Tag Archives: income-based repayment

THE ONGOING LAW SCHOOL BAILOUT

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Recently, Senators Dick Durbin (D-IL), Jack Reed (D-RI), and Elizabeth Warren (D-MA) introduced the “Protect Student Borrowers Act of 2013.” The bill would allow the Secretary of Education to require that colleges and universities pay a penalty for federal student loans in default. The penalty would increase with the school’s default rate.

Default is too long to wait before creating a better nexus between educators’ incentives and their graduates’ fate. Thousands of recent law graduates are living with the consequences of a system that immunizes schools from financial accountability for their students’ poor employment outcomes. Eighty-five percent of today’s newest lawyers have six-figure law school debt. Only about half of all 2012 graduates found full-time long-term jobs requiring a JD. The most recent Bureau of Labor Statistics employment report indicates that between December 2012 and December 2013, employment in the “all legal services” category actually declined by 1,000 people.

Demand down; supply still growing

As the profession was losing a thousand jobs last year, law schools graduated a record number of new lawyers — 46,000 — and big classes are in the pipeline. Sure, law school applications are down, but acceptance rates have gone way, way up to compensate. Recent BLS estimates suggest an ongoing lawyer glut for years to come. (For a more detailed analysis, take a look at Matt Leichter’s recent article in Am Law Daily.) And in the midst of this disaster, law school tuition keeps increasing. It’s all quite perverse.

Unfortunately, it’s also a predictable consequence of structural incentives. Most university administrators (and their law school deans) run their institutions as businesses. In the current system of financing higher education, that approach produces a myopic focus: maximizing short-term tuition revenues by filling classrooms. Added encouragement comes from U.S. News rankings criteria that, for example, actually reward expenditures regardless of added value or lack thereof. The vast majority of students borrow enormous sums to pay tuition. But — and here’s where educational institutions lack the constraints that they would encounter as true businesses — any later failure to repay those loans never becomes the school’s problem.

Instead, virtually all student loans come with the backing of the federal government. In case of default, the schools remain protected. So far, graduate student default rates have remained below those for colleges and vocational schools, but across the board, all rates are trending higher. (I wonder if low JD default rates are attributable, in part, to lawyers’ better understanding of the procedural steps that can forestall default. Attorneys also grasp the counterproductive futility of defaulting: educational debt survives bankruptcy and forcing the government to pursue a default just adds monetary penalties and collection costs to the tab.)

IBR is no panacea

Income-based tuition repayment plans may become an important potential relief valve to some indebted graduates. But IBR is new and it comes with lots of caveats. For example, during the time that a graduate remains in the program, interest on his or her overall debt continues to accrue. Exiting the system before completing the requisite repayment period (typically 25 years; 10 years for public service jobs) can produce an even greater debt than existed upon graduation.

Those who make it all the way to the end of the repayment period are off the hook for their loans and accrued interest, but debt forgiven through IBR is considered taxable income. If Congress doesn’t fix that problem, the result will be a big tax bill for a person who, by definition of ongoing participation in the IBR program, can’t afford it. Moreover, the forgiven amounts still have to come from the federal treasury at taxpayer expense, so there never was or will be a free lunch – except for the schools that received tuition but thereafter had no financial skin in the game. It has the feel of a law school bailout, doesn’t?

A better way

Maybe this three-step approach would help to restore a functioning market: 1) allow educational loans to become dischargeable in bankruptcy; 2) in the course of such a proceeding, require the bankruptcy court to determine whether educational debt was a significant factor in the debtor’s need for bankruptcy protection; and 3) in those cases where it is such a factor, permit the federal government guarantor to seek recompense from the educational institution whose conduct lies at the heart of the mess. (Requiring need-blind admissions as a prerequisite to participation in the federal loan guaranty program generally might counteract a school’s temptation to bias admissions in favor of those who can afford to pay.)

Most people profess confidence in free markets — some with an evangelistic zeal. If they really want to give the market a chance to work in the student debt setting, they’ll support a serious effort to cure the system’s current failures. Personal educational debt currently exceeds $1.2 trillion — more than all consumer credit card debt combined. Every day, that bubble is growing. Just ask a law student.

A COMMENDABLE (AND COURAGEOUS) COMMENT AWARD

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As the executive director of National Association for Law Placement (NALP) — the organization that sets the rules whereby big law firm employers and their prospective new hires find each other — James Leipold has a tough job. Sometimes, NALP has looked like a victim of regulatory capture. Students’ interests have often taken a back seat to two constituencies that wield far more economic power, namely, law schools and big law firms.

Such power was one reason that NALP initially “back-pedaled” in early 2010, when big firms balked at NALP’s request to provide detailed information about equity partners’ gender and race. At the time, Leipold acknowledged that some firms threatened to withhold all information from the annual NALP employer directory, which “represents an important revenue source for us.”

Another example of big law firm influence over NALP is the evolution of the rules governing employment offers — including the powerlessness of students when a big firm unilaterally rescinds a previously accepted one. But NALP’s shortcomings are topics for another day.

Today’s commendation goes to Leipold because he recently stood up to deans who wanted him to provide prospective law students with a “better message” about the legal job market. That is, they wanted him to lie. Leipold said he was “surprised” at this turn of events, including deans who asked him to describe the job market as “good.” He refused. But his real act of courage was in revealing that some deans were applying such pressure. They should be ashamed. And they should be named.

Nothing new

Many deans have been hyping their schools with misleading employment statistics for a long time. Truth is finally catching up to a lot of them, notably with the ABA’s newly required data. Harsh reality hit with the news that, nine months after graduation, slightly more than half of all 2011 law graduates were able to get full-time long-term jobs requiring bar passage. The recent past has been bad and the current picture is ugly. So some deans have tried to shape perceptions about the future.

Leipold rightly resisted. The employment prospects for law graduates generally are not likely to brighten any time soon. Leipold could have said even more about that: there are still far more law school applicants than places for them; most estimates project that over the next decade, schools will produce twice as many law graduates as the number of legal jobs available for them. Even at the so-called pinnacle of the profession — big law firms — the total number of attorneys has yet to return to pre-recession levels.

The case for names

What will stop this insanity? Unfortunately, the problematic deans are responding to institutional pressures. That’s because law schools have become large cash cows for their universities. The impulse to run a school as a business that maximizes short-term profits is irresistible to them and their superiors. Every incentive they see encourages them to pump-and-dump: pump up demand for law students and dump debt-ridden graduates on a glutted market. Their unemployed graduates become someone else’s problem.

It turns out that the someone else is not just the victimized students themselves. Eventually, the profession itself suffers. Staggering student debt will haunt some graduates forever because bankruptcy won’t discharge it. Income-based repayment programs will help some of them, but as Professor William Henderson observes, taxpayers could wind up paying large portions of those participants’ ultimate obligations when the federal government picks up the tab for residual unpaid debt.

Will anything make these deans stop? The villains are giving all other deans a bad rap. They know who they are. Now, James Leipold does, too. Perhaps it’s time for the rest of us to learn their names. Where all else has failed to alter unfortunate behavior, maybe public humiliation will help. Nothing else seems to be working.

The Most Unfortunate Comment Award to Date

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The words seem so innocuous — “federally guaranteed student loans.” But what do they mean when someone actually defaults and the government has to make good on its guarantee? A recent article in The New York Times provides the answer.

A brief review of the business model

This post is the latest in what became my unintended series on the law school business model. It began with The Wall Street Journal’s misrepresentation in a lead op-ed piece. The Journal claimed that Congress made student loans non-dischargeable in 1976 because of widespread abuse. That is, graduates benefited from government loans and then declared bankruptcy on the eve of lucrative careers to avoid their debt. There’s no delicate way to put this: The WSJ was perpetuating a thirty-five-year-old myth.

Then I considered law schools that offer tuition discounts in the form of merit scholarships. There’s no mystery there: a secretive process of awarding money facilitates an individualized approach to pricing that maximizes tuition revenues while enhancing a school’s U.S. News ranking.

Most recently, I turned to yet another element of the current law school business model: raising the list price of tuition while reserving the flexibility to move lower as needed to attract particular candidates.

Follow the money

Now consider the source of all that tuition money. Some people are able to pay their own way, regardless of the cost. But they’re in the minority. Matt Leichter reports that the 44,000 law graduates in the class of 2010 took on $3.6 billion in debt, up sharply from $3.1 billion only two years earlier. The number is climbing as tuition goes up.

The chances that recent graduates will secure a job requiring a law degree are about 50-50. Although others will get non-legal jobs that pay reasonably well, the ranks of new lawyers with loans they can’t afford to repay is growing.

So what?

Students now have an income-based repayment (IBR) option for federal loans; that may afford some relief. But as Professor William Henderson explains in “The Law School Tuition Bubble,” two problems arise. First, dedicating fifteen percent of income for the requisite twenty-five years of a total IBR plan is akin to a permanent tax on the already low incomes of those lawyers. Forget about saving for retirement or funding their own kids’ higher education.

Second, those IBR participants who make it all the way to the end of the twenty-five years will have their remaining loan balances forgiven. That will add more debt that that the federal treasury will bear — for anyone who worries about such things.

Default

For recent graduates with limited job prospects, IBR is better than nothing. But some will default on their loans, just as their predecessors have. This poses no problem for law schools; they’ve already collected their tuition money and don’t have to return it.

Default poses no problem for lenders, either. That’s because educational debt is not dischargeable in bankruptcy, except in rare cases that satisfy the “undue hardship” requirement.

Moreover, the federal guarantee kicks in for private lenders, at which point the government foots the bill. But that’s not the end of the story. As the Times article explains, the newest growth industry is student loan debt collection. Last year, the government paid more than $1.4 billion to debt collection organizations it hired to track down student defaulters.

A Most Unfortunate Comment

For anyone who doubts that this is unapologetic intergenerational exploitation of the young by the old, consider these comments from Jerry Ashton, a consultant for the debt collection industry and the winner of the most Unfortunate Comment Award to date:

“As I wandered around the crowd of NYU students at their rally protesting student debt at the end of February [2011], I couldn’t believe the accumulated wealth they represented – for our industry. It was lip-smacking.”

Ashton included a photograph of several students to which he added these details: “a girl wearing a t-shirt emblazoned with the fine sum of $90,000, another with $65,000, a third with $20,000 and over there a really attractive $120,000 was printed on another shirt.”

Someday this will all come crashing down. I fear that people like Ashton — and merger/acquisitions specialist Mark Russell, who described student loans as the debt collection industry’s “new oil well” — will make money on that event. too. Shame on them. Shame on all of us.