

(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or

(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.

Why is “undue hardship” undefined? Because until President Clinton signed the Higher Education Amendments of 1998, section 8 read:

(8) for an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution, or for an obligation to repay funds received as an educational benefit, scholarship or stipend, unless -

(A) such loan, benefit, scholarship, or stipend overpayment first became due more than 7 years (exclusive of any applicable suspension of the repayment period) before the date of the filing of the petition; or

(B) excepting such debt from discharge under this paragraph will impose an undue hardship on the debtor and the debtor’s dependents.

In other words, one only needed to show an “undue hardship” if her loan had been in repayment for fewer than seven years before the petition date. After that, student debt was treated no differently than credit card debt. Note also that nonprofit institutions (e.g. Access Group) were also shielded from debtors well before private institutions received the same protection in 2005.

The 1998 amendment was passed with extraordinary bipartisan support (Ron Paul voted against it), which suggests that no one bothered to think about the consequences of permanent government-backed student loan debt. The primary such consequence is that for student debtors who wish to include their student loans in their bankruptcy petitions, their fates are basically in the hands of a federal bankruptcy judge. Or Article III federal judges, going up the line, as is the case here. The circuits have, I think, three different tests for determining an “undue hardship.” The circuit you live in could mean the difference between discharge and debt peonage.

Thus, in Krieger, the debtor pretty much threw herself at the mercy of the federal courts, and thankfully they ultimately sided with her. In the trial over the dischargeability of the debt, the bankruptcy judge wrote:

Never has the Court seen such utter futility be the result of a debtor’s job search efforts. Krieger at 5.

(How many times have you read comments on scamblogs, Above the Law, and elsewhere of people who’d sent out 700 or more resumes in a handful of years rather than 200 in ten years?)

I don’t want to dive too deeply into the minutiae of the “undue hardship” test that the Seventh Circuit uses, but its third prong requires the debtor to show that she has “made good faith efforts to repay the loan.” The district court believed the debtor didn’t meet this requirement.

So law school gunner, answer me this lest I Socratic cold-call you: Does the debtor’s decision not to sign on to Income-Based Repayment mean she has failed to meet the good faith requirement?

.

.

.

No, writes Easterbrook, who argues that logically IBR’s existence does not repeal § 523(a)(8).

[T]he judge concluded that good faith entails commitment to future efforts to repay [i.e. IBR]. Yet, if this is so, no educational loan ever could be discharged, because it is always possible to pay in the future should prospects improve. Section 523(a)(8) does not forbid discharge, however; an unpaid educational loan is not treated the same as a debt incurred through crime or fraud. The statutory language is that a discharge is possible when payment would cause an “undue hardship”. It is important not to allow judicial glosses, [like the "undue hardship" test], to supersede the statute itself. Krieger at 4. [Emphasis original]

But what makes Krieger an even bigger bellwether over IBR is the concurrence by Judge Daniel Anthony Manion. It’s really only a concurrence in the loosest sense: He agrees with the bankruptcy judge’s determination that the loan is dischargeable only because the standard of review the Seventh Circuit is using requires a showing that the bankruptcy court’s decision was “clearly erroneous,” which Manion happens to believe is not the case.

Otherwise, Manion warns that a successful discharge of $25,000 by someone who is in good health “should be labeled as an extreme exception and an outlier” because with student debt growing to “crisis” (his words) levels, he’s afraid that debtors will flock to the bankruptcy courts instead of signing on to IBR. Krieger at 9.

What I don’t get is if Manion thinks people who are in good health and are IBR-eligible at $0 per month shouldn’t be able to discharge their loans, then why did he not find the bankruptcy court’s ruling “clearly erroneous”? How is Krieger an exception? Why is this not a dissent?

While I don’t think this is the first time a student loan bankruptcy case has encountered IBR, I’m pretty sure it’s the highest-profile example, so I’m going to call it Bankruptcy 1, IBR 0. Although it’s still a factual matter left to the mercy of bankruptcy judges, they have more leeway to side with a debtor than if the debtor were seriously injured but ineligible for an administrative hardship discharge by the Department of Education. Destitution is enough.

NY Fed: Young Student Debtors No Longer Taking on Other Debt

Meta Brown and Sydnee Caldwell, “Young Student Loan Borrowers Retreat From Housing and Auto Markets,” Federal Reserve Bank of New York

At last, a New York Fed research paper that doesn’t promote perpetual debt-financed education. In seriousness, this article is quite well done, so I don’t have too much to say about it. The only line I object to is the beginning when it states:

Student loans have soared in popularity over the past decade, with the aggregate student loan balance, as measured in the FRBNY Consumer Credit Panel, reaching $966 billion at the end of 2012.

“Popular” isn’t the word I’d use to characterize student loan debt.

The paper principally finds that young people without student loans are buying houses and cars—and they have better credit scores—than those with student loan debt, a stunning (if you didn’t stop to think about it) reversal from several years ago. The authors state two possible reasons: (1) Young debtors expect lower future incomes, which hampers their spending, and (2) Lenders will no longer loan money to people with high debt-to-income ratios. You can guess which one I think is more prevalent.

The only other observation I’ll note is that the average 25-year-old has less overall debt than several years ago, but more if it is student loan debt. This is a big deal because if the educations they purchased (if they completed them) increased their productivity, then there isn’t a lot to worry about. If we correct a few imbalances in the economy, we will expect them to be good drones.

On the other hand, if the debt did very little for their productivity, then it’s no worse than borrowing nondischargeable money to buy a large amount of lottery tickets.

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In other news, the hawk-eyed TaxProf refers us to a New York Times blog post informing us that President Obama’s proposed budget would remove the tax obligation accompanying canceled loans on IBR. So what’s the call debtors? A tax break potentially worth hundreds of thousands of dollars, or a cut to your Social Security checks that will amount to 12 percent in 40 years thanks to the wonders of chained CPI?

New Column on Idaho Statesman

“Valley View by Matt Leichter: With a surplus of lawyers, there is no need to expand school,”

The Statesman gave me the opportunity to air my beef with the University of Idaho College of Law’s dean’s specious claims that student debtors pass their loan costs onto their employers and clients.

Also, it’s spring! So time to listen to the Byrds.

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Kinda wonder what happened to the cage dancers.

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.

Good Recommendations From Illinois Bar Association Report

“Special Committee on the Impact of Law School Debt on the Delivery of Legal Services: Final Report and Recommendations,” Illinois State Bar Association.

Some good primary stuff:

Congress and the Department of Education should place reasonable limits on the amount that law students can borrow from the federal government. Student loans should also be made dischargeable in bankruptcy so private lenders have the incentive to properly screen loan applicants based on the chance that the school they attend will prepare them to be successful in the job market. That way, law schools will have an incentive to restrain costs to the level that students can borrow. If a school fails to do so, most students will not be able to afford to attend, and the school will close. (4)

And go diploma privilege:

Consider Ways to Reduce the Cost of Becoming Licensed: For example, supreme courts could allow qualified students to take the bar exam in February of their third year, thus avoiding the cost of studying for the bar exam after graduation, and reducing the delay before beginning work. Such a proposal should be careful not to restrict the time law students have in their third year to become practice ready. Alternatively, supreme courts should consider offering bar admission to qualified graduates of their state’s law schools without a bar exam. (6)

And some contradictory stuff:

Small Law Firms Face Challenges Hiring and Retaining Competent Attorneys… (1)

But:

The Committee heard testimony from many recent graduates who were unable to obtain any jobs in the private sector or elsewhere paying more than $40,000-$45,000. That fact makes the academic debate about the effect of debt on graduates’ choice between the public sector and the private sector, see supra note 25, somewhat misleading. There may be no significant difference in salary between the two sectors for the many graduates who are unable to obtain higher-paying jobs in the private sector. In addition, many graduates testified that jobs were so scarce that they would take any available job. (Footnote 38, emphasis added)

Because I really can’t ask for much more from a report like this that recommends restoring bankruptcy protections to student loans, curtailing the federal loan program, and easing licensing requirement, I’m not going to waste too much energy on it. However, if the executive summary is going to read, “Exessive Law School Debt Decreases the Quantity and Quality of Legal Services Available to the Public,” then it helps to make sure it’s arguing for the right policies for persuasive reasons.

Specifically, there are two theories of how debt relates to legal services. (1) The Special Committee says that poor people can afford legal services but lawyers’ debts are raising the lawyer labor costs to the point that it’s impossible for both parties to reach an agreement. (2) People like me say demand for legal services is scant because poor people can’t afford much of anything.

If (1) is right, then we’d see much higher employment rates for graduates with less debt than more, as small firms and clients would be able to pay them. Indeed, Southern Illinois’ and Northern Illinois’ 2011 graduates finished with a disbursed amount of debt below $70,000. Assuming none of this is Grad PLUS loans, we’re talking about a ballpark estimate of $6,250 per year in debt service on $75,000 over 25 years. It’s a lot, but it’s not irreparably impossible to service that on $40,000 in annual income (okay, there’s undergrad debt too, but did most NIU/SIU grads go to expensive private universities too?).

Do we see better employment outcomes for NIU and SIU than high-debt schools? Answer: Sometimes:

I think, though, that we’d expect much higher FT/LT lawyer job rates and much lower unemployment levels for the two public law schools. Instead, they’re no better than Illinois’ mid-range private law schools, and employers appear excited at the prospect of employing Chicago and Northwestern grads, even though they should cost quite a bit more. If theory #1 were true, the “market-failure” debt threshold at these schools would’ve been surpassed many years ago.

This is why I believe the second theory is accurate, for it explains how there can be graduates who would take any job no matter what their debt levels are.

As for IBR:

Many public interest attorneys are unwilling to enroll in IBR because, although it lowers an attorney’s monthly payment, any interest unpaid at that payment level continues to accrue. Moreover, the attorney’s debt will not be forgiven until ten years of service in public interest. Funding for public interest jobs is unstable, and an attorney who does not continue in public interest law may have her accrued interest capitalized, leaving the attorney in a worse position than before. In addition, IBR does not cover private loans, the program may penalize a lawyer for the earnings of the lawyer’s spouse, a lawyer’s credit score may still suffer while on IBR, and many attorneys do not expect funding for IBR to continue in a time of government austerity. In addition, some graduates were not aware of the intricacies of IBR and may not be taking advantage of all the features available to them. (2-3)

It’s implausible that people with high Grad PLUS loan levels are not on IBR. I think the Special Committee should have put more effort in determining how many graduates are in the program to bolster its points.

Illinois Bar President: The J.D. Production Shall Continue!

Don Dodson, “Thies: Law School Debt ‘Unsustainable’ Over Long Term,” The News-Gazette.

At a University of Illinois College of Law event, Illinois State Bar Association president John Thies said:

[O]ver the long term, that kind of debt for legal education [$100,000 + undergrad] is “unsustainable,” given salaries in the profession.

Jobs that pay enough to satisfy the debt payments aren’t forthcoming, he said.

“I don’t see salaries changing,” Thies said. “What’s got to change is cost.”

This much is true, but the rest is confused. Thies does not believe that law school could be cut to two years, but it should be changed to make lawyers “practice-ready.” President Thies also created a task force to study the effects student debt is having on Illinois’ legal services.

For example, small law firms — those with fewer than 10 employees — may not be able to afford people who have to pay off high law school debt.

It’s strange that President Thies needed to convene a task force when the ABA already tells us how many graduates of Illinois law schools are working in small practice environments. For example, as of a year ago, 14.7 percent and 1.7 percent of Illinois’ law schools’ 2011 graduates were working full-time long-term in 2-10-person practices and solo practices, respectively. For 2010 grads, those numbers were 15.7 percent and 2.0 percent, respectively. Most of these practices were probably in Illinois. Given also that law school graduates can go on IBR, it’s questionable that student debt should matter at all for small practitioners looking to hire in a glutted market. It would appear the Illinois State Bar Association is wasting a lot of time researching a non-problem.

One student in the audience reported hearing a story of someone still paying off law school debt from 1993.

Thies said he didn’t doubt that. He said some have described law school debt as “the mortgage for a house I can’t live in” and “the debt I’ll die with.”

Given that 85 percent of U Illinois’ 2011 grads had an average of debt load of $90,000 in principal at graduation, this student is probably not far behind.

One student asked why, if law school costs are so high, aren’t fewer students applying to law school.

Thies said applications to law schools have dropped substantially the last two years.

Do law students even read the news?? Like, the applicant nosedive can drive news cycles autochthonously. It’s pretty frakked up—just not as much as law students who are clueless about it.

[Thies] said the nation “may have too many law schools.” But he dismissed any notion that there are too many lawyers or law students, saying there’s “a tremendous need” for legal services.

When asked what reforms law schools should make, Thies said he didn’t want to pre-empt the task force’s recommendations. But he said arrangements could be made to match law school students with “aging baby-boomers” in private practice so the young lawyers can eventually take over the practice.

He also said law schools could do a better job facilitating internships and externships for students, recognizing that many students can’t afford to serve unpaid.

So we should pack the same number of students into fewer law schools? The correct answer is that we have the exact right number of lawyers the market can bear, but (a) we need poor people to earn more money to afford legal services, and (b) we have too many law school students and graduates nonetheless. I don’t think there are enough aging baby-boomer lawyers in private practice to go around. I’d also like to know who will pay for the interns and externs. Conscripting law schools into finding these kinds of placements hints of Lysenkoist quotas used in the Soviet Union and the Great Leap Forward.