Income Based Repayment

WSJ: Grad Debts That Can’t Be Repaid … Can Be?

Josh Mitchell of The Wall Street Journal does some good reporting in, “Grad-School Loan Binge Fans Debt Worries.” There are, as one should expect, some errors.

One, after interviewing a handful of professionals with high incomes and unpayable debts, he writes:

But a number of recent studies show the benefits [of IBR] are largely going to people who need them the least—doctors and many lawyers who will end up making six-figure salaries. The benefits are less meaningful for undergraduate borrowers, because their average debt burden is roughly $30,000 and income-based repayment plans aren’t likely to lower their bills by much.

This is not true. There is no study that estimates the number of IBR freeloaders out there, otherwise the WSJ would’ve named it and cited the statistic. At best all we have is fear-mongering by the New America Foundation. Nor is there a study that estimates the total number of Grad PLUS loan debtors by course of study, median income, and proportion on an income-sensitive repayment plan. Such a study would probably find that the handful of people gaming the system are outweighed by professionals who aren’t earning much. This is the point of IBR.

Next:

Of the 5,686 hospitals in the U.S., 73% are nonprofits or government owned, according to the American Hospital Association, thus qualifying their employees to have loan balances forgiven after 10 years.

Do we have freeloading doctors? Response: No! It’s not their fault there are so few for-profit hospitals. If you want them to pay, charge them less. (By the way, one reason I like this article is that it doesn’t obsess over the handful of law grads who have spectacular earnings coming out of law school; it’s nice to beat up on the M.D.s for a change.)

I’ll close:

The collection of incentives—passed in separate measures over several years—weren’t intended to work together to help so many grad borrowers.

Very true, but the issue is what the harm is and where it’s coming from. IBR and its like are not the cause, Grad PLUS loans are. Without IBR, there would’ve been widespread graduate debtor defaults (or at best hardship deferments). This is how the WSJ can find real people who can’t repay their loans without IBR but then say there are studies somewhere out there finding that debtors are making cash sacks.

Or, to butcher Michael Hudson: Debts that can’t be repaid, can be.

ABA Task Force Dodges Student Debt Reform

Oh you knew I would not ignore the results of the ABA Task Force on the Financing of Legal Education. It was a long time in coming, but it required a careful read. My review is at The American Lawyer.

I would’ve told y’all sooner, but I just got back from vacation, which got an extension thanks to a thunderstorm in New York grounding planes in Chicago. Grr.

Steel Links

Haven’t done a links post in a while, but there are a few things worth writing about in brief.

Allison Schrager, “Becoming a Doctor or Lawyer Is Still Worth It,” Quartz, July 14, 2015.

Of course, that doesn’t mean going to law school is still worth it because, of course, the article carefully points out that not all law school graduates work in high-paying professional jobs and lawyers have a notably high attrition rate.

Wait, it didn’t point that out? Oops. Then maybe we shouldn’t be saying that the return to law school is so high. (I should add that the underlying paper at least discusses this.)

Molly Hensley-Clancy, “LegalZoom Wants to Be ‘The Good Guys’ in the Shady World of Student Debt Relief,” BuzzFeed, July 6, 2015.

Fun fact: BuzzFeed does investigative reporting. I’m happy to serve it a compliment. What it found is that everyone’s favorite legal disruptive innovator is making money by … charging federal student loan debtors $700 to sign them on to income-sensitive repayment plans. Which they can do for free on their own. LegalZoom swears it’s informing borrowers of that fact, but that’s not what happened when BuzzFeed‘s reporter called in posing as a debtor. (Yes, really. This is what journalists are supposed to do.)

Did I mention that a couple weeks ago New York’s Student Protection Unit shut down a financial services company for charging student debtors money for signing them onto IBR plans without telling them they could do so for free? Did I also mention it paid a $10,000 fine? Does anyone call these companies legal disruptive innovators?

Now, to editorialize: If you couldn’t tell, I think LegalZoom’s impact is hyped, UPL or not. It’s quite possible that it makes money by (a) offering services lawyers wouldn’t charge for, as in the above case, or (b) serving clients for legal issues they might not bother going to a lawyer for anyway, e.g. a no-income, no-asset, few creditors, chapter 7 bankruptcy filing. Neither of these activities takes business from traditional lawyers.

In fact, in 2014 30 percent of LegalZoom’s revenue came from subscription fees, meaning it wasn’t selling actual legal services. Also, one of its biggest sources of revenue appears to be incorporation documents for California businesses. Perhaps it offers needed services, but consumer regulators need to catch up with it.

Gainful Employment Rule Post

Yeah, this link is for me. Because readers forwarded around my post applying the Gainful Employment rule to all law schools, I went back and updated it so that the table showed only the results from the total income test. I figure in case researchers want to cite it or replicate my results, they’ll have an easier time understanding what I was doing. I realized that the results of both tests produce the equivalent number, so even if a law schools’ graduates’ discretionary incomes are lower, the table now shows the equivalent income graduates would need to be making. I didn’t update the post’s text, so bear that in mind.

Expert Institute’s Best Legal Blog Contest

A generous reader has nominated the LSTB for the Expert Institute’s Best Legal Blog Contest. You can read about it here. As ever, I am grateful to you, my readers, for your support.

Graduate Student Loan ‘Horror Stories’ Are the Point

Most of what Jordan Weissmann writes in “A Sign That Washington Might Be Charging Too Much Interest on Their Student Loans,” is correct. Okay, the title should use “Its Student Loans,” but that’s trivial.

Weissmann argues that startups targeting high-income graduate student debtors for student loan refinancing probably aren’t much of a threat to the federal loan program’s profitability (assuming there is any). The example he cites from a Bloomberg article isn’t very inspiring. The debtor has an MBA earns $140,000 per year, and has a scant $45,000 of debt. A 31 year old, the debtor’s 6.55 percent interest rate indicates that he probably has only unsubsidized Stafford loans from back when the interest rates were fixed rather than Grad PLUS loans at a floating rate. He is totally ineligible for income-based repayment. Rhetorically speaking, so far so good.

As for that assumption about that the federal loan program’s profitablity, we’ve already been down that road. (In a related article, Weissmann implies that anyone who disagrees with accrual accounting is a conservative—ha.) The government may have lower borrowing costs, but that doesn’t mean it always lends money wisely. Anyone who disagrees is free to argue why we shouldn’t socialize the entire credit system—and not just postal banking, I mean everything.

Where Weissmann gets tangled up is when he writes, “[W]hile there are certainly plenty of horror stories out there from underemployed and overindebted law grads and Ph.D.s, advanced degree holders are generally high earners who rarely default. Their reliable payments help subsidize lending to low-income undergrads, who are generally far less of a solid bet for the government.”

First of all, graduate debtors’ low default rates are probably due to selection bias, not high incomes. Presumably, highly educated people are savvier, more conscientious, and therefore more likely to contact lenders when they start running into financial problems, so they sign up for hardship deferments rather than default. Now they have IBR. In short, not being in default isn’t the same thing as being in full repayment.

More importantly, however, is that the characterization of law debtors and others as “horror stories” is misleading. In the past I’ve estimated that about 30 percent of Grad PLUS loan dollars go to students at private law schools. More go to public law school debtors. Weissmann should know that a sizeable proportion of these debtors will never repay their loans in full. Even if they’re a minority of graduate debtors, they still owe more than the average, but that’s where the profits are supposed to come from! Consequently, that minority matters quite a bit.

What’s needed is a cross-section of Grad PLUS dollars (not debtors) by degree, then repayment status, and then repayment type. If a minority of debtors owes a greater proportion of the debt and is on IBR because it has a low income, then startups poaching a few MBAs will be the least of ED’s problems.

CBO: IBR/PAYE to Cost Gov’t $39 Billion Over Ten Years

Most people know better than to read through the Congressional Budget Office’s annual “Budget and Economic Outlook,” which was released last week. Not me, though.

Student loans play a subtle roll in these kinds of reports, and this year’s offers an interesting twist. In Appendix A, which concerns the changes since August to the CBO’s baseline projection, on page 113 (pdf 119) it states:

CBO increased its projection of outlays for federal student loans by $39 billion over the 2015–2024 period. That increase is primarily attributable to higher projections of participation in repayment plans that are based on a borrower’s income. Under those plans, the government forgives the loans of borrowers who meet certain criteria, so they cost more than other repayment plans.

Yeeouch.

Don’t worry too much though, the office still believes that there’s an overall negative subsidy to the student loan system thanks to its accrual accounting methodology. I’m a rare liberal who thinks fair-value accounting works better. I think the opponents of FVA confuse the government’s enormous borrowing power with the belief that it never spends money recklessly.

The CBO’s specific estimates of the federal student loan system will be out later, but I suspect this stray statement will be used by Wall Street Journal types to argue that IBR/PAYE is a “debt forgiveness program” for wastrel college students rather than a monthly payment reduction program that it’s largely intended to be. At least people can’t say that it’s a student debtor shakedown to extend standard repayment plans. This whole student loan thing is going to get uglier and not end well. I’m not excited about it.

Shifting gears, another place student debt rears its hideous visage is in household formation. On page 36 (42), the CBO tells us that “[S]tudent loans have rendered some young adults unable or unwilling to obtain a mortgage.” Brookings Institution people, take note.

But for some reason the CBO thinks household formation will surge ahead.

CBO Household Formation Projection

The CBO’s only reason for optimism is “better prospects for jobs” and easier access to mortgages, yet it concedes that in recent years household formation has not been linked to employment gains as it has been in the past.

Looking at the employment-population ratio for 25-54-year-old Americans, there’s but slim reason to be hopeful. It’s risen two percentage points since October 2011, but it needs to go up five more points to return to its 2000 peak. I don’t think the current trajectory is compatible with rapid growth in household formation. On the other hand, two percentage points is probably more than I would’ve predicted a couple years ago.

Civilian Employment-Working Age Population Ratio

Without new households, vacancy rates will stay high (though there are regional variations I’ll not speculate on at this time), so expectations of higher future land values will stay suppressed. This doesn’t bode well.

Less Debt, Fewer Defaults, and More IBR

…Is everything you needed to know about last week in the world of federal student loans.

We have The Wall Street Journal‘s Morning Editorial Report … um … editorializing on the “Surge in Student Debt Forgiveness.” The whole article is subscription required, but it appears the WSJ is continuing its biased reporting on IBR by sloppily characterizing it as a loan-forgiveness program rather than a program whose intended purpose is to reduce monthly payments. That’s not to say I don’t think IBR will cost the government a lot of money or that the average amount borrowed is high enough to indicate that a lot of these debtors borrowed Grad PLUS loans, but this is pretty shrill. Like, how dare an income-based repayment program base people’s repayments on their incomes? What’s next Social Security securing society from old people starving to death in the streets??

On the other hand, we have The Washington Post, which does a much better job of pondering why student loan defaults are dropping. IBR is part of it, as is slightly better job outcomes for graduates. It even concedes that college graduates are finding jobs that don’t require their degrees. Clearly the author has not gotten the memo on occupations.

Finally we have an article by … me. This very post you’re reading. Recently, the Department of Education released its fourth quarter report of total student loan volumes by institution. The slightly good news is that last year the aggregate disbursement fell below $100 billion.

Aggregate Federal Loans Disbursed (Current $)

The bulk (43 percent) of the $5.9 billion decline is in unsubsidized Stafford loans to undergraduates, and 37 percent were due to subsidized Stafford loans (which now go only to undergraduates). The rest (1/4th) is due to unsubsidized Staffords to graduate students. Grad PLUS loan disbursements grew by half a percent. Can’t win ’em all, I guess.

As for the amount disbursed per recipient (in current dollars, for loan limits aren’t inflation-adjusted and that’s the benchmark to measure changes against), most of the loan types saw negligible declines, indicating that either fewer people are taking out federal loans or fewer Americans are going to college.

Meanwhile, since the Internet tells us that Thomas Jefferson School of Law is in trouble, I figure it’s time to check in on those freestanding private law schools. TJSL isn’t alone, it just hasn’t managed to find a public university to socialize it yet (see WSJ, there’s your Social Security quip!). Western State fused into Argosy University two years ago, but I heard that was a long time coming. Texas Wesleyan is now Texas A&M, and some of the formers’ graduates want diplomas that say they went to the more reputable latter. Chalk one more up for the signaling hypothesis. Finally, the University of New Hampshire (formerly Franklin Pierce Law Center) is in fact now the University of New Hampshire. Go figure.

Oh, and how could I forget: Thomas M. Cooley is now affiliated with Western Michigan University.

I’ve heard rumors of other mergers going on among the FSP law schools, but that’s four that are adapting to the new world. TJSL just happens to be dealing with its fiscal problems by having a fiscal crisis.

There’s more to be said on this, but I figured I’d leave you with a chart comparing the average amount borrowed per recipient of federal loans at each of these law schools to their total costs for full-time students according to the Official Guide.

Average Amounts Borrowed Over Full-Time Costs at FSP Law Schools (2013-14)

I draw your attention to the fact that at none of these schools can a full-time law student cover his or her tuition with just unsubsidized Stafford loans. (Also, it seems that some law students are cleverly borrowing more than the annual loan limit allows. Hm.) At the average FSP law school last year, 87 percent of students took out Stafford loans; 70 percent borrowed Grad PLUS loans.

Fin.

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.