student loans

5 Ways Speaker Ryan Might Change (Law School) Student Loans

Yes, not the Trump era—the Ryan era. Partly we should be clear about who’s really setting any agendas here, but it’s also to recognize that extraconstitutional President D. Trump might not finish his term. The way things have been going since the election, I wouldn’t be surprised if he’s gone by the time you’re reading this.

Moreover, thus far Trump’s sole contribution to student-loan reform has been yet another income-sensitive repayment plan, which was one of the few ideas that he provided any details for during the campaign. As I understand it, his proposal limits the repayment period to 15 years rather than 20, which saves on the net amount debtors pay while increasing their monthly payments. I don’t know if that would require any action by Congress, so I’m sure Betsy DeVos is right on it.

More interesting is why Trump even looks like he cares about student debtors at all. According to the WSJ, for example, they’re the biggest moochers ever, requiring a projected bailout of $100 billion over some number of years. (Never mind that a week later the Defense Department admitted that it wastes $125 billion every five years. Debtors are moochers; the Pentagon, no.) Republicans hate moochers, Trump is a Republican, debtors are moochers; therefore Trump hates debtors. Q.E.D. Maybe Trump sympathizes (if that’s possible) with student debtors because of his frequent bankruptcy filings and probable debts to Vladimir Putin’s buddies. Hey, the syllogism still works if Trump or Republicans are moochers or debtors themselves.

Anyhow, I don’t see student debt on Trump’s agenda such as it is. As I understand it, presidents have a brief window early in their first terms to push their priorities through Congress before their popularity plummets. Trump was never popular, and his popularity is already plummeting, so if student loans were a low priority to begin with, they’ll fall off his list now. Consequently, I think he’ll sign any legislation so long as he can spin it to sound like a victory. This leaves the legislature as the only source of policy. Senate Majority Leader McConnell is too busy looking like a tortoise, so this all falls to the House, which means Ryan.

And Speaker Ryan likes policy. He’s not particularly good at it, but he sounds like he is, so there’s that. Here is where I Ryan might take Congress on student loans:

  1. Nowhere. Ryan and friends are already excited about (a) avoiding their constituents who want to keep their Obamacare, (b) avoiding their constituents who want them to investigate the president’s Russia ties, (c) passing tax cuts for people who don’t need them, (d) passing a budget that slashes all discretionary programs (i.e. “Mr. Rogers’ Privatized Neighborhood“), (e) privatizing Medicare/Medicaid/Social Security/national parks, and (f) dealing with even more blowback from all of the above. If Trump’s conflicts blossom into a constitutional crisis, then we’ll have more entertaining things to think about than student loans.
  2. Adopting fair-value accounting for government credit programs. This is one of Ryan’s few policy positions I agree with, and the Congressional Budget Office does too. (More info here.) There’s long been plenty of liberal opposition to it, but the Republicans might be able to flip the Democratic senators necessary to beat a filibuster. Changing the Federal Credit Reform Act is also sufficiently technical that it will not lead to grassroots mobilization of angry liberals who believe fair-value accounting threatens diversity.
  3. Passing the ExCEL Loan Act. I have no idea where it originally came from, but sometimes even Democrats offer this bill. Its point is that there are too many types of federal loans and too many repayment plans. The ExCEL Loan Act consolidates them, but it also eliminates loan forgiveness features that come with income-sensitive repayment plans.
  4. Capping or eliminating Grad PLUS loans. Supposedly, Ryan doesn’t like the program, and other representatives have grumbled about it, so law schools’ crutch might finally die. The only two reasons to think this might not come about are (a) the diversity crowd, and (b) the for-profit law schools that provide a very important public service—can Ryan resist the siren call of corporate welfare?
  5. Reforming or Eliminating the Department of Education. Maybe something like this could happen if the Democrats do badly in the 2018 midterms—many Senate seats are up—but it depends on how the next two years unfold. Similarly, it’s possible that Republicans will resurrect the guaranteed loan program. Ultimately, there’s a tension between honoring the Bennett hypothesis and giving government revenue to banks.

In the past I’ve said that (4) (Grad PLUS loans) is a likely option, but now I’m not so sure. Nobody expected the election to turn out as it did, but I thought unified Republican governance would be more focused. Yet one month in we have a party that’s stumped on repealing the health care law it’s hated for years and is nowhere near cutting taxes. It’s not implausible, then, that higher education reform is either lower on the agenda or won’t be as decisive as we’d hope.

Speaking of unified governance, a few weeks ago the ABA House of Delegates rejected the Section of Legal Education and Admissions to the Bar’s proposed bar-passage standard for law schools. As with all rulemaking or legislation the dispute isn’t fully resolved, but it’s noteworthy that the section committees that passed the standard are supposed to be the ones captured by student-loan dependent law schools and self-important law professors, while the House of Delegates is independent. Instead, the house is preaching diversity while the section passed a rule mandating accountability. Maybe the house is bad-copping the good-cop section, or the ABA’s politics have gone topsy-turvy as our Putin-loving government’s has.

In context, the bar-passage standard appeared to be the only viable idea out of the ABA that would shut down the most superfluous law schools. Given that the number of applicants is flat, and assuming policy is still gridlocked, it seems we’re in for more of the same for the next few years.

CBO: $1.3 Trillion in New Federal Student Loans by 2027

Each year the Congressional Budget Office (CBO) provides its baseline projections for the federal student-loan program. This year it published them early with its annual “Budget and Economic Outlook.” The projections include the total amount of new federal student loans that the office believes will be disbursed, 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 $1.3 trillion to students between FY2017 and FY2027. The figure is up slightly since the 2016-2026 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. 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 offering a student loan, which is why many people advocate fair-value accounting. It’s a surprisingly contentious issue, which I elaborate on in the student debt data page, because under most fair-value accounting estimates 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 profiting from its lending. All student loans issued in FY2017 will earn an estimated 13.3 percent return, about the same as last year. Of interest to law-school watchers: Unsubsidized Stafford loans and Grad PLUS loans issued in FY2017 will make 18.6 percent and 20.8 percent returns, respectively. Oddly, Parent PLUS loans appear to be the most profitable for the government.

table-2As with last year the CBO included fair-value estimates of federal student loans. By this measure, the government loses about 10 percent of its investment on student loans every year until FY2027. Unsubsidized Stafford loans and Grad PLUS loans lose about 4.5 percent in 2017, but the percentage increases 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.

table-6Under accrual accounting the student loans will net the government $112.6 billion; under fair-value accounting the government will lose $133.8 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 is the CBO’s projection of future interest rates. Last year, the office believed interest rates for FY2016 would be about half a percent higher than they turned out to be. This year, the CBO estimates that interest rates will plateau at 3.5 percent starting in 2022.


Last year, I argued that the interest-rate estimates were more plausible than two years earlier. That was, however, before the election, and now the rate on 10-year government bonds is much higher than before. As a result, student debtors will probably pay higher rates starting in the next academic year, and the accrual method will produce higher future profits for the government that are probably illusory.

Does Charlotte Law School Offer a Test of the Bennett Hypothesis?

The Charlotte Observer tells us that the Department of Education believes Charlotte Law School has engaged in “‘dishonest’ practices,” and as a result it is yanking CLS’s access to federal student aid by the end of the year. ED blindsided CLS—at least that’s the school’s story—but apparently its low bar-passage rates, the ABA’s probation of it, and its alleged misrepresentations to applicants and students are the culprits. Maybe CLS will successfully appeal the decision, but if it doesn’t then we’ll get the opportunity to test whether law schools absorb federal student loans and pass them back on to students, aka the Bennett hypothesis.

Okay, maybe the shock is so sudden that the school would need to scramble to balance its budget anyway (and I think the “90/10” rule applies, but I won’t go into that). However, we do know some things about how CLS’s revenue and spending.

For one, in the 2015-16 academic year a mere 31.3 percent of its full-time students paid full tuition ($41,348). Altogether, it made $8.5 million from these students. Thanks to the article and ED data, we know that last year the school was a conduit for $48.4 million: $19.1 million in direct unsubsidized Stafford loans and $29.3 million in Grad PLUS loans. Because CLS is relatively new and freestanding, it probably has no significant endowment or gift income.

Here’s how much federal loan money CLS has disbursed each year since it was founded and its revenue from full-time students paying full tuition.


Note: CLS’s numbers of full-time students paying full tuition appear erratic for unknown reasons, probably misreporting by the law school, but that’s CLS’s problem, not mine.

And here’s how much it disbursed per student (including non-recipients), along with the weighted-average full tuition between full-time and part-time students. Not everyone borrows each type of loan, but the chart gives a sense of how much students are paying for both their educations and living expenses on top of that.


CLS is an unusual case because it was founded around the time odious Grad PLUS loans came into being. Its budget is undoubtedly acclimated to them and probably can’t be balanced without them. Moreover, I think I’ve underemphasized how crucial it is that they pay for law students’ living expenses. Without that, students would not be able to go to law school. Nevertheless, the Bennett hypothesis tells us that if this school is to remain in business as an ABA-accredited school but without access to federal loans, then we should expect it to charge much, much less than it currently does. Although, it may offset costs by encouraging students to borrow from private lenders, whose loans will not be dischargeable and probably require co-signers.

I doubt CLS is as bloated as an elite law school is, but it will soon cost a lot less to attend if it wants to stay in business. Unfortunately, I suspect liberals will see CLS’s downfall as a victory over predatory for-profit colleges rather than evidence that federal loans help law schools more than students. Still, it’s a victory. Maybe Infilaw will get the message that many nonprofit law schools should’ve years ago.

Finally, in passing I notice that CLS’s enrollment is quite lopsided: 452 women to 260 men. The mainstream discussion on law school enrollment in 2016 is emphasizing how women now outnumber men. Without CLS, the margin falls to a sliver. It’s a notable finding, but I’d like it if the coverage drew more attention to the fact that men attend more prestigious law schools (some articles do). I don’t see it as a milestone for the profession because it’s pretty clear that schools like CLS enroll a larger proportion of women—and schools like CLS don’t offer much of a path to a professional career.

WSJ’s Editorial Page Blames Obama for Preventing Student Loan Defaults

I wrote that the WSJ’s reporting on student loans had improved slightly. Its editorial responding to the GAO report on the Department of Education’s cost estimate of income-driven repayment plans, on the other hand, backslides. It’s really more of a rant than an editorial, but here’s a digest of what I think it was arguing:

  • Cutting out banks as middle-men for federal student loans costs taxpayers money, even though it didn’t, and that change had nothing to do with IDR plans.
  • Democrats knew that student loans would never be repaid when it federalized student lending. Again, even if true, this claim has nothing to do with IDR plans, which were authorized by prior administrations.
  • IDR plans keep default rates “artificially low,” which while technically accurate doesn’t explain how debtors are supposed to pay loans they can’t repay. What would the WSJ propose if all these people default instead?
  • The Obama administration allowed borrowers to retroactively sign on to IDR plans, which is true but doesn’t explain how debtors would repay the loans otherwise since they probably would not be able to discharge them in bankruptcy.
  • IDR is an “entitlement” that can be “exploited,” even though there’s no evidence student debtors could repay their loans without it. Assuming the GAO’s report is correct, IDR plans are doing exactly what they are supposed to do. The problem is that too many people have too much debt.
  • The Obama administration is responsible for the shoddy accounting of student loans’ ultimate costs—which I’ll accept—but it doesn’t blame lending programs passed by the Bush II administration that created these unpayable debts to begin with. Seriously, the WSJ threw the 2000s down the memory hole.
  • The Obama administration used costly IDR plans to buy votes. No evidence is given, and didn’t younger voters bail on the Democrats in this election? Nice bribe, Obama.
  • Implicitly, the Republican-controlled Congress bears no responsibility for failing to create more jobs or raise incomes, even though it was more concerned with slashing the budget, shutting down the government, and threatening to default on the national debt despite trifling interest rates.

I feel bad for the reporter who carefully tried to explain the GAO’s report and was just upstaged by an incompetent, partisan editorial. (I hope it’s not the same author.)

There’s much blame to place at Obama’s feet regarding the value of college education and student loans. One of these days I’d like to summarize my coverage of him to gauge my fairness towards the outgoing administration. Hopefully, I’ve been consistently non-partisan in my analysis, but perhaps not. However, if the best the WSJ can do is blame Obama for preventing defaults on loans that could not be repaid given the Congresses he had to work with, I’m confident my final assessment will smell like roses by comparison.

WSJ’s Student Loan Coverage Improves: More Facts, Fewer ‘Deadbeats’

And not just facts, neutral facts, which is how reporting is supposed to be. I’ve criticized The Wall Street Journal‘s student loan coverage, but its most recent article on the topic, “U.S. to Forgive at Least $108 Billion in Student Debt in Coming Years,” is a start in the right direction.

Okay, the title could use some work. More accurately, it should be something like: “GAO Projects U.S. Will Forgive $108 Billion in Student Loans in Coming Years.” It’s 76 characters, which is too long for most SEO-obsessed editors, but it doesn’t characterize a possibility as a certainty.

Conversely, the WSJ neglects to cite another GAO study on the subject of student debtors’ earnings. Its data are nearly two years old, but they show that 72 percent of people on income-sensitive repayment plans were earning $20,000 annually or less. Not even 10 percent of IBR and PAYE participants (157,000) made more than $40,000 per year.

Thus, the WSJ’s reasoning still follows a shaky line of reasoning:

(1) IBR participants’ debts are high,

(2) High debts are only feasible for grad students taking out Grad PLUS loans,

(3) Graduates tend to find jobs with high incomes and have low unemployment rates,

(4) So the benefits of IBR go to high-income people.

The prior GAO study pokes holes in (3) and (4). Income is the independent variable, not debt, and incomes are low. Still, the WSJ’s reporting this time inserts enough adverbs to qualify these claims that I’m going to give this an earned “C.” There is no grade inflation on this blog.

Oddly, in its haste to cover the GAO’s attacks on the government’s accounting for student loans, the WSJ neglects to include immanent compensating factors that will raise student debtors’ incomes: tax cuts, stimulus, job growth, a harried Fed, and 3-4 percent growth in the near future. Things will rapidly get better for America’s student debtors.

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.

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.