WHO REALLY PAYS FOR LAW STUDENT DEBT?

More public interest lawyers for our nation’s underserved citizens would be a good thing. More public debt to subsidize law schools that shouldn’t exist at all would be a bad thing.

In recent years, law schools have promoted debt forgiveness programs as a solution to rising student loan obligations. In some important ways, they are. Income-based repayment (IBR) can be a lifeline in a drowning pool of educational debt. It can also open up less remunerative options, including public interest law, for those willing to forego big bucks to avoid big law firms. But now everyone seems surprised to realize that, when all that debt is forgiven years hence, someone will have to pick up the tab.

Well, not quite everyone is surprised. More than two years ago, Professor WIlliam Henderson, one of the profession’s leading observers, saw this train wreck coming. “Unless the government’s actuarial assumptions on student loan repayments turn out to be correct,” Henderson wrote, “federal funding of higher education is on a collision course with the federal deficit.”

Tuition increases without regard to value added

Recently, the Wall Street Journal made that collision a front page story. In “Plans That Forgive Student Debt Skyrocket,” law students took center stage — and for good reason. For a decade, new lawyers have outpaced everyone, even medical students, in the rate at which they have accumulated educational debt.

Am Law columnist Matt Leichter has reported that from 1998 to 2008, private law school tuition grew at an annual rate of almost 3.5 percent, compared to 1.89 percent for medical schools and 2.85 percent for undergraduate colleges. Public law school tuition increased at an even faster pace: 6.71 percent. From 2008 to 2012, median law school debt for new graduates increased by 54 percent — from $83,000 to $128,000. (That compares to a 22 percent increase in medical student debt.)

Market disconnects

What accounts for the law school tuition explosion? For starters, the U.S. News rankings methodology incentivizes deans and administrators to spend money without regard to the beneficial impact on a student’s education. More expenditures per student mean a higher ranking, period.

Who provides that money? Students — most of whom obtain federally backed loans. To that end, the prevailing law school business model requires filling classrooms. As transparency about dismal law graduate employment outcomes has produced fewer applications at most schools, deans generally have responded by increasing acceptance rates. The overall rate for all law schools rose from 56 percent in 2004 to almost 80 percent in 2013.

Sell, sell, sell

As National Law Journal reporter Karen Sloan observed recently, “It’s a tale of two legal education worlds.” Top law schools place 90 percent of their graduates; but “more than three-quarters of ABA accredited law schools — 163 — had underemployment rates of 20 percent or more.”

Those numbers begin to explain what has now become an annual springtime ritual. As I’ve discussed in recent posts, many law school professors and deans at schools producing those underemployed graduates are proclaiming that the lawyer glut is over. Now, they say, is the best time ever to attend law school.

Outside the ivory tower, practicing lawyers know that such hopeful rhetoric isn’t transforming the market or slowing the profession’s structural changes. Last June, NALP Executive Director James Leipold wrote, “There are no indications that the employment situation will return to anything like it was before the recession.”

The most recent ABA employment statistics for the class of 2013 prove Leipold’s point: Nine months after graduation, only 57 percent had obtained long-term-full-time jobs requiring a JD. Median incomes for new graduates aren’t improving much, either. For the class of 2008, it was $72,000; for the class of 2012, it was $61,245.

IBR to the rescue

The vast majority of students borrow six-figure sums to fund their legal education. The federal government backs the loans, which survive bankruptcy. The end result is law schools with no financial skin in a game for which they reap tremendous economic rewards.

IBR is a godsend to many new lawyers who can’t get jobs that pay enough to cover their loans. It permits monthly installments totaling 10 percent of discretionary income (defined as annual income above 150 percent of the poverty level). Outstanding balances are forgiven after 10 years; for private sector workers, it’s 20 years.

Less obvious consequences

IBR has a dark side, too. If a person leaves the program early, total debt will include all accrued interest and principal, often creating a balance larger than the original loans. For those remaining in the program for the requisite 10 or 20 years, forgiven debt becomes taxable income in the year forgiven.

More insidiously for the profession, IBR allows marginal schools to exploit an already dysfunctional market. Such schools are free to ignore the realistic job prospects for their graduates (including JD-required public service positions) as they recruit new students who obtain six-figure loans to pay tuition. When graduates can’t get decent jobs, it’s not the school’s problem. Meanwhile, IBR becomes the underemployed young lawyer’s escape hatch.

The Wall Street Journal reports that graduates are using that hatch in dramatically increasing numbers: “[E]nrollment in the [IBR] plans has surged nearly 40% in just six months, to include at least 1.3 million Americans owing around $72 billion.” Those figures aren’t limited to lawyers, but they undoubtedly include many young graduates from law schools that should have closed long ago.

Bill Henderson probably finds some measure of vindication as a wider audience now frets over a problem that he foresaw years ago. But I know him well enough to believe that for him, like me, four of the least satisfying words in the English language are: “I told you so.”

4 thoughts on “WHO REALLY PAYS FOR LAW STUDENT DEBT?

  1. Consider also the ethical consequences on loading lawyers with debt. Fraud examiners consider high personal debt as a red flag of fraud. http://www.columbiabusinessmonthly.com/View-Article/ArticleID/1220/Red-Flags-of-Occupational-Fraud.aspx

    With legitimate fee income becoming scarcer and scarcer, and student-loan debt loads increasing, watch out for more scandals from the likes of Marc Dreier (http://en.wikipedia.org/wiki/Marc_Dreier) and Scott Rothstein (http://en.wikipedia.org/wiki/Scott_W._Rothstein).

  2. There’s another piece to this picture. IBR prevents a default that would otherwise occur. To qualify for IBR the debtor has to be unable to meet the original promissory note payments in light of his income.

    So far as I am aware every institution that is allowed to take federal student loan funds is under a requirement in the Code of Federal Regulations that its default rate not exceed certain thresholds under penalty of being ineligible to take federal student loan money for 3 years.

    Those thresholds are based off of the a 3-year “cohort default rate,” which is the rate of default in the most recent 3 graduating classes. If a school has either a default rate of 25% or more for 3 years running, or in any one year of the cohort period has a default rate of 40% or more, that school becomes immediately unable to take further student loan funds for 3 years.

    So, who is really getting bailed out by IBR? With the possible exception of the top few law schools in the country, no ABA law school would be below the default rate cut-off where they lose federal student loan support.

    • I have to correct my mistake: the default rate quoted as 25% is actually 30%.

      Given that Congress doesn’t appear to be interested in being honest about its role in price inflation, or the identity of the parties truly bailed-out by IBR, why shouldn’t recent graduates line up and remove themselves from IBR, allowing their loans to default?

      Congress will move slower than the protest movement. I think it would be politically impossible for Congress to move from a back-door-bailout of law schools to a naked and explicit one that has to walk in, if at all, through the front door. Congress will be too slow to move the cohort default rate cut-off, goal posts.

      So, it seems to me recent law grads should line up, get off IBR, and crash the cartel. Such can’t even be chided as an “immoral” voluntary default, since debtors are on IBR because they can’t pay, not because they could pay and choose not to. “That’s immoral,” was the weak cry against those who took voluntary defaults on their under water mortgages, but that move worked out well for most people who did it.

      If Congress, if law schools will not move to stop the excessive debt and over-supply problem for us, we can deal with it ourselves. This is what happens when you create a situation in which the victimized with power have nothing to lose. Debtors still have power – the power of an honest, unmasked default. I think we should use it.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s