Unconscionable Debt

April 18th, 2013 / By

Third-year students with federal loans are completing their mandatory exit counseling. That online program shows students how much they have borrowed to finance their education, their current debt (with interest), estimated monthly payments, and other information designed to help them manage their loans. Some students have shown me their print-outs, and the numbers are shocking.

Here is just one example: A single, unmarried student attended a flagship public law school with the median scholarship offered by that school. He had no family support or other assets, so he borrowed to finance his discounted tuition and living expenses. He worked throughout his second and third years of law school, but was only able to obtain low-paid faculty research positions and unpaid internships. Over his three years of law school, he borrowed $123,865.

That amount, I predict, will be common among students graduating from public law schools this spring. It may not yet represent the average at public schools, but I estimate that at least a third of current 3Ls at public schools have borrowed $120,000 or more to finance law school. The average amount borrowed by private school graduates, of course, is already over $124,000. If you doubt these figures and you teach at a law school, you can ask your financial aid office how many of your graduating students have borrowed more than $120,000 to attend law school. The figure will be less than a third at some state schools with very low tuition, but it will be higher than a third at other public schools and most private ones.

But the amount borrowed is just the beginning. What does it mean to borrow $123,865 to finance law school? First, according to the federal counseling program, it means that you currently owe $133,869. About $10,000 of interest has accumulated just during law school. That debt level also means that you are continuing to accrue about $21 of interest a day. Since you’re unlikely to pay down any of your debt before completing the bar exam, another $2,184 of interest will accrue between now and then.

Exit counseling also advises that, if you attempt to repay this loan on the standard ten-year plan, you will owe $1,579 per month. And here’s the kicker: The government program counsels that, using guidelines published by the Consumer Financial Protection Bureau, this student should find a job with a minimum gross income of $236,850 to support those loan repayments! Even the students who obtain those BigLaw jobs won’t gross that amount.

I know (and this student knows) that you can get by on less money than the consumer guidelines suggest. He also knows that there are repayment plans like Income Based Repayment and Pay As You Earn that will tie his loan repayments to his salary. But the numbers generated by this debt counseling program illustrate how outlandish law school debt has become.

Remember that we’re talking here about a scholarship student at a public law school, one who paid about $22,750 per year for tuition and $18,250 (a bit over 150% of the federal poverty level) a year for living expenses. If a student like that needs $236,850 in gross income–or even $100,000 in gross income–to pay off his debt, then law schools are enrolling students in a clear financial trap. We know that incomes like that aren’t available for the vast majority of our graduates. The median pay for all lawyers, including those who have worked 40 or more years, is $112,760 per year. How many lawyers reach that pay level within their first ten or twenty years after graduation, when they are repaying student loans?

How can we possibly maintain access to the legal profession at these prices? How can we provide justice for clients? How can we in good faith enroll students in programs that will leave them financially strapped for years–or dependent upon taxpayer goodwill for reduced payment programs? How can we, as scholars who value public policy, impose those costs on the public?

We can’t. There are four steps that we, as law schools, should pursue aggressively to address this unconscionable situation: (1) Dramatically lower tuition, whatever that takes. (2) Restructure law school so that students can work close to full-time while completing their studies; there’s no other way to cover post-college living expenses for adults who choose not to live with their parents (or don’t have that option). (3) Publicize very clearly how much graduates will earn from average jobs after making average loan payments. (4) Lobby Congress to guarantee reduced payment plans like IBR and PAYE for loans that have already been disbursed, but to repeal those programs for professional students going forward. Those programs were never designed for professional students, and they are coninuing to inflate the cost of professional education. As a policy matter, the money would be better spent on almost any other line in the federal budget.

Meanwhile, the students I’ve talked to can’t spend too much time worrying about their debt: they’re still looking for jobs.

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Obama’s Budget and Student Loans

April 17th, 2013 / By

President Obama’s 2014 budget has two proposals that could affect law students who rely on federal loans. First, the President has proposed eliminating taxes on loan debts that are forgiven. Second, the proposed budget would change interest rates on student loans. Here’s more detail about both proposals, as well as an important caveat about the politics of educational loans and professional students.

Taxation of Forgiven Debt

The Department of Education offers several programs that allow law graduates to reduce their monthly debt payments. Both Income Based Repayment (IBR) and Pay as You Earn (PAYE) link repayment amounts to salary, capping payments to a percentage of the graduate’s discretionary income. The programs also forgive any remaining debt after 10 years (for graduates working in public service), 20 years (under PAYE), or 25 years (under IBR). For graduates falling in the first category, those working in public service, the value of the forgiven debt is not taxable. But for graduates in either of the other two categories, that value is taxable.

Taxation of the forgiven debt makes IBR and PAYE less attractive to graduates–especially those, like law students, who may still owe substantial amounts when their debt is forgiven. These graduates face the grim prospect of concluding one series of loan repayments only to begin a second series of structured payments to the IRS.

Obama’s proposed budget would eliminate that burdensome prospect, insulating all forgiven student debt from taxation. If adopted, the change could relieve some anxiety about student loan payments, although twenty years of repayment is still a daunting prospect.

Interest Rates

Law students qualify for two types of federal loans. First, they may borrow up to $20,500 per year in unsubsidized Stafford loans; those loans currently carry a 6.8% interest rate. Second, law students may borrow additional sums as Grad PLUS loans; the latter loans carry a 7.9% interest rate.

Both rates are quite high compared to other interest rates. The interest rate on 10-year Treasury bills has been depressed for years; it was just 1.75% earlier this week. Fifteen-year fixed-rate mortgages currently impose just 2.55% interest.

Higher rates for student loans partly reflect their increased risk; there is no collateral for an educational loan. The rates, however, also reflect the fact that Congress fixes these rates by statute rather than allowing them to shift with changes in the T-bill rate.

The President’s proposed budget would adjust interest rates on student loans by pegging them to the T-bill rate. Unsubsidized Stafford loans would charge the T-bill interest rate plus 2.93 percentage points. Grad PLUS loans would charge the T-bill rate plus 3.93 percentage points.

At current T-bill rates, this proposal would lower interest rates for law students. Interest on the unsubsidized Stafford loan would fall from 6.8% to 4.68%; interest on the Grad PLUS loan would decline from 7.9% to 5.68%. Those are both significant cuts.

As T-bill rates rise, however, so will interest rates for students. The long-term average interest rate on 10-year Treasury bills is 6.61%. At those rates, law students would pay 9.54% interest on the first $20,500 they borrowed and 10.54% on additional amounts. And that’s just the average T-bill rate; rates could move even higher.

Note that, under the Obama proposal, the interest rate for any loan would be fixed at the time of disbursal; these would not be adjustable rate loans. So, if the proposal passes, students currently enrolled in school will obtain lower-interest loans than the ones currently available; so will future students as long as T-bill rates remain low. Interest rates will rise only for students who enroll and borrow in the future, assuming that T-bill rates return to historical averages.

Politics and Professional Students

The changes outlined above are just proposals; Congress may not accept them. Both changes will cost the federal government money, at least in the short term, and there’s not a lot of money lying around on Capitol Hill. It’s too early to celebrate possible relief for students who depend on educational loans.

Professional students, in fact, face a special risk in the political debate over these proposals. Congress may decide that the President’s proposals are necessary changes for college students, but not for professional students. Professional school graduates, after all, are supposed to earn high enough salaries to repay their loans and profit handily from their educational investment; that’s what law schools and other professional schools have been telling prospective students. Why, then, should Congress spend limited funds to assist professional school graduates?

Congress, in fact, might decide to do what it has done in the past: Help college students by cutting benefits for professional ones. In the 2011 Budget Control Act, Congress eliminated subsidized loans for graduate/professional students and used that savings to improve funding for undergraduates. The upcoming debate raises the same risk: Will Congress accept the President’s proposal, which would offer benefits to current law students? Or will it worsen conditions for graduate and professional students in order to ease debt loads for undergraduates?

Hat tip to TaxProf Blog for noting these important proposals.

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Deluged by Debt

March 13th, 2013 / By

As Brian Tamanaha writes at Balkinization, law school debt levels continue their relentless climb. The latest figures from US News show that, among 2012 graduates, the average amount borrowed for law school exceeded $150,000 at six law schools. Only one of those schools (Northwestern) ranks among the top fifteen law schools; one other (American) ranks 56th. The other four (Thomas Jefferson, California Western, Phoenix, and New York Law School) lie in the unranked fourth tier.

As Brian’s post shows, the job outcomes at five of these schools (all but Northwestern) are dismal. Less than 40% of the students at these schools obtained full-time jobs that required bar admission and would last at least one year. Even at Northwestern, only 77% of the class met that mark. How can all of the graduates with part-time, temporary, or non-lawyering jobs possibly pay off more than $150,000 in debt–plus all of the accrued interest on that debt? What calculations can justify attending most law schools at that debt-to-outcome ratio?

The problem, of course, reaches far beyond these six schools. They are at the top of the debt ladder, but most other law schools are close behind. 123 law schools, well over half of the 193 listed schools, reported average amounts borrowed that exceeded $100,000. Even Irvine law school’s first graduates, who paid no tuition for their three years of law school, reported debt. More than two-thirds (68%) of Irvine’s initial class incurred debt, borrowing an average of $49,602 for their “free” law school ride. Remarkably, that figure gave Irvine the second lowest average debt load among the 193 law schools.

When students borrow almost $50,000 to attend law school, even without paying tuition, we have to re-think the way we structure legal education.

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