Good News: The Student Loan Crisis Has Been Canceled

…According to the Brookings Institution’s Beth Akers’ and Matthew M. Chingos’ paper, “Is a Student Loan Crisis on the Horizon?” The authors find that not only is there no crisis today, but there won’t be one in the future. (“Crisis” here, I gather, means debtors being unable to make their payments and taxpayers being forced to write-down some billions in student loans.)

Before picking through their paper, though, I have to give special credit to The New York Times‘ David Leonhardt, who crows:

The deeply indebted college graduate has become a stock character in the national conversation: the art history major with $50,000 in debt, the underemployed barista with $75,000, the struggling poet with $100,000. … Such graduates make for good stories (and they tend to involve the peer group of journalists).

This comes mere days after The New York Times Magazine ran an article officially declaring that millennial college graduates who were living with their parents weren’t leaving. Many of the subjects had significant student loan debts and low-paying jobs. I’m not saying the participants were typical of their age group, but I’m impressed that Leonhardt can undercut his own publication. I admire gall.

As for Akers’ and Chingos’ paper, take a look at John Haskell’s response. He argues that the authors commit a composition fallacy by comparing student debt repayment during the more recent economic disaster with the halcyon days of the 1990s.

It’s an excellent point, and I have some of my own to add.

One, on page 4 of the report, the authors aggressively lean on the college premium as evidence that “the growth in debt is not [obviously] problematic.” The idea is that if the gap between college graduates’ earnings and high school graduates’ widens, then college is a good bet. The flaw, and there are many with this kind of thinking, is that both sets of earnings can be falling simultaneously but so long as high school graduates’ earnings are falling faster, then student debt can still be a problem even as the premium is growing.

Two, the authors make an implied structural unemployment argument when they write, “In 2011, college graduates between the ages of 23 and 25 … had employment rates 20 percentage points higher [than high school graduates].” However, not going to college isn’t the cause of lower employment rates among high school graduates. It’s because there’s slack demand for labor in the economy. It’s not too much of a stretch to hypothesize that employers prefer college graduates even for menial jobs.

Three, as always with college premium discussions, not everyone gets the average college degree, and not everyone has the average debt level. The authors only bring this up in their conclusion, which I think is unfair to readers.

Four, Akers and Chingos challenge the rhetoric of a student debt crisis by analyzing data on households with householders aged 20-40 from the Federal Reserve’s Survey of Consumer finances. It’s a minor point, but people who have higher debt levels are probably more likely to be living with their 40+-year-old parents than on their own. I doubt the effect is that large, but it’s something Akers and Chingos should have noted.

Five, it’s one type of composition fallacy to compare past trends with current outcomes, but it’s another to omit prospective factors from one’s predictions. The authors assume today’s college graduates won’t suffer from “cohort risk” due to the persistent output gap. It’s a pretty big if, and Akers and Chingos won’t pay anyone’s student loans if they’re wrong.

Having said that, when the authors find fairly low monthly payment-to-income ratios (excluding debtors making less than $1,000 per year) it may appear too good to be true, but we should acknowledge it.

Monthly Student Loan Payment-to-Income Ratios, 1992-2010

I’m not sure what this means given the simple calculation I did above. It’s pretty surprising that student loans are such a small amount of monthly incomes. It might be that they’re excluding the billions of dollars in student loans that are in default, forbearance, deferment.

Finally, since the conversation on student loan debt is creeping towards amputating graduate school debtors from undergrads, gaze upon Akers’ and Chingos’ Figure 4:

The Survey of Consumer Finances is given only once every three years, but even between 2007 and 2010, the spike in graduates’ debt is evident. Who wants to bet that these aren’t Grad PLUS loans? Seriously, that program is not long for this world.

The authors conclude that their results should encourage Washington to not tweak the student loan system based on a perception of widespread financial hardship. They do not, frustratingly, discuss any of the existing indicators of a present student debt crisis. 11 percent of student loan balances are delinquent, 11 percent of debtors (minimum) with federal loans are in default, and $322 billion out of $1.043 trillion in federal loans are in deferment, forbearance, or default. (Calculated from here) Since we know the economy isn’t roaring forward and won’t without systemic reform, it’s hard to believe that all these loans will be repaid in full. If this doesn’t count as a crisis, what does?

 

Lowering Law School Tuition Mainly Benefits Students, Taxpayers

Gotta be quick, but Brooklyn Law School dean Nicholas Allard writes in The Chronicle of Higher Education, “Lowering Law-School Tuition Benefits Everyone, Not Just the Students,” which deserves comment.

The fact is that the financial model of law schools is broken. Unless the schools do what they can to make legal education more affordable, they will price themselves out of business, contribute to the high cost of legal services that most people need, and widen the gap in access to justice.

The first sentence is true, but the rest is questionable. Many people will not go to law school at any price, but some schools will survive if they slash tuition. However, tuition has little to do with the cost of legal services and access to justice (not the justice of rents to legal educators).

Allard appears to believe that high tuition leads to high debt, which leads to lawyers not taking public interest jobs that pay less then courtroom janitors. It’s odd because two paragraphs later, he mentions Public Service Loan Forgiveness and Pay-As-You-Earn, which falsify his thesis. If highly indebted graduates want to serve the poor, they should be able to under the current loan-repayment framework. Sure, the proposed caps on PSLF would be bad for debtors and are based on the belief that they over-borrowed rather than the schools over-pricing, the government over-lending, or the jobs-underpaying, but graduates do not often pass up public interest in favor of biglaw. Not everyone gets such a choice.

It is a shameful canard that student loans and indebtedness are the cause of high tuition. They are not; they are the symptom. Tuitions at law schools are soaring … because of the way law schools spend money in pursuit of rankings rather than investing in students, education, professional training, and scholarship.

Not sure what Allard means here, but I think it’s the closest I’ve seen to a law school dean rejecting the Bennett hypothesis. Without excessive federal lending, law schools couldn’t raise their costs. It’s the means of the tuition bubble, not the motive and opportunity—if you fancy looking at this like a murder mystery.

With political currents eroding America’s historic and successful support for higher education, we can’t expect anyone else to help. We must do what we can to break this cycle ourselves. By making law school expensive for motivated, talented women and men, we are shortchanging ourselves. In this country, lawyers have played the central role as guardians of our democratic republic and architects of economic opportunity and prosperity. They will be needed even more in the future.

Political support for legal education has not been a success. It’s created too many law schools, too many law school graduates, and too much unpayable student debt. For example, the NALP just reported that the percent of 2013 graduates employed at all in February 2014 had fallen—negligibly—to 84.5 percent, even though late last year Dean Allard predicted, “[T]he employment rates reported in 2014 will be substantially higher than in 2013.” (More on the NALP report another time.)

Look, good on Brooklyn Law School for unilaterally cutting its tuition next year. It may not be a voluntary rather than demonstrative act like if an elite law school did it to buck the U.S. News rankings, but we can have competent lawyers without student loans and expensive law schools.

On a 25-year fixed repayment the average 2013 Brooklyn Law grad would have to cough up over $750 a month to make his or her student loan payments on $110,000 in debt. Even under the old IBR system, that would require an income of $121,600 per year from day one to escape loan cancelation after 25 years. Since many BLS grads don’t make that kind of income, many will undoubtedly take PAYE and the government will have to write-down the losses. Thus, Allard is right: The beneficiaries of lower law school tuition aren’t just law students but everyone else. Although, it is a “shameful canard” to imply that the federal loan program is a blessing for everyone but law schools and a handful of lucky law students.

It’s Official: I Am Your Sovereign.

Readers of The New York Times Magazine were undoubtedly disappointed when the June 20th article titled, “It’s Official: The Boomerang Kids Won’t Leave,” neglected to cite which duly constituted body in fact solemnly declared that the “boomerang kids” won’t leave. It also doesn’t tell us who the “boomerang kids” are (garage rock band?) or what they won’t be leaving. Reminiscent of last May when the much lesser-known PolicyMic proclaimed, “It’s official: The law school bubble has popped,” based merely on a paper by Moody’s, I think this idiotic trope deserves exploitation.

By the power vested in me by WordPress.com and abrogated editorial standards, I hereby decree that it’s official: I am your Sovereign. You may kiss my hand and remit your tax payments to…

You can read the rest of the Times Magazine article if you dare. To summarize: After a 197-word anecdote about what I guess is a “boomerang kid,” it tells us without reference to any sources that “One in five people in their 20s and early 30s is currently living with his or her parents,” even though the Census Bureau says that 31 percent of 18-to-34-year-olds are children of householders. (For the 25-34 bracket, it hit 14 percent in 2013. The trend began ticking upward in 2006, and it’s mainly driven by women.)

The article then goes about treating the increase in young people living with their parents as equal parts bad luck and policy Rubik’s cube. (At least it didn’t say that “tough choices had to be made”.) It impliedly dismisses the notion that simple solutions could change things for the better, like abandoning the labor policy of mass unemployment. No comparisons to Japan are made. There’s a paragraph-long digression on the advent of childhood in the 19th century. Then the article substitutes careful analysis with grand philosophizing, e.g., “[W]e are living not simply in an unequal society but rather in two separate, side-by-side economies.”

Whoa. Think about that the next time you pay your rent.

Then the article torturously spends its final four of its fifteen paragraphs on yet another anecdotal individual who is “emblematic of a generation.” Really, I could’ve been much harder on this piece. Although, to its credit it doesn’t conclude with rabid college-for-all frothing.

The only question I’m left with is, “Has reporting on young adults ever not been infantilizing and uninformative?” Perhaps I’m setting the bar a bit high for an article that slaps “official” onto its title to trick its readers into thinking that it’s so. Maybe editors will stop pulling that the day you all send me, your official Sovereign, your tax bills.

Top 6 Underreported Changes to the ABA Accreditation Standards

(That should read “proposed” changes, but I wanted to keep this parody listicle under 71 characters.)

I’ve seen some of the reporting on the changes to the ABA’s accreditation standards that the Council of the Section of Legal Education proposed on June 6. The ABA’s House of Delegates will decide on them in August; you can read here about the intricate procedural shenanigans that ensue if the house chooses not to concur with the council.

That page also contains the link to the pdf of the revised standards, which I read through, and frankly I think others commenting on the proposed changes should have as well, for there are some juicy nuggets there that have gone unreported and underreported. Just about all of the coverage has been on two topics: (a) the council’s decision to disallow course credit for paid externships, and (b) the rule allowing up to 10 percent of a law school’s entering class to forgo the LSAT under certain circumstances. I have nothing to add about the paid externship rule, but the LSAT requirement will be number one on the list. So…

(1)  The 10 percent LSAT rule is not open ended.

Really, this topic was badly underreported, and anyone who didn’t read the actual proposed change was led to believe that law schools would be able to admit up to 10 percent of a class without an LSAT score for just about any reason whatsoever. Not even close. The new Interpretation 503-3 only allows applicants to forgo the LSAT if either (a) they’re undergraduates at the same institution to which they’re applying to law school, or (b) they’re seeking a dual-degree at that institution. The benefits will go primarily to law schools putting together 4-2/3-3/3-2 (for masochists) undergrad-J.D. programs and those touting their dual-degree offerings.

Even then, applicants in both circumstances must still take a standardized test. They must have scored in the 85^th percentile or higher on the ACT or SAT if they’re undergrads at the same institution. If they’re seeking a dual-degree, they must have scored at the 85^th percentile or higher in the GMAT or GRE. No one gets into law school without taking a standardized test and doing very well on it. Applicants must also have either ranked in the top 10 percent of their undergraduate classes “through” six semesters (I’m unsure if this means six semesters total or six consecutive semesters) or achieved a cumulative GPA of 3.5 or greater.

Bottom line: Very few applicants will benefit from this interpretation, and in no way is it watering down the aptitude requirement because only very sharp people will be able to use it. If anything, I doubt even those who are qualified would even know about it. At best it excuses a bunch of would-be elite law school students who would’ve crushed the LSAT anyway.

(2)  Death to the full-time faculty calculation!

Interpretations 402-1 and 402-2, which set out the convoluted rules for calculating full-time-equivalent faculty has been crossed out. No longer shall full-time legal writing instructors be treated as seven-tenths of a full-time teacher.

(3)  Goodbye dusty reporters in the library…

Standard 606 and Interpretation 606-2 have added the language “reliable access” to describe the “core collection” law school libraries must provide their students. “Reliable access” can include subscription and publicly available databases as well as “formal resource-sharing arrangements.” Anyone talking about onerous library requirements will have nothing to complain about now. (Okay, maybe less.)

(4)  …And hello office-sharing for professors.

Yup, Standard 702(3) (now 702(4)) has been modified from “an office for each full-time faculty member” to “office space for full-time faculty members.” Now deans can retaliate against petulant faculty by making them share offices with their ill-mannered colleagues.

(5)  No more taxation without documentation.

The new Standard 202(b) requires law schools that are attached to parent universities to obtain an annual “accounting and explanation for all charges and costs assessed against resources generated by the law school and for any use of resources generated by the law school to support non-law school activities and central university services.” Those of you with longish memories remember in 2011 when the University of Baltimore ousted its law school’s dean, Phillip Closius, allegedly for disclosing that the parent university confiscated all but $81,000 out of a $1.4 million tuition hike. After the ABA’s regular inspection, it asked for (read: demanded) such an accounting by the parent university. If this standard goes into effect—and this one absolutely certainly will—a lot of universities will have to confess the extent to which they’ve been looting their law schools. This might lead to more awkward conversations between ABA accreditors and university administrators. Who knows, maybe students will get more of their money’s worth or even a tuition cut?

(6)  Dishonor before death?

In a cryptic pair of new standards, 202(c) and 202(d), law schools will be deemed not in compliance with the standards if their “current financial conditions” and even their “anticipated financial conditions” (whatever that means) has—or is reasonably expected to have—”a negative and material effect on the law school’s ability to operate in compliance with the standards or to carry out its program of legal education.” 202(c) is a modified version of Interpretation 201-1, but 202(d), the “anticipated financial condition” appears new but ported from the original 201(a).

I’m not sure what conditions would trigger a non-compliance situation due to anticipated financial problems, or its consequences, so I don’t know what this means or how it’d be enforced. I include it because law schools are in tough times, so I can imagine a central university shutting down its law school if it reasonably believes it won’t be in compliance with the standards in the future. I seriously doubt a law school would lose its accreditation due to anticipated financial reasons before being shut down.

This concludes the listicle. Take care folks.

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.

Fed Household Survey Finds Rampant Student Loan Illiteracy

And you’re surprised because?…

Liberty Street Economics brings us, “What Americans (Don’t) Know About Student Loan Collections,” in which the authors report on the impact of an added question on student loans to the Fed’s Survey of Consumer Expectations. Its first chief finding is that only 35 percent of the households surveyed correctly answered this question:

If a borrower is unable to repay her federal student loan, what steps can the government take to collect the debt?

A. Report that the student debt is past due to the credit bureaus.

B. Garnish wages until the debt, plus any interest and fees, is repaid.

C. Retain tax refunds and Social Security payments until the debt, plus any interest and fees, is repaid.

The correct answer is all of the above. (You did know that, right? If not, don’t worry, fewer than half of all respondents who had student loans got it right too.) Alarmingly, 28 percent thought it was none of the above.

The survey’s second question was to rate on a scale of one to five how likely it is that a student loan can be discharged in bankruptcy, with one being “extremely unlikely” and five being “extremely likely.” Here, the authors’ findings are confusing because their chart says that 37 percent gave a 5, but the text says those 37 percent marked 1. It’s the type of mild error that is both understandable yet deeply annoying. The average response was 2.4, suggesting that “U.S. households overestimate the ease with which student loans may be expunged from their balance sheets.”

Oh God.

It gets worse: In a parenthetical, the authors state that “reported federal recovery rates on defaulted direct student loans exceed [pdf] 70 percent.” (Emphasis original) The link is to ED’s student loan overview in its budget proposal for FY2014, which began in October 2013. On page S-32, it provides a table estimating that for all the subsidized Stafford loans disbursed in 2014, nearly a quarter will go into default (so much for those subsidies), and up to 9 percent of all PLUS loans will do so as well. I’m guessing this already takes IBR into account without estimating substantial future enrollments, which I think are likely. The net present recovery of subsidized Stafford loans that’s also net of collection costs is predicted to be nearly 90 percent.

So the bad news is that American households don’t know the full extent of the consequences of defaulting on student loans. The good news is the government is going to be paid vastly more than it would if these were credit cards. Oh, that’s bad news for the student-loan-illiterate debtors. Oops.

Dear Leftists, Please Get Your Facts Right

Signed,

LSTB

Yesterday, Salon ran an article with as many as three titles.

“Help Us Thomas Piketty: The 1%’s Sick and Twisted New Scheme” [??]

“The Revolt of the Caring Class” [Okay…]

“David Graeber: ‘Spotlight on the Financial Sector Did Make Apparent Just How Bizarrely Skewed Our Economy Is in Terms of Who Gets Rewarded'” [??]

Like, I hesitate linking to it for fear that the title will change again. (Okay, link here)

Anyway, it’s really just an interview of David Graeber by Thomas Frank. I’ve enjoyed Frank’s recent Sunday contributions to Salon, even when the titles are poorly rewritten to click-bait readers into thinking it’s about Piketty when neither his name nor his work (thankfully) ever appears in the article.

As you can imagine, Frank’s questions focus on Graeber’s August 2013 article on “bullshit jobs,” which mainstream economists criticized because it rejected marginal utility theory—and frankly I think they’re mostly right. Just because some jobs don’t seem “useful” doesn’t mean that “useful” jobs that pay McWages should be high-paying. Likewise, although Graeber’s examples of people who wrote to him about their pointless jobs were entertaining, it’s not a scientifically valid survey. Maybe some people work for incompetent, if generous, managers.

At one point, Frank asks and Graeber answers:

Today productivity continues to increase, but Americans work more hours per week than they used to, not fewer. Also, more than workers in other countries. Correct?

The U.S., even under the New Deal, was always a lot stingier than most wealthy countries when it comes to time off: whether it’s maternity or paternity leave, or vacations and the like. But since the ‘70s, things have definitely been getting worse.

Uh huh. Like David Leonhardt last week, it appears Frank and Graeber need to learn how to use FRED. If they did, they’d know that average hours worked per week in the United States has declined over the decades.

As always, there might be compositional problems with this average: Maybe workers in some industries are now tasting the lash while others aren’t, but if that’s true it’s up to the Franks and Graebers of the world to research those facts. Instead, we keep hearing that employers are cutting workers’ hours so that they don’t have to buy them health care or other benefits.

And if you think people are piecing together multiple part-time jobs to get by, that’s true but no less common than in the mid 1990s.

In general though, I think the proportion of multiple job holders is shifting toward multiple part-timers rather than one full-time plus one part-time, or variable-hour jobs. Still, it’s lower in general and probably overwhelmingly due to cyclical reasons rather than structural ones like bullshit jobbery. Perhaps poorer households work more hours than wealthier ones, but I’d have to see evidence of that.

The interview continues:

Do economists have an explanation for this combination of greater productivity with increased work hours? What is it and what do you think of it?

Curiously, economists don’t tend to find much interest in such questions—really fundamental things about values, for instance, or broader political or social questions about what people’s lives are actually like. They rarely have much to say about them if left to their own devices. It’s only when some non-economist begins proposing social or political explanations for the rise of apparently meaningless administrative and managerial positions, that they jump in and say “No, no, we could have explained that perfectly well in economic terms,” and make something up.

Funny, BLS economist Shawn Sprague found so much interest in such questions that he published an article on May 29^th titled, “What Can Labor Productivity Tell Us About the U.S. Economy?” The answer is, quite surprisingly, that even though Lesser Depression-era American workers manned the lines for as many hours as they did in 1998, they produced 42 percent more stuff.

You can ask why these productivity gains aren’t benefitting workers, which economists have been blathering about since the robots-are-taking-our-jobs fear began bubbling over a few years ago. You can also ask why some workers are paid beyond the value of what they produce, i.e. they receive rents. And as always, you can criticize how output is calculated before dividing it by workers or worker hours. You cannot, however, say that economists don’t ask these questions, even though Graeber does.

Japan’s Legal Profession Doesn’t Need Law Schools

…Is really all I have to say in response to the May 30th Yomiuri Shinbun editorial titled, “Law School Reform Urgently Needed, Essential for Profession’s Future.” I discussed the striking data underlying this topic last week. The newspaper that owns the indomitable the Tokyo Giants baseball team writes:

The primary cause of this situation [people qualifying for the bar exam by taking the preliminary test rather than blowing ~$16,000-$45,000 on two to three years of law school] lies in the fact that law schools have failed to perform their function of nurturing the legal profession.

…

Launched in 2004, law schools aim to foster work-ready legal professionals. Therefore, their curricula emphasize practical business skills, and essentially exclude preparation for the bar exam. The result is low pass rates. It could be said that law schools fail to fulfill the original purpose for their establishment.

It is, of course, necessary to cultivate practical business capabilities. But, first and foremost, it is essential to help students acquire the abilities needed to pass the bar exam. Reconsideration of curricula is essential in this regard.

What nonsense. Prospective lawyers are behaving rationally. If it’s less risky to take the preliminary test than be nurtured into a “work-ready legal professional” at law school at their cost, then that’s what people will do. The fact that the bar exam is the necessary condition to becoming a lawyer in Japan means that the law schools’ purpose is frivolous. If the state thinks the exam is more important than learning professionalism or whatever, then concerned newspapers should be lobbying to either change the test to cover practical skills or reduce its impact altogether. It sounds to me like Japan’s legal profession’s future doesn’t need law schools. The government’s failed policy has pretty much said as much.