Where can an investor earn a 7.9 percent guaranteed annual rate of return? Not 30-year United States Treasury bonds; they pay around 3 percent. Not other countries’ sovereign debt; some of the most economically fragile nations in the Euro zone sell 10-year bonds bearing interest rates of less than 6 percent—and it’s certainly not guaranteed.

Try your kids. The interest rate on subsidized federal student loans is currently 3.4 percent, but it will jump to 6.8 percent on July 1 and covers just a slice of the market anyway. For undergraduates who don’t qualify for the subsidy, it’s already 6.8 percent. For graduate students (including law students), the rate is 7.9 percent.

Big returns with no risk

The program is a moneymaker for the government. According to a February 2013 Congressional Budget Office report, the federal government makes about 36 cents in revenue for every student loan dollar it puts out. Graduate (and law) student loans are especially lucrative — 55 cents on the dollar.

These eye-popping returns are especially juicy because the loans have virtually no risk of non-repayment. If a student defaults, the feds retain a collection agency to pursue the money (total cost of all federally retained debt collectors last year: more than $1 billion). Eventually, they’ll get it because such loans are in that small category of debts that survive a personal bankruptcy filing, along with alimony, child support, certain fines, and taxes. An exception for debtors who can demonstrate “undue hardship” rarely applies.

Bipartisan blame

How did this happen? Good intentions went awry. In the 1960s, Congress followed economist Milton Friedman’s earlier recommendation that the government provide direct loans for higher education. The underlying principle still resonates: a society’s investment in human capital pays long run dividends. The corollary is that those who benefit personally should repay loans for the education that gives them a better life.

Unfortunately, as that better life has become more elusive for so many, the student loan program has converted struggling young people into profit centers for the government. In the trillion-dollar world of educational debt, students entering the professions — including law — are among the most unfortunate victims, in part because both their tuition and their loan interest rates are the highest.

The special plight of young lawyers

Lawyers generate little sympathy from the rest of the population. But 85 percent of today’s law graduates have educational loans exceeding $100,000. The grim market for new attorneys means that only about half of them are finding full-time long-term employment requiring a legal degree. Even fewer earn enough to repay their staggering loans. (Before blaming these young people for their plights, take a close look at the behavior of many law school deans who misled them into the profession with deceptive information about post-graduate employment prospects. Meaningful transparency on that topic is a recent phenomenon.)

As the July 1 deadline nears, proposals that seem to be gaining traction in Washington would preserve all above-market rates and the student loan program’s profitability. They also suggest that we’ve learned little from the subprime mortgage debacle. The House recently passed Rep. John Kline’s (R-MN) bill, resetting the graduate student rate at 4.5 percent above the 10-year Treasury, subject to a 10.5 percent cap.

In the unlikely event that the House bill gets past the Senate, President Obama has threatened to veto it. However, he is willing to have students borrow at a lower variable rate that’s still significantly higher than the 10-year Treasury, but with no cap (although once set, the rate would remain for the life of the loan). Combining the floating rate elements of the House proposal with the president’s plan could produce a truly disastrous compromise. The president also wants income-based repayment and debt forgiveness. Because Republicans with blocking power oppose those partial remedies on the grounds that it will encourage students to take on bigger debt, those proposals seem doomed.

Recently, Sen. Elizabeth Warren (D-MA) offered her first bill. For a year, it would cut the student loan rate to 0.75 percent—the same rate that big banks get on their borrowing from the Fed. Unfortunately, a prospective one-year solution is no solution at all. Sen. Kirsten Gillibrand has the best current plan: set a 4 percent rate for all student loans and allow graduates with existing debt to refinance at that rate. But that won’t happen, either.

Guiding principles

As policymakers grapple with the growing educational debt bubble, they might consider two governing principles.

First, those running institutions of higher education should be held accountable financially for their graduates’ poor employment outcomes. Otherwise, federal dollars will continue to worsen the situation as administrators focus myopically on filling classroom seats to maximize tuition revenues. Allowing the discharge of educational debt in bankruptcy and permitting the federal government to seek recourse from schools that impoverish their graduates with tuition loans might alter some schools’ worst behavior.

A second principle should be even easier to implement. No mechanism for funding higher education should convert our kids into profit centers.


At a recent debate, New York’s U. S. Senate candidate Joseph J. DioGuardi repeated his charge that Democratic incumbent Kirsten E. Gillibrand spent her early professional career at a prestigious New York City law firm (Davis, Polk & Wardwell) where she represented the world’s largest cigarette company. Gillibrand countered that DioGuardi cast pro-tobacco votes as a congressman. She also explained that, as a young lawyer, she had no choice in her assigned cases.  (

Gillibrand’s response was intriguing for two reasons. First, she fought tobacco taint with tobacco taint, rather than citing the foundational principle of our adversary system: However distasteful it sometimes seems, everyone is entitled to representation. Second, her law firm supposedly had a policy that allowed attorneys to decline work for its tobacco client. ( If she didn’t avail herself of the firm’s policy, what does that mean?

Maybe nothing. Although she didn’t mention the principle that everyone deserves a lawyer, it still applies. That’s why even Liz Cheney’s most conservative colleagues with law degrees lambasted her for publicly listing current Department of Justice attorneys who represented Gitmo detainees pro bono — as if there was something wrong with providing a defense to those individuals.

To be sure, Cheney has the personal freedom to decline such representations. My former law school professor, Alan Dershowitz, defended notorious criminal defendants, but as he told my fellow classmates more than 30 years ago, “Everyone has a right to representation, but no one has a right to me.”

Every lawyer has that power to exercise a final veto. If used, someone else will certainly take up the cause. But Gillbrand’s defensive response concerning her tobacco client suggests at least a retrospective queasiness with her earlier work. If the firm gave her the right to say no, what’s the significance of her failure to do so?

Every young associate in a big firm could answer that question. Regardless of a firms’s official position, practical considerations define the limits of an associate’s willingness to say no.

Large clients’ biggest and often unpopular problems have become central to Biglaw profits. The prevailing law firm business model has reduced the number of available equity partnership slots and concentrated internal power in the relatively few who control clients and billings. For an associate, it’s only natural that a firm’s official “freedom to choose” policy would sometimes yield to the pressures accompanying a request from a senior partner who can single-handedly make or break a subordinate’s career. Partners themselves sometimes confront analogous difficulties when clients push uncomfortably close to the outer edges of what their lawyers deem permissible.

Some consequences are subtle. The resulting erosion of individual attorney autonomy has probably contributed to growing career dissatisfaction, especially in large firms where unhappiness is greatest. In today’s tight labor markets, young lawyers desperately need their jobs to repay enormous student debt and sustain themselves. Few would risk unemployment to assuage their consciences or to avoid an abusive superior. In fact, most don’t allow such rebellious thoughts to enter their heads, but maybe they should.

One of my adult children recently encountered a high school classmate who is now working in a big firm after graduating from a top law school. While contemplating the many challenges confronting the next generation, consider that young lawyer’s lament and career plan:

“I’m working too hard for clients I don’t like pursuing I causes I can’t stand and making the world worse. But I have to do it long enough to repay student loans and get experience that I can use to do something worthwhile with my law degree.”

It may not be that simple. Those wrestling with situations that burden them with genuine moral havoc — whatever its nature or origins — might be well advised to extricate themselves sooner rather than later. Life’s decisions tend to be cumulative and the consequences of earlier choices that seem inconsequential at the time can endure far beyond their originally anticipated life expectancies. Just ask Kirsten Gillibrand.