Legal Education ROI

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.

Class of 2014 NALP Data: Unemployment, Small Firm Jobs Down

A few weeks back, the National Association for Law Placement (NALP) uploaded its national summary chart that’s the basis for its Employment Report and Salary Survey (ERSS). It’s here (pdf). Two things worth noting: One, this year’s version doesn’t include the total number of graduates or the number who responded to the survey, making it impossible to determine non-responses. I have no idea why the NALP did this.

Since the class of 2013 ERSS appeared to use the same total number of grads as the ABA did that year, I’ll assume it’s 43,832 this year, which includes graduates from the three Puerto Rico law schools. Also, this year the ERSS changed 2-10-lawyer firms to 1-10-lawyer firms. I’m not sure if this is a typo or if it’s meant to separate graduates who work under solo practitioners as non-lawyers from graduates who start their own solo practices.

Okay, some analysis. Obviously this year’s ERSS confirms what’s been widely reported since the ABA’s version of the same data came out several months ago: Unemployment is down, as is the number of grads in bar-passage-required jobs, and with fewer graduates, the percentage of employed grads rose.

Here are charts of the number of graduates by employment status and the percent employed. (These exclude non-responses.)

No. Grads Employed by Status (NALP)

Percent Employed by Status (NALP)

These charts also illustrate the remarkable growth in J.D. advantage jobs over the years.

Here’s a detailed version graduate employment but with full-time and part-time status and only going back to 2007.

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

The question that I don’t think has been addressed is what kind of bar-passage-required jobs are responsible for the drop in that category. I won’t show all the math, but the answer is overwhelmingly private-practice, small-law firm jobs: 1/2-10-lawyer practices and solos.

No. Graduates Employed by Size of Firm (NALP)

Interestingly, the number and proportion of grads reported as starting their own practices did not change much since 2013 (-175 from 1,378). I draw two conclusions from this: One, small firms looking for new lawyers will need to look harder. I have no idea if that will push up wages in the future (there’s trivial evidence it has this year for full-time, wage-and-salary jobs). On the other hand, these could be eat-what-you-kill arrangements, which wouldn’t cost these firms much. Nominal wages for 1/2-10-lawyer practices are still way down from 2007, but the proportion of grads reporting wages is up, so this is a phenomenon to look for. The better these jobs pay, the better grads do overall: It’s the marginal graduate who matters most.

Speaking of whom, and this is my second thought, grads appear to prefer J.D.-advantage jobs and unemployment to small firm work. Given the definition of J.D. advantage, which is so broad that it likely includes graduates returning to their prior jobs, graduates’ employment “choices” don’t speak highly of small-firm work.

Thus, there is still much slack in the legal labor market, but it is improving. Big law isn’t hiring the way it used to, but fewer grads are working in smaller practices:


Cumulative Percent Change in Grads Employed in Law Firm Jobs by Firm Size (Index 2007=100) (NALP)

(Sorry this one is a little unclear.)

To conclude, this ERSS verifies the odd accounting identity explaining law graduate employment: The first people who don’t go to law school are the first ones to not be underemployed after graduating. Small beans for the thousands of unemployed grads though.

Prepare for the Return of Private Law School Loans

That’s what you should be inferring from Charles Lane’s WaPo op-ed, “How student loans help keep expensive schools in business.”

Lane argues that Grad PLUS loans are, “a de facto bailout, enabling many law schools to maintain capacity and delay reforms, or settle for modest ones, while continuing to charge more or less the same high tuition.” The author’s position, to say nothing of his article’s title, largely resembles my early forays into the subject, especially, “How Grad PLUS Loans Sustain Zombie Law Schools.” It’s always nice to see mainstream sources arrive at my conclusions.

It’s not so nice when they don’t fully understand the implications. If Congress gets rid of Grad PLUS loans, or scales graduate lending back dramatically, then some law schools will demand their students substitute the tuition difference with private loans. These loans won’t be easily discharged in bankruptcy, so it will be a strong reason to stay clear of law school, even more prestigious ones.

Before I go, I just wanted to editorialize on Lane’s opening: “Income inequality bedevils the United States, as does debt, of the public and private varieties.”

This is bad writing. One, “income inequality” doesn’t play any role in the editorial, so a good editor would’ve axed it. Two, public debt doesn’t bedevil the U.S. at all. Currently, 10-year treasuries are trading at 2.18%.

10-Year Treasuries

(Source: FRED)

Yes, I’m not the first to recognize that WaPo caters to people who insist public debt is the second evilest thing in the history of evil (no. 1 is inflation), but eliminating Grad PLUS loans won’t close the deficit. Does Lane write editorials against corporate welfare?

Still, there are many correct points in the article, and it suggests that our East Coast media elite are finally beginning to turn on student loans instead of debtors—but not totally.

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.


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.