Income Based Repayment

NY Fed: Student Debt Delinquencies Still High in 2015

What started in 2012 just isn’t stopping. According to the Federal Reserve Bank of New York’s Housing Debt and Credit Report, the percent of student-loan balances that are 90+ days delinquent was about 11.5 percent at the end of 2015, about where it was a year ago. Delinquencies for all other household debts save credit-card debt fell last year:

Student-Loan Delinquencies (2015)

This year, the NY Fed declined to discuss all those bad student loans, unlike last year.

Between fourth quarter 2014 and and the end of 2015, all non-housing debt grew from $3.15 trillion to $3.37 trillion. Student-loan debt accounted for 31 percent of the $220 billion increase.

Meanwhile, looking through Department of Education data, only 51.74 percent of all $1.204 trillion in federal student loans are in active repayment. 21 percent are in deferment or forbearance, and 9.5 percent are in default. Of the $585.8 billion of direct loans in repayment, forbearance, or deferment, $188.2 billion are on IBR or PAYE. Nearly one-third of all direct loans in repayment are in one of these plans, about 15.6 percent of all student loans.

This just doesn’t end. Until it will.

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?

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.

GAO Report: RIP High-Income IBR Deadbeats

We are alerted to the U.S. Government Accountability Office’s latest report, “Education [Department] Could Do More to Help Ensure Borrowers Are Aware of Repayment and Forgiveness Options” (here). The report asks one of the questions I’ve always had of income-based repayment plans: How much are people on them earning?

The answer, as of September 2014, is squat—even less than I would’ve guessed.

(I suspect the GAO chose September because it’s the end of the fiscal year.)

GAO Report--Figure 4 (Income)

Out of 11.2 million borrowers in repayment, 13 percent were in IBR and 2 percent were in PAYE (1.46 million plus 0.22 million). If you play with the numbers right that means about 2 percent of all IBR-plus-PAYE borrowers earned more than $80,000 annually. That’s about 30,000 people. By contrast 72 percent (1.2 million) earned $20,000 or less.

Other fun facts: One, about two-thirds of all IBR/PAYE borrowers are women, so we can predict that the REPAYE plan of the future, which will essentially require debtors’ spouses to pay their debts, will be an anti-dowry. Two, within the IBR group, 13 percent were paying the equivalent of a 10-year repayment plan, and for the PAYE people, it was only 5 percent, implying that perhaps some high-income debtors are not going to require loan forgiveness anyway. Three, only one-third of IBR borrowers went to grad school; for PAYE it was only a fifth.

The low-income finding is important because there have been some articles about how IBR and the changes to it confer vastly unfair benefits to high-income deadbeats who could repay their loans if loopholes were closed. For example, earlier in September, The Wall Street Journal shrieked about studies showing how IBR and PAYE are sops to doctors and lawyers (not M.D.s and J.D.s apparently), and my personal favorite occurred last February when The Washington Post ran an op-ed by the New America Foundation’s Jason Delisle and Alexander Holt, who argued against PAYE based on a lopsided hypothetical of a law grad who made $70,000. Thanks to the GAO study, this person was not only lucky as law grads go but also totally unrepresentative of IBR/PAYE borrowers.

So going forward, I fully expect media outlets and the NAF to report on how the changes to IBR broadly favor low-income debtors, and that there aren’t so many high-income debtors taking advantage of the system.

But what did the NAF actually say about the study? It appears to be shifting its focus away from IBR deadbeats to graduate debtors on PSLF specifically. That’s not really a topic I’m interested in exploring today, but those hoping the authors would apologize for wasting so much of our public-policy mental bandwidth up until now will have to wait. The IBR deadbeat might be dead, but I’m sure they’ll resurrect it fairly soon.

In the meantime, the NAF attacks IBR by blaming students for earning too little money. I’m not kidding. Consider their closing line:

Given that borrowers in IBR and PAYE have such low incomes and high debt levels, the plans look much more like very long-term programs for borrowers, not sources of temporary relief.

What does the NAF expect? The economy is still depressed. It won’t really recover without fiscal, trade, and labor reforms. It’s not the borrowers’ faults they don’t have high-paying jobs, nor is it IBR/PAYE’s. So what’s the solution? Making them pay more? It’s unclear where the NAF will go from here, but more debt, more education, and tougher repayment plans aren’t going to work. Given that the NAF took a wide swing and missed over the IBR deadbeats, I discourage optimism.

Speaking of pessimism for college grads, the Census Bureau has updated its “Income, Poverty and Health Insurance Coverage” data for 2014. As with last year, I won’t delve too deeply into the analysis, but here are median earnings by education level for the 25-34 bracket.

Median Earnings by Education (25 - 34)

Okay, the median college grad earned $1,000 more in 2014, but it’s still way below the peak in 2000.

Meanwhile, the percent of college grads who weren’t working is still 3 points higher than in 2008, and 6 points higher than 1997. That amounts to more than half a million college grads who could be working. Moreover, it’s noisier, but there’s been an upward trend since the 1990s in professional-degree holders who don’t work.

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

The best we can say is that things didn’t get worse last year, but it’s much too soon to say things are getting better.