WSJ Has No Idea Who Benefits From IBR/PAYE/REPAYE/ETC

A hypothetical: Jill and Jack live in the same town. Jill has many healthy habits but is a nurse who spends time around infected people, Jack less so. The town is hit with a case of spectrox toxaemia, a dangerous disease. The government offers to immunize people. Jill decides to be immunized; Jack does not. Jill does not get sick; Jack does. So, epidemiologists, did Jill not contract spectrox toxaemia because she was immunized or because of her healthy habits (or luck)?

If you’re The Wall Street Journal, the answer is her habits. Most of us would believe otherwise, given how dangerous spectrox toxaemia is and Jill’s contact with its victims.

Likewise, this line of reasoning animates the WSJ’s opinion of the government’s income-sensitive repayment programs for student debtors, which it claims benefit higher-debt people with better credit scores than lower-debt people who don’t. It’s unintuitive, if you’re the WSJ apparently, but it makes more sense to those of us familiar with the student debt system.

Here’s how it works: People who take out lots of debt might not in fact have the incomes to repay them, so they choose an income-sensitive repayment because the alternative is … Default! Thus, looking at how much they borrow is less important than looking at how much they’re paid.

Last year, in fact, the Government Accountability Office explored this topic and found that most people in income-sensitive repayment programs were earning less than $20,000 annually. So the Jills aren’t so different from the Jacks after all.

Sure, if there were no IBRs/PAYEs/REPAYEs/ETCs, then these Jills with good borrowing habits would be more likely to take deferments and forbearances, but their debts would still not be repaid. That’s because debts that can’t be repaid will not be repaid, no matter what someone’s credit score or how much they borrowed. What matters is what they earn, and college graduates don’t earn much these days.

And if you think the Jills have too much debt, then the problem isn’t IBR/ICR/REPAYE/ETC, it’s that the government lends too much money to people for degrees they don’t need.

‘Law Deans Are Running Bait and Switch Operation’

…In Australia.

Yes folks, y’all can add Down Under to the list of countries with too many law students chasing too few legal jobs, according to a surprisingly scathing opinion piece in The Australian Financial Review by a law instructor at Macquarie University.

A few quotes:

“Law student numbers are out of hand. Nearly 15,000 finish their degree each year, and enter a market where there are only 66,000 solicitors.” Yikes.

“Law deans are running a bait and switch operation. They hold out the promise of a legal career, while adding to the unemployment queue.”


“[The deans’] claim that the legal problems undertaken in law tutorials are a platform for a generalist degree – that will see students who miss out on a job as a lawyer well placed to enter other high-paid spheres of the economy – is a self-serving myth.”

All this is just more evidence that American legal education does a better job of training law deans to advocate their positions than other countries do. The best they can offer here is the versatile-law-degree argument, but if they want to avoid a government crackdown, they’ll have to lean on increasing diversity in the profession or at least gussy up what they have with some kind of human-capital analysis. Otherwise, these Southern Hemispherians will end up like their Japanese counterparts.

Council of Economic Advisors: College Pays. Grad School? Sh!

Or, “The Reality Behind AEI’s Reality Behind the Student Debt ‘Crisis'”

Speaking of student loans, I am directed to the American Enterprise Institute’s response to the Council of Economic Advisor’s (CEA’s), “Investing in Higher Education: Benefits, Challenges, and the State of Student Debt” (pdf).

Because I try to deliver early on my post titles rather than bury them, here’s the report’s chart on the crucial but under-emphasized dispersion of earnings by educational attainment for 35-44 year-olds with payroll incomes. (This cohort doesn’t seem so representative to me of recent student borrowers—and not in a good way, but that’s a different issue.)

CEA--State of Student Loans--Figure 5

Eyeballing the chart, more than a quarter of graduate-degree holders earn less than the median 4-year-degree holder in the same age bracket, and the bottom 25 percent of grads earn about $45,000 or less. The B.A.s earn between about $20,000 and $130,000 while the grads make roughly between $30,000 and $170,000. Graduates in between the 75th and 90th percentiles haul in nearly half the total difference. This wide dispersion cries for more analysis because graduate borrowing amplifies student debt loads. High debts and low incomes, even for this small group of debtors, tend to discredit the human capital hypothesis and the purpose of student lending.

But back to the reality behind the reality behind the- etc.

Critical readers should always be on their guards whenever someone characterizes the “student debt crisis.” Frequently it’s a strawman of the crisis writers want to discuss rather than how much of the unpayable debt will be written down in the future. In the AEI’s case, the crisis is, “[T]he macroeconomic impact of high debt levels.” Here, AEI takes this to mean the stock of $1.3 trillion of debt.

The AEI post turns to its education scholars, startlingly Jason Delisle, who perhaps has moved on from the New America Foundation. Delisle focuses first on the claim that “student debt is holding back the economy.” The CEA report attempts to discredit this position in six ways. One, student debt is not as big as the mortgage bubble (which I don’t think I’ve seen anyone argue for a few years now). Two, hardship today will be offset by the future productivity unleashed by education. Three, everyone borrowed student loans when the opportunity costs were lowest, so high debt levels are in step with the economy and not undermining it. Four, student debt is only slightly reducing homeownership among young people. Five, student loans only reduce auto debt for high-balance debtors. Six, student-loan debts reduce small-business formation and their incomes somewhat, but other factors are involved.

The study concludes, “Had the same students received an education without as many loans, the recovery would likely have been stronger, but not substantially so. Most individuals, and the economy as a whole, will benefit from the education made possible by student loans” (56).

In other words, the Obama administration is asking everyone to double down on its hope that all this education will pay off someday and the government won’t have to write down hundreds of billions of dollars in unpayable education debt, whether by forgiveness promises in repayment plans or new legislation. It’s a theme that crops up elsewhere in the report, and it suffers from two problems. One, higher education doesn’t correspond to higher aggregate incomes; rather it seems to be swapping high-school grads with college grads while keeping incomes flat. If college boosts incomes like video-game power-ups, then we’d expect exponential growth in aggregate incomes, but we’re not. And anyone who thinks the payoff will come later must explain why intervening variables aren’t involved, e.g. occupational differences, which would explain the wider earnings dispersions for the credentialed. The CEA gives us no confidence in its education bet.

Problem number two is that the report tends to side against studies produced by the Federal Reserve Bank of New York (especially those by Meta Brown, et al.) in favor of research producing more satisfying results. The impacts might be trivial, but the NY Fed found that youngish student debtors weren’t getting mortgages or were more likely to live with their parents than the unindebted (links buried here). Meanwhile, the report shoos away the Bennett hypothesis by claiming a lack of consensus, with the caveat that there may be some “administrative bloat” in colleges and universities. Consensuses are tough rhetorical animals to wrestle with and should require significant evidence to prove. A few studies here and there will not do it.

So back to AEI. When Delisle writes, “[Advocacy groups] say student debt is forcing people to delay things like buying a house, starting a family, all productive things. This report is pretty clear that isn’t the case,” he’s wrong. The report clearly concedes that student debt is negatively affecting the economy, albeit to a small degree, and thanks in part to wishing away contrary NY Fed studies and insisting that all the education will pay off someday.

To clarify, student debt is a notable if not primary contributor to a generational disaster dominated by the trade deficit or slack aggregate demand—and new student borrowing is declining—but the CEA report isn’t the source to show it. So that’s a strike against Delisle.

He asks:

Why are millions of borrowers flocking to enroll in a program [IBR, PAYE, REPAYE, etc.] that allows them to cap their student loan payments at a small share of their income if the return on an educational investment are large? Something seems amiss there. I’ve done a lot of work showing that the income-based repayment program is too generous as a result of Obama administration changes, which may explain this disconnect.

I’ve answered the first question already: There is no large, aggregate return to higher education. As to Delisle’s work on the changes to IBR, it’s never demonstrated that the programs are too generous because it’s based on lopsided, self-verifying hypotheticals. In fact, according to a GAO study, in 2014 only 2 percent of debtors in IBR or PAYE plans earned more than $80,000, so Delisle’s mythical IBR deadbeat is not a serious policy concern. Amusingly, Delisle’s reaction to the GAO study at the time was to blame debtors for not making enough money, gasping that they’d use IBR plans for long-term rather than short-term debt relief.

AEI then turns to resident scholar Andrew Kelly, who writes, “Lower interest rates [proposed by Democrats] won’t help folks with small balances who aren’t repaying nearly as much as they’ll help those with average or large balances, most of whom have no trouble repaying because they have the highest educational attainment!”

I have problems with the Warrenian interest-rate proposals too, but Kelly makes the frequent mistake of flipping the income and debt variables to conclude that high-balance debtors are deadbeats, even though the CEA report shows a wide income dispersion for graduate-degree holders.

I admit I didn’t give the CEA report a thorough read, but it looks like the AEI scholars didn’t either.

No Libertarians, the ABA Does Not Control The Supply of Lawyers

Writing for Forbes, University of Chicago law professor Todd Henderson explains to us “Why Lawyer Salaries Are Skyrocketing.” Although he attributes most of the cause of the big-law salary hike to the libertarian red-tape boogeyman, Henderson opens the article with long-falsified supply-side reasoning.

On the supply side, the American Bar Association operates a state-approved cartel, which uses a licensing regime to artificially limit the supply of legal services. In a recent white paper, the White House came out against occupational licensing in general, and breaking the ABA cartel would be a good first step in addressing the staggering growth in lawyer pay.

The last time I recall encountering the “ABA attorney shortage” claim in any depth was two years ago when Michael Lind on Salon told us that that the ABA controls the supply of lawyers. Henderson’s argument though more predictably libertarian is nevertheless surprising because only a month ago The New York Times explored law-graduate underemployment in depth. The natural question is, how can Henderson discuss an attorney shortage while graduates a state away from him struggle to find work at far less pay?

In recent years bar-passage rates have played a role in graduate underemployment to some extent, but not all of the 5,004 unemployed or unsurveyed class of 2015 graduates failed the bar. Another 5,400 graduates were in JD-advantage jobs, which frequently includes positions that could be filled with people with less education. These graduates should be pushing lawyer pay down, and this is prior to any discussion of whether big law salaries should track inflation.

Then of course, there’s the fact that payroll lawyers’ incomes have been flat for quite a while.

10th to 90th Percentile Dispersion of Annualized OES Lawyer Incomes

From a business perspective, law firms could also take the same amount of money and substitute more new associates for the same (or less) pay to cover demand for their services. That is, if demand for their services is really an issue.

Then of course, there’s the ABA’s accrediting power, which a Department of Education panel threatened with a one-year suspension not because it’s refusing to accredit more law schools but because it’s accrediting law schools with insufficient regard to graduates’ employment outcomes.

Cleary other forces are responsible for the ~$20,000 big-law pay raise. I insist I’m not a biglawologist and other voices such as Steven Harper are vastly more credible than I am on the subject, but anyone who thinks ABA rules are choking lawyer supply doesn’t have much credibility when it comes to regulatory boogeymen either.

Change in Graduate Outcomes Driven by Small Jobs

My second cut at the class of 2015 employment data:

Comparing the law-school classes of 2015 to 2014 (and excluding our three Puerto Rico law schools), there were 3,772 fewer graduates, a decline of 8.7 percent. Four employment categories constituted nearly 90 percent to this change: bar-passage-required jobs (52%), JD-advantage jobs (13.1%), law-school-funded jobs (14.3%), and unemployed grads seeking jobs (9.5%).

Changes among the employment types accounted for 85 percent of the 3,772 fewer graduates. The four largest drivers were 2-10-lawyer practices (25.9%), business-and-industry jobs (23.6%), government jobs (11.6%), and public interest jobs (7.5%).

Finally, I looked at the distribution of graduates among the employment categories and statuses by their Gini coefficients. Some of these are more informative than others given the small number of grads that fit into some of them, e.g. the two dozen employed – undeterminable grads. There’s nothing unexpected here. Aside from solos and unknowns, outcome inequality at law firms increases with firms’ sizes. Federal clerkships are still doled out like income in a landlocked, kleptocratic, military dictatorship. Public interest jobs aren’t so easy to come by either, which casts some doubt on the willingness of grads to take them given their student loan burdens.

In all, I’m surprised so little of the decline is attributable to fewer unemployed grads. Instead, it appears that small-law and non-law jobs took much more of the hit. The change in how law-school-funded jobs are tallied distorts these results somewhat, and I look forward to years in which the employment criteria remain constant. At least the categories and statuses (mostly) added up correctly.

Here’s an analytic table I base these opinions on.

2014 2015 2014 2015 2015 2015 2014 2015
Employed – Bar Passage Required 26,794 24,832 62.0% 63.0% -7.3% 52.0% 0.30 0.32
Employed – JD Advantage 5,913 5,420 13.7% 13.7% -8.3% 13.1% 0.36 0.37
Employed – Professional Position 1,787 1,634 4.1% 4.1% -8.6% 4.1% 0.49 0.53
Employed – Non-Professional Position 600 537 1.4% 1.4% -10.5% 1.7% 0.57 0.54
Employed – Law School 1,577 1,037 3.7% 2.6% -34.2% 14.3% 0.73 0.79
Employed – Undeterminable 21 25 0.0% 0.1% 19.0% -0.1% 0.93 0.94
Employed – Pursuing Graduate Degree 693 649 1.6% 1.6% -6.3% 1.2% 0.44 0.50
Unemployed – Start Date Deferred 313 285 0.7% 0.7% -8.9% 0.7% 0.64 0.63
Unemployed – Not Seeking 553 494 1.3% 1.3% -10.7% 1.6% 0.54 0.57
Unemployed – Seeking 4,103 3,744 9.5% 9.5% -8.7% 9.5% 0.43 0.47
Employment Status Unknown 841 766 1.9% 1.9% -8.9% 2.0% 0.67 0.68
Total Graduates 43,195 39,423 100.0% 100.0% -8.7% 100.0% 0.27 0.29
Solo 902 653 2.1% 1.7% -27.6% 6.6% 0.51 0.53
2-10 7,657 6,680 17.7% 16.9% -12.8% 25.9% 0.34 0.33
11-25 1,875 1,737 4.3% 4.4% -7.4% 3.7% 0.37 0.39
26-50 1,036 942 2.4% 2.4% -9.1% 2.5% 0.42 0.44
51-100 799 807 1.8% 2.0% 1.0% -0.2% 0.46 0.46
101-250 1,090 952 2.5% 2.4% -12.7% 3.7% 0.50 0.52
251-500 1,082 1,059 2.5% 2.7% -2.1% 0.6% 0.66 0.66
501-PLUS 3,968 4,008 9.2% 10.2% 1.0% -1.1% 0.78 0.77
Unknown 247 254 0.6% 0.6% 2.8% -0.2% 0.80 0.83
Business Industry 6,608 5,718 15.3% 14.5% -13.5% 23.6% 0.35 0.36
Government 5,038 4,602 11.7% 11.7% -8.7% 11.6% 0.32 0.33
Public Interest 2,160 1,878 5.0% 4.8% -13.1% 7.5% 0.50 0.51
Federal Clerkship 1,275 1,222 3.0% 3.1% -4.2% 1.4% 0.67 0.70
State/Local Clerkship 2,056 2,007 4.8% 5.1% -2.4% 1.3% 0.57 0.58
Other Clerkship 37 125 0.1% 0.3% 237.8% -2.3% 0.93 0.86
Education 772 635 1.8% 1.6% -17.7% 3.6% 0.46 0.49
Unknown Employer Type 90 206 0.2% 0.5% 128.9% -3.1% 0.84 0.94
Total Employed by Type 36,692 33,485 84.9% 84.9% -8.7% 85.0% 0.29 0.30

That’s all.

Wage-and-Salary Lawyer Employment Slows in 2015, Incomes Flat

The Bureau of Labor Statistics (BLS) usually completes its updates of its many measures of occupational employment for the previous year by April. Data for 2015 are now available, allowing a comprehensive summary of lawyer employment for the year. For detailed discussion of what the BLS datasets are and how they address lawyer employment, I recommend the lawyer overproduction page [updated!].

For context, according to the Current Population Survey (CPS), the number of people who reported working as lawyers in 2015 grew 2.5 percent to 1,160,000. The employment projections program (EP program) placed the number of lawyer positions at 778,700 in 2014. The discrepancy between these two measures has existed for a long time and has yet to be explained. Although the CPS is considered more reliable, the EP program estimate is appropriate for discussing future lawyer employment. The CPS measures the number of people in an occupation, but the EP program estimates the number of positions in that occupation, including people holding multiple jobs. Both measures include part-time lawyers and self-employed lawyers in all industries.

The CPS also estimated 803,000 people working as lawyers on a wage or salary basis, an implausible 9.0 percent growth from the previous year (+66,000 lawyers). By contrast, the more accurate Occupational Employment Statistics (OES) program found that the number of wage-and-salary lawyers grew by 1.1 percent last year to 609,930. The number of employee lawyers in the legal sector grew only a negligible 0.4 percent to 380,180.

Lawyer Employment by BLS Measure

Employee lawyers’ incomes were flat in 2015. The OES estimated a scant 0.6 percent median hourly wage growth, although the CPS registered a 4.2 percent median weekly wage increase. Going by the OES, the last peak for lawyers’ earnings was 2009; incomes are about $10,000 lower in real dollars since then. Here is an annualized dispersion.


10th to 90th Percentile Dispersion of Annualized OES Lawyer IncomesThese lawyer employment measures are not strong bellwethers for the value of legal education because they include many established lawyers and don’t measure recent graduate outcomes particularly well, especially those of graduates who do not promptly start careers in law. Readers are instead advised to look at my criteria for predicting improvements in law graduate outcomes for insight.

CBO: $1.2 Trillion in New Federal Student Loans by 2026

Each year the Congressional Budget Office (CBO) provides its baseline projections for the federal student-loan program. The projections include the total amount of new federal student loans that the office believes will be issued, future interest rates, and subsidy costs, i.e. whether the government will make or lose money on the loans. This year, the CBO projects that the government will lend an additional $1.2 trillion to students between FY2016 and FY2026. The figure is down slightly since the 2014-2024 period, discussed here.

Subsidy Rates

The CBO uses an accrual-accounting methodology to determine the present value of federal loans. This essentially means discounting the estimated cash flows of student loans against government securities with the same maturities. If student loans make more money than buying government debt would, then the loans are valuable. Accrual accounting does not include the market risk that a private lender would consider when making a student loan, which is why many people advocate fair-value accounting. It’s a surprisingly contentious issue, which I elaborate in the student debt data page, because under fair-value accounting, the government loses money on student loans.

Under accrual accounting, the CBO projects negative subsidy rates for federal student loans; that is, it sees the government making money on its lending. All student loans made in 2015 will make an estimated 13.9 percent return. Of interest to law-school watchers: Unsubsidized Stafford loans and Grad PLUS loans issued in FY2016 will make 19.2 percent and 18.9 percent returns, respectively. Oddly, Parent PLUS loans appear to be the most profitable for the government.

CBO Table 2This year, however, the CBO included fair-value estimates of federal student loans. Under these, the government loses about 12 percent of its investment on student loans every year until FY2026. Unsubsidized Stafford loans and Grad PLUS loans lose about 5 percent in 2016, but the losses increase over the decade. Parent PLUS loans remain profitable.

Note also that the CBO believes the net number of loans will rise during the decade. It’s already evident that federal-student-loan borrowing is declining.

CBO Table 6Under accrual accounting the student loans will net the government $85.2 billion; under fair-value accounting the government will lose $145.1 billion. This isn’t a lot of money for the government, actually, but it could obviously be redirected to better uses.

Interest Rates

A crucial variable affecting subsidy rates, for both accounting methodologies, is the CBO’s projection of future interest rates. Two years ago, the office believed interest rates would rise from less than 2 percent in 2013 to 5 percent in 2018. This year, the CBO estimates that interest rates will rise to only 3.4 percent in 2018 and 4.14 percent starting in 2022.

CBO Table 4I believe the current interest-rate predictions are more plausible than the office’s estimates two years ago. The interest rate on 10-year government bonds has been falling this year, so the CBO may be overly pessimistic again for FY2016.


In all, I think the CBO is overly pessimistic with these assumptions. Student borrowing is declining, and there isn’t much of a reason to believe interest rates will rise. This doesn’t mean the government won’t make bad loans, or that the skills and knowledge they pay for will make the workforce more productive, but it’ll probably be less than $145.1 billion.