A Thanksgiving Troll From The New America Foundation

The New America Foundation’s article, “Income-Based Repayment Tops Repayment Plan Choice for First Time,” is such blatant policy trolling that you might wonder if it’s still Halloween and not Thanksgiving.

The NAF discovered that income-based-repayment program-enrollment efforts have borne fruit: It’s now the most popular plan among direct loan borrowers. (I haven’t checked myself, but let’s roll with it.) But the NAF’s response is confused: On the one hand, it likes low-income people enrolling in IBR, and it wants IBR to be the default repayment plan. This position is neither unusual or, superficially, disagreeable.

But on the other hand, growing IBR hordes keep the NAF awake at night:

Policymakers have to ask themselves, if college is a good investment, why are borrowers flocking to this insurance program? And why are those trends occurring while other economic indicators, like unemployment rates, are looking pretty good?

The easy answer is that college is not a good investment and “other economic indicators” are not looking pretty good. For one, the unemployment rate isn’t such a good measure of work when so many people leave the labor force.

Here’s the percent of 25-34-year-olds with zero earnings by education.

Percent of 25-to-34-Year-Olds With Zero Earnings by Education

(More here.)

In 2014, 13 percent of college-educated young ‘uns weren’t working; in 1997 that was 7.1 percent, equivalent to 640,000 people. It’s possible many of these folks are back in school, but that just tells us the opportunity cost of education is low—because there aren’t any good jobs. And yes, incomes are down too.

The NAF then trots out (trolls out?) the discredited IBR deadbeat after linking to the GAO finding that only a fraction of IBR enrollees have high incomes:

Maybe IBR enrollment is not a good proxy for borrowers falling on hard times — at least not since the Obama administration … [changed the program] from what was a safety net in 2009 to a heavily subsidized loan program for even well-off borrowers if they borrow for graduate school.

Except the NAF’s research on the changes to IBR didn’t show anything of the kind. Its “Safety Net or Windfall” report never documented a single IBR deadbeat. Instead it crafted nothing other than hypotheticals: Its “narrated borrower examples” even included a law grad who went to California Western, a law school with bad employment outcomes, yet managed to start a job at $65,000 per year. After ten years “Robert” miraculously switched to a job that paid him more than $100,000 per year, and after 25 years, he was make more than $200,000.

Why not just say that he inherited $40,000,000,000 from his wealthy uncle who also happened to be the pretender to both the Qing dynasty’s and Ottoman Empire’s thrones? It’d still fit the NAF’s definition of research.

In truth, only 14 of California Western’s 219 graduates in 2014 found full-time, long-term work at law firms with more than 25 lawyers. 58 were either unemployed or couldn’t be found. The Pay-As-You-Earn changes to IBR benefited these people quite a bit because they will never repay their loans anyway. Income is the independent variable, not debt, and it’s pretty unlikely that after 30 years any California Western grads will be earning $240,000 annually like “Robert”—unless you live in the NAF’s world where one can pass off fantasy as policy analysis.

Because the economy is improving, the NAF reasons, there must—must—be another reason those folks are signing onto IBR:

Borrowers may be enrolling in IBR because they know a good deal when they see one. And as word gets out, more and more students are likely to borrow larger sums to pursue graduate school because they plan to use IBR. That is especially true if they qualify for earlier loan forgiveness under the Public Service Loan Forgiveness benefit. [Emphasis original.]

If this were true, then we’d expect law-school enrollments to swell, even at schools where the credential leads nowhere. Hey, who are students to argue if the government gives Grad PLUS dollars toward their living expenses and not demand they pay it back?

Except that’s still not happening, even three years after the NAF’s Kevin Carey predicted it would. It’s more likely that prospective applicants are sensitive to whether graduate programs lead to jobs at the other end, not whether they can get free money today. Here’s law school applicants:

Applicants, Admitted Applicants, 1Ls

(More here.)

I’ve asserted elsewhere that the law-school applicant crunch has slowed because of articles blathering about how now is the best time ever to go to law school. IBR is a secondary concern, if at all. Really, it’s bizarre that anyone would think that applicants are sophisticated enough to base their decision to go to law school on the existence of IBR but shallow enough to overlook evidence suggesting that J.D.s do not lead to long-term professional careers.

Moving on, the NAF then appears to argue that the Obama administration is wrong to characterize IBR as an insurance policy against student-loan defaults because defaults are still increasing. The NAF says this is a “strange trend” even though it offers no reason to believe that savvy borrowers might be signing on to IBR instead of defaulting, while others haven’t received the message. Maybe both types of borrowers have low incomes and can’t otherwise repay their loans in full, but this assumption negates the NAF’s position that the economy is improving. Oh well.

Finally, the NAF worries that outstanding student loans are growing despite falling issuances because either (a) debtors’ incomes are alarmingly low, or (b) IBR is too generous. Again, only a few paragraphs earlier, the NAF cited the GAO study that found 80 percent of IBR enrollees earn $20,000 or less. Incredible. The ghoulish IBR deadbeat lives on.

So there you have it: In one post the NAF starts by arguing that more people should enroll in IBR to avoid default and then concludes that we should be troubled by … more people enrolling in IBR to avoid default. If it’s (a), then the problem is underemployment and low-wage jobs, not IBR; if it’s (b), then the problem is excessive government lending for unneeded education, not IBR.

That’s enough troll, I’m ready for turkey now. Enjoy your Thanksgiving, too.


Post-script: In case any of you were wondering, Congress can change or revoke IBR at any time because the Higher Education Act is incorporated by reference into student-loan promissory notes. Because the number of IBR variants is increasing, it’s probable that the government is hoping to simplify all of them into one that will probably not be so generous to graduate students as PAYE is. This is a compelling reason to stay away from grad school just because IBR is around. (More here.)

How Many PSLF Deadbeats Are There?

Answer: Don’t Ask The Wall Street Journal.

According to Josh Mitchell’s, “U.S. Student-Loan Forgiveness Program Proves Costly,” 295,000 people are signed up for Public Service Loan Forgiveness, which cancels federal student loans after 10 years of payments with no tax liability afterwards, unlike other income-based repayment plans.

But before going further, a few compliments:

(1) The WSJ is correct that PSLF is a “forgiveness program,” in contrast to at least one past instance when the WSJ called IBR a “student-debt forgiveness program.” More accurately, IBR is a monthly-payment-reduction program.

(2) Moreover, I don’t think I’ve ever defended PSLF, so the WSJ’s examples of doctors taking advantage of the program, even though there’s a good chance they could repay their loans, are more believable than past reporting.

(3) Again, it’s nice to see the spotlight turned away from law grads.

However, the WSJ still doesn’t answer the question: How many of the 295,000 debtors (and projected 600,000 over the next decade) on PSLF will earn high enough incomes to compromise PSLF? Does the program work on net? If the IBR deadbeat is a myth, then shouldn’t we be just as critical of the PSLF deadbeat?

I don’t really have a dog in the PSLF fight, and it should be fairly easy to reform it to take the advantages away from the deadbeats, but the right questions still aren’t being asked. If the unfair beneficiaries are few in number, then they shouldn’t be sensationalized. (Amusingly, the New America Foundation argues that PSLF should be eliminated entirely because the WSJ made it look so bad that it could lead to further backlash against IBR, which, of course, the NAF has never engaged in.)

Speaking of asking the right questions: Is the problem PSLF, or is it the Grad PLUS Loan Program?

Saudi Arabia Channels the Gracchi Brothers

Facing a housing shortage of 1.5 million homes, Saudi Arabia’s Shoura Council approved a 2.5 percent tax on undeveloped land in urban areas, according to Bloomberg. King Salman has the final say, but he gave initial approval in March.

Coincidentally, shares for development companies have fallen. It could be causation, and if so, it shows that even talking about land taxes wipes out speculation.

The article offers more than one assertion that the goal is overwhelmingly stimulative and not directly revenue-related. Oil prices have fallen substantially, and Saudi Arabia has no income tax, so it’s not getting the revenue it once did. It’s almost as though the government is being defensive about the whole thing.

Another goal is increasing “middle-class homeownership” over renting. In short, Saudi Arabia is facing the same problems the Roman Republic did after the Punic Wars: restless landless citizens. The populares, led by Tiberias, and later, Gaius Gracchus, tried to force land reforms, but they were murdered by the optimates. The optimates resisted later “land for loyalty” policies, but Roman generals embraced them, hence the empire. Land-for-loyalty a good strategy so long as the majority is mollified: Promise future rents to as many—but not all, and not equally—people as possible, and you can keep your superior cut.

As for the revenue the Saudi government can expect from the scheme, as always, remember three things:

(1) Gross rent is the independent variable,

(2) Gross rent is the independent variable, and

(3) Gross rent is the independent variable.

…Which means that the final assessed land value itself is an ephemeral number. It melts away as you tax it. The gross rental value is a real, periodic quantity, e.g. per year. (And if you complain it’s an imputed sum, I offer to buy the right to that flow value from you for $1.00 until death or transfer.) Thus, a parcel that rents at $100,000 annually will have a different land value depending on how much of it is taxed. This is not to say that capitalized land values are fictitious numbers or can’t be calculated. Rather, it just means that when the Saudi government says it’ll tax these vacant parcels at a 2.5 percent rate, you need to think it through more than if it were a just 2.5 percent tax on their gross rents.

For example:

Current assessed land value: $2,000,000

Capitalization rate, no taxes: 5.0%

Therefore, current annual rent: $2,000,000 x 0.05 = $100,000.

Now let’s add a 2.5% tax on the land value:

New assessed land value: $100,000 gross rent / (0.05 + 0.025) = $1,333,333.33 land value.

NOT: 2,000,000 x 0.0725. That’s wrong!

Land-value tax revenue (which will come out of gross rent!): $1,333,333.33 x 0.025 = $33,333.33.

Tax rate on the gross rent: $33,333.33 / $100,000 = 33.33%

The $666,666.67 in capitalized land value melts away because of the tax.

Consequently, although it sounds trivial, a 2.5 percent LVT turns out to be a huge amount, depending on the capitalization rate. The lower it is, the higher the tax revenue. I’m sure the Shoura Council knows this.

The other benefit of this arithmetic exercise is answering the question: How much building is necessary to escape the tax? Answer: Trick question. The answer has little to do with the numbers; it comes up even in U.S. cities when people talk about taxing vacant parcels. The easiest way to evade the tax, onerous though it is, is to put a small, halal hot-dog stand on the property. Okay, maybe you want to put a little more on there, but if real-estate speculation is your thing, expect minimal effort.

This explains why I favor full LVT over partial measures. Even if Saudi Arabia adopts the tax and the phase-in isn’t too long, it might not alleviate the housing crisis. But it sure beats being toppled by Gaius Marius or Julius Caesar.

Government Finally Tells Private Law Schools to Slash Tuition, Faculty

…In Korea.

The country’s Ministry of Education wants people from poorer backgrounds to be able to practice law, so its solution is to demand law schools charge less and offer more need-based scholarships, according to The Korea Times.

Average private law school tuition is a scandalous $17,152 annually (it takes about five years, as I discussed last year). The plan calls for a 15 percent tuition cut at Korea’s fifteen private law schools, which would put it below $15,000. The article isn’t clear as to whether public law schools would be affected.

Just to show you that there’s nothing new under the sun, the law schools complained that they’re under financial strain already, with faculty taking up ~$24.0 million while tuition revenue is only $19.7 million. Using math against ABA data for the 2013-14 academic year, I get an average $10.6 million to private law schools (excl. Brigham Young, Pontifical Catholic, and Inter American) from full-time students paying full tuition. I doubt the total is more than $15 million.

The government’s response: “[T]hey can lower the tuition if they restructure their high-cost faculty system.”

Indeed, the faculty numbers the article gives are bizarre: The government’s standard is 312, but they have—and I think this is an average—537. That comes to 8,055 faculty for … 6,021 students at all 25 law schools, which implies a student/faculty ratio well below one. Again, for comparison, in the U.S., the average number of full-time faculty (current definition) at private law schools rose from 35.4 in 1999 to 43.2 in 2014 (peak 48.9 in 2012). We could also easily get by with fewer profs and fewer schools.

Maybe there’s something off in the reporting, and I’m not sure how the ministry can encourage the law schools to cut their tuition levels if they don’t want to. Nonetheless, it makes you wonder whether the law-school system fails wherever it’s tried.

Pew Research Center Discovers the Death of American Household Formation

The Pew Research Center announced that in 2014, the percentage of young women (18-34 years) living with their parents or other older relatives is at a record high level going back to 1940.

Pew Not Leaving the Nest

Oddly, Pew isn’t interested in the fact that young people in general appear to be living with family, especially since 2000. Why might that be? Perhaps widespread joblessness and low incomes for young people? Fifteen years later and this is still apparently a head-scratcher.

This topic—household formation—is important to me because it indicates the future direction of land rents. Single people rarely buy houses, so we’d expect land rents to stay flat. Flat land rents lead to flat construction, and hence, low growth.

At least, that’s my hypothesis. I discussed it earlier this year when the Congressional Budget Office assumed in its models that household formation would increase sharply because young people would suddenly find jobs and build families. Many of my Georgist peers by contrast stick with the 18-year land boom cycle, pioneered by Homer Hoyt’s One Hundred Years of Land Values in Chicago, which predicts a bust around 2026. I’m not so sure, but then again, I do see a lot of construction going on in Minneapolis. Maybe that’s regionally isolated.

The lurking comparison here is Japan: Fewer families lead to fewer children, which solidifies low expectations for future rent increases. None of this is to say that endlessly growing populations are a good thing, but if your definition of capitalism requires ransoming land rents to incumbent owners in exchange for future growth, then you might want to consider an alternative theory.

I will add two thoughts to the Pew Research Center’s findings.

One, It’s interesting that women are more likely to live with older relatives than men. Census Bureau data show that in fact men are more likely to live with their parents than women, so it appears many women don’t live with their parents but do live with other relatives.

Compare this with the above chart:

Census Living With Parents

Two, excluded from both these charts are college students. I’d really like to see what that looks like. A smaller proportion of young Americans were living on college campuses in 1940 than now, and college students would probably live with their parents if it weren’t for school. Consequently, the percentage of young Americans who are effectively dependent on their parents is probably higher than in past decades.

Given that, as the Pew Center finds, marriage rates have fallen, especially since 2000, these are not trends that bode well for the future happiness of young Americans.

A Simple Equation: Huge Debts + IBR = -(-(Default))

Simple, that is, for everyone but the letter-writers responding to the NYT editorial from two Sundays previous.

The objective of today’s outing isn’t to defend the Times as such but rather to draw attention to the sad rebuttals to it.

Argument #1: Law students are less likely to default on their student loans than undergrads.

Law students borrow more than undergrads, but most are able to repay, and do. The graduate student default rate is 7 percent versus 22 percent for undergrads.

[O]nly about 1.1 percent of alumni at Florida Coastal are in default.

[D]ata shows that law school graduates have lower default rates than other professional degree holders.

Response: It is true that the Times accused law schools of, “sticking taxpayers with the tab for their [students’] loan defaults,” but the line between “default” and “certain IBR/PAYE/REPAYE/PSLF loan cancelation” is hazy. Arithmetic tells us that with $130,000 of debt at current student loan interest rates, law-school debtors earning about $70,000 from day one cannot even dent their student loans’ principal. Because it’s unlikely these debtors will ever find high-paying jobs, it’s all but certain that large portions of their loans will be canceled.

It may not be default, but it’s only “repayment” in the technical sense. Better to call it “not-not-default.”

Argument #2: Thanks to scrupulous admissions practices, law school enrollments have declined.

Many law schools are downsizing to maintain standards. Since 2010, first-year enrollment has dropped from 52,500 to 37,900, a level last seen in 1973.

Since 2010, law schools have responded to the changed legal job market by dramatically cutting first-year enrollment by 28 percent.

Response: This is the most astonishing bit of revisionist law-school history I’ve seen. Remember five years ago (!) when Richard Matasar cited record law-school enrollments as evidence that applicants understood their job prospects? Well, surprise, surprise, surprise! Only 53,500 people applied to law school in 2015, down from 87,900 in 2010, and there’s evidence that fewer people applied in 2010 than the number of LSAT takers would’ve predicted. Law school admissions policies are not responsible for prospective applicants’ decision not to go to law school.

Applicants, Admitted Applicants, 1Ls

(Sources: LSAC, ABA)

Also, law schools are admitting higher proportions of their applicants since 2010.

Dispersion of Full-Time Law School Applicant Acceptance Rates

(Source: Official Guide, author’s calculations)

Argument #3: Declining interest in law school will [create a disastrous attorney shortage/equalize supply and demand for lawyers].

[Due to falling enrollments] the rule of law may begin to fray. Our country needs lawyers, prosecutors, defenders and judges, not only lawyers in big cities and big law firms.

[A] law degree continues to be a sound investment over the course of a career. … [Falling enrollments] will bring supply more into line with demand.

Response: I lump these arguments together because they entail the same prediction: Job outcomes and wages for law grads will improve in the near future. Testing this belief with NALP data, it’s clear that law grads are much more likely to find themselves in J.D.-advantage jobs than in the past. If the job market for lawyers tightens, we’ll see graduates shift from these jobs to lawyer jobs. Instead, while the number of unemployed grads fell in 2014, so did the number of grads in 2-10-lawyer firm jobs. Meanwhile J.D.-advantage jobs rose. This doesn’t speak highly to the value of law school.

No. Grads Employed by Status (Incl. FT-PT) (NALP)

Additionally, based on various measures, including those provided by the Bureau of Labor Statistics, there are hundreds of thousands more law grads than there are lawyers. Many of these people left law voluntarily, e.g. they didn’t like law practice or they moved on to post-law professional careers (like the judiciary). Alternatively, they didn’t have opportunities for careers at the bar at all. As more lawyer jobs open up, presumably many of these people would come out of the woodwork. However, there are few indicators that demand for lawyers—which is what really matters here—is improving. Moreover, graduates reporting full-time, long-term employment might not stay in the law for long due to the profession’s high attrition rate.

Also, one letter-writer asserted that a law degree is “a sound investment” and that declining enrollments will “bring supply more into line with demand.” These statements contradict each other, albeit mildly. Although it’s possible the 5,000 class of 2013 graduates who were reported as unemployed will embark on professional careers in the future, it can’t be to their advantage if they graduated when supply was higher than demand could absorb.

Argument #4: Capping federal loans restricts the profession to the wealthy.

Capping graduate federal loans as the editors suggest would fall hardest on students from modest circumstances who will not be able to attend law school or will need to resort to private loans, which are typically more expensive, and repayment is not income-contingent.

[C]utting federal loans will only narrow the pool of people who can pursue a legal career and decrease the availability of lawyers to serve this need.

Response: Even with unlimited federal loans the legal profession isn’t accessible to the poor, but supposing these consequences are true, state governments could just make it easier for people to become lawyers, e.g. by reducing law to an undergraduate major. We have had lawyers without law schools—good ones even, and we’ve had bad lawyers with law schools.

Argument #5:

[T]aking loan money from law students is both bad economics and bad policy.

Response: No evidence is given to support these claims, but the existence of not-not-defaults discussed above disproves them. Also, we had lawyers with fewer loans to law students and dischargeability for private loans. This isn’t the distant past; it’s pre-2005.

Argument #6: Florida Coastal School of Law’s graduates rocked the February bar exam.

In February 2015 we had a 75 percent first-time bar pass rate, third best out of 11 law schools in the state, and an institutional ultimate pass rate of 87 percent.

Response: Fewer people typically sit for the February bar exam than the July one, so we have a sample problem. Also, don’t let FCSL’s 509 report fool you: Its graduates may pass the Florida bar at about a 75 percent rate, but at least 30 percent of its students don’t report at all. Florida State’s non-report rate is about 15 percent; U of Florida’s is less than 10 percent. Both of those schools have higher pass rates too.

Paul Campos addressed some of the other arguments by Florida Coastal’s dean.

Argument #7: The editorial ignores improvements to legal education, like more clinical courses.

[Law schools have] sharpened academic programs to provide the training employers seek.

In recent years, many law schools have been overhauling their programs to provide more hands-on skills training. Clinics cost more than big lectures, but they prepare lawyers for practice and teach them about their professional responsibility to serve people unable to pay for services.


Better training does not create jobs.

Better training does not create jobs.

Better training does not create jobs (except for the trainers).

The one letter I’ll call out specifically is New York City Bar Association president Debra L. Raskin’s because … it leveled a coherent argument.


I’ll not exhaustively nitpick everything here, but by focusing on law school debt the Times editorial is bringing out the kinds of arguments we can expect to see from academics defending the subsidies that ultimately flow to them. Some of the points I read here are novel, so it’s not an opportunity to waste.