The Road to Serfdom -- Part II

How much law school educational debt are law students acquiring?  The following information is courtesy of Matt Leichter, who runs the invaluable site The Law School Tuition Bubble.


(1) Today, law students can get Unsubsidized Stafford Loans at 6.8% interest. As graduate students, law students cannot accumulate more than $138,500 in total Stafford Loans, including undergraduate debt (Edit: There is a $20,500 yearly limit on these loans for law students). After that, if their credit is good, law students are able to borrow Grad PLUS loans at 7.9% interest that cover the remaining tuition balance and living costs (called "total cost of attendance"). Law schools calculate total cost of attendance, and you can find those on their websites or archived in the Official Guide. Interest begins accruing immediately on all these loans but they can be deferred until after graduation. These loans are all ICR/IBR-eligible, and any default on them will be absorbed by the federal government, i.e., taxpayers. They are with very limited exceptions non-dischargeable in bankruptcy.

(2) If law students' credit is not good, then they will have to borrow from private lenders. These loans are not in any way subsidized or guaranteed by the federal government, making their terms harsher and interest rates higher. The 2005 bankruptcy law rendered private student loans non-dischargeable absent a showing of undue hardship.

This means that most law students can borrow the full cost of law school tuition and living expenses from the federal government, in the form of high-interest non-dischargeable loans, no matter how high that cost may be.   With average private law school tuition now just under $40,000 per year, and with three years worth of living expenses, books, and other associated expenses probably totaling around $60,000 for most people, someone who starts law school this week and debt finances a law degree at the typical private law school is going to borrow around $180,000 by the time he or she graduates (Edit: As a commentator points out, somebody who borrows $180,000 over the course of law school is likely to have around $205,000 in debt by the time they graduate, because of accrued interest).  Public school tuition is on average slightly less than half as much, so pure debt financing by state residents of such schools will probably run around $110,000 on average (However the ten most expensive public law schools -- a group which includes all public schools in the USNWR top 20 -- are now on average almost as expensive as the typical private school).


The fine folks at USNWR also provide this handy chart, which allows one to check out both what percentage of graduates of individual law schools incur law school debt, and what that debt averages.  A few notes about these figures:


(1)  Given the absurd annual increases in law school tuition, these numbers must be revised well upward prospectively, when trying to estimate the debt that will be carried by the graduating class of 2014.  This chart covers the graduating class of 2010 -- a class that at my school paid $18,600 in resident tuition in its first year, and averaged about $22,000 in resident tuition over its three years (everybody at my institution gets resident tuition after their first year).  By contrast our new entering class is paying $31,100 in resident tuition (although the administration has, thankfully, pledged not to raise this number further on the first year class until it graduates).


(2)  It would be nice to know the distribution of the debt around these averages.  It's unclear whether the average is a mean (total debt divided by total number of students incurring debt) or a median (half of debt-incurring students above and half below the given figure).  In any case it seems probable that at schools where average law school debt among graduating students with any debt is $100,000 or more (a category that included nearly half of all ABA-accredited law schools last year, and surely included more than half this year), that means large percentages of the class are already graduating with $200,000 or more in law school debt.  (The COI estimates given by many law schools seem ridiculously low to me, although that impression is no doubt in part a reflection of class privilege. I remember how more than 20 years ago a partner at the firm where I worked briefly told me he simply could not understand how people got by on incomes of $200,000 a year. That was real money back in the day. He may, however, have been slightly drunk).


(3) These figures only reflect law school debt: they say nothing about other educational debt, let alone consumer debt.  It would be good to know what the average total unsecured indebtedness of the graduating class of 2011 is.


(4) It's interesting to try to tease out some ethnographic generalizations from the percentages of students who don't have law school debt at particular schools. I'm pretty sure I can guess what it tells us that two out of five SMU law students graduated with no law school debt at all, for instance.  I'm also curious as to how Harvard managed to get away with not reporting this information.


What does it mean to graduate with $150,000 in law school debt, at an average interest rate, to be conservative, of 7%? Amortized over ten years (the traditional period for educational loans), that means making payments every month of $1743 for a decade.  Over 20 years, the figure drops to $1163. (Opting for a 25-year-term, as more and more graduates are doing, only reduces the monthly payment by $66, to $1097, while producing nearly $40,000 more in interest payments).  Note that the (almost completely fictitious) median starting salary of lawyers in the class of 2010 was reported as $63,000 by NALP.  This number, it's safe to say, bears much less relation to reality than the self-descriptions provided by hopeful suitors in personal ads. For one thing,  it includes only graduates working full time who reported a salary.  For reasons I've discussed elsewhere, this guarantees the $63,000 figure is certainly a massive overstatement of the true compensation level of the 2010 graduating class.  But let's indulge for the moment in the fantasy that it isn't.  People making $63K per year pay on average about 26% of their income in federal and state and local taxes. That means their take-home is slightly under four thousand dollars per month.  

Of course it would be next to impossible for people in this position to consider paying off their law school debt via the standard ten-year amortization even making the wildly implausible assumption that they had no other debt of any kind.  Even if one amortizes the debt out to 20 years, this would mean a person in this position who had no other debt -- no undergraduate debt, no credit card debt, no car payment -- would be able to afford a mortgage, using standard debt to income calculations and assuming the person had the liquidity to put ten per cent down, of $511 per month.


Back on planet Earth, what percentage of the graduates of the national law school class of 2010 actually have legal jobs that pay at least $63,000?  Law schools have taken great care to make sure this question remains impossible to answer with any real precision, but the available numbers, poor as they are, suggest the answer is in the rough neighborhood of 10% to 15%.   That may be optimistic.


And for the other 90% -- or at least that increasingly large percentage of the other 90% that has $100,000 and $150,000, and $200,000 in law school loans alone -- there's no way out.  They can barely pay the most modest ordinary bills, let alone the equivalent of an upper middle class family's house payment on top of those. They can't declare bankruptcy, or at least doing so will do them more harm than good.  They can't get a "fresh start."  They are in the equivalent of an abusive marriage, in a country with no divorce and no way to flee to the village on the other side of the valley.  


No one planned for things to turn out this way. No one wanted any of this to happen.  All that is true -- and utterly irrelevant going forward.  The first thing legal academia must do is to begin to understand this world we have created, through inattention and negligence and complacency, rather than, as the old common law lawyers would have put it, by malice aforethought.  Only then can we begin to do our part to change it.