Thursday, August 25, 2011

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.



111 comments:

  1. Here's a question that I'll rehash (I asked it in a prior thread). What will the bursting of the student loan bubble would look like? Everyone acknowledges that this can't go on forever (although it could go on for decades), so how is that machine going to break down?

    For example, in the real estate bubble it looked like this: (a) people could not make their mortgage payments, (b) banks thus had to write down the value of these loans. Around this time, some in the market foresaw the problem and started buying credit default swaps on these loans (even though it seemed crazy to bet against real estate in 2005). (c) the loan write downs put the commercial banks (Citi, JP Morgan etc.) on the verge of collapse, meanwhile the payments that had to be made on the credit default swaps put AIG/Goldman Sachs on the verge of collapse.

    Perhaps the student loan bubble bursting would look like this: (a) Tea partiers prevent any further increase in the national debt. (b) not being able to take on more debt, the president cuts into social security and military payments. He also completely ends IBR and demands that graduates pay at least the interest on their loans, (c) many are unable to pay and have their credit ruined, and so a number of graduates declare bankruptcy thus wiping out their credit card debt too which again causes a vicious cycle of write downs and puts pressure on the banks, (d) the government can't afford to make any new loans to incoming students, which causes a collapse in enrollment and a disaster for many schools.

    Or perhaps something like this: Republicans gain control, and circulate a report showing the shockingly poor quality of student loans. A bunch of rhetoric gets thrown in there too, perhaps something like "why are taxpayers funding 4 and 3 year vacations for spoiled middle class kids?" BAM, government student loans are cut and capped at community college tuition levels. "We owe you a sufficient education, not a rolls royce education." This leads to a crash in enrollment forcing many expensive and low ranked private schools to shutter their doors.

    Mr. Leichter, have you done any investigation into what the collapse might look like?

    Of course there might not be a collapse at all. It might be like social security, a very expensive entitlement that one can only hope to whittle away slowly (like Greenspan did in the early 80s when he raised the retirement age by a few years).

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  2. How does law school compare to other "professional" graduate schools? Can MBAs, archetiects or engineers expect a better return on their educational investment? I am not trying to be snarky, I am genuinely curious as to whether this is just the tip of the iceberg.

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  3. I think the thing to do now is to propose a real solution to the problem. My proposal, which I have put very little thought to, would be to (a.) get rid of subsidized loans for law school, and (b.) allow all future private loans to be dischargeable in bankruptcy. That way, private loan companies would think twice about lending to people, and only agree to do so under the most responsible terms. You also take care of the problem of having to explain it to the taxpayers, since they will no longer be subsidized. This will have the market effect of keeping people from going to law school unless they can afford to do so, or of course really want to do so. This will also cure the problem of not having enough lawyer jobs.

    This is really the best solution in the eyes of the legal professors' selfish interests as well, since the current state of the legal profession is continuing to be at risk of deregulation (taking off a year of law school, etc.) in order to lower costs. Deregulation would cost law schools dearly in lost tuition. On the other hand, having people becoming lawyers with less extreme debt loads will, in turn, keep legal fees down, which will quell the rallying cry for deregulation.

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  4. 12:11, anecdotally I've heard it's bad in all areas of education. The greatest generation gave the boomers jobs and opportunity. The boomers gave their kids debt, debt, and more debt.

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  5. I know a doctor couple who, although they have better career prospects than lawyers, are in $500,000 of combined debt. They'll probably make at least $300,000 combined per year once they finish their residency, but still that's a lot of debt.

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  6. To 12:13:

    I think the "bursting" of the student loan bubble will be in the form of deregulation, either in lowering the length of time to go to law school or letting people sit for the bar exam without going to law school, et cetera. This would be disasterous to the current legal profession.

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  7. I am moving to Canada in a few months due to the student loans in the US, which I cannot pay and can no longer defer, as well as because of a job market that provides no job with income sufficient to pay back those loans. Having completed my undgrad degree and law school, my loans now total over 200K. With law school tuition roughly $43,000/year on average and living expenses(rent) being $10,000/year, law school easily accounts for most of my loan balance. After having taken the bar and applied to over 10,000 jobs(yes, 10,000) within the past year, I have only been able to find temporary work that pays $15-20/hr, which in no way covers my loan payments, which alone are over $1600/month. Seriously, the MATH IS NOT THERE. I work two jobs now and can't make it here. All of this nonsense about the American Dream and social mobility and the value of education is GARBAGE.

    Some people have even suggested that I should have worked my way through school or saved up the money for law school!!! HA!! If I had a job that allowed me to save up over 200K for law school, don't you think that I would have stayed in THAT job.


    Others have suggested that I should have anticipated the risks. Well, no one tells you that the law schools fraudulently manipulate the numbers they release to US News and World Report. Having now worked in the admissions office at Georgetown Law School, I can tell you that the school cherry picks the data to only use the high-paying individuals....and then actually has the nerve to hire people part-time in a temp position for 4 weeks so that they can count those people as employed for the purpose of the survey. Further still, they count people working in fast food and who have no legal jobs as employed for the purpose of the survey. THAT IS FRAUD. Basically, I along with many people were sold on lies and dishonest stats, which we used as the basis for our investment/risk. This issue deserves a wikileaks-styled espose in itself.


    Move to Canada where the US has NO JURISDICTION over your loans. Start life anew and watch the US economy collapse under the weight of its own lies. Enjoy this life; this is the only one you have. I chose to follow the rules and believe the popular mythology about education debt being good debt. Rather than squander year and year....month after month....trying to find solace in entertainment, books, music, friends, family and that old adage "things will work out"....wake up and get the hell out while you can. You owe it to yourself as a HUMAN to have no allegience to anything or anyone that would suppress your humanity, making you a slave to an orchestrated, bureaucratic fraud that is so large that the contemplation of it likely makes even my short message here seem exaggerated.


    Don't trick yourself into saying this is all YOU. You know what you are feeling, and your brain has already made you keenly aware of what is not working. The powers-that-be have already fooled you once. Don't go on fooling yourself.


    WAKE UP and get out.


    Yes, it is that bad. (Remember, DO NOT FOOL YOURSELF...USE YOUR BRAIN and YOUR SENSES)


    It is time to follow your own path rather than follow the misguided directions of others that served only to line the pockets of your schools and the bankers, who now make interest on the money that was loaned out.

    You can punish them by listening to yourself.

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  8. "Move to Canada where the US has NO JURISDICTION over your loans."

    Really? Good to know if it's true although I doubt it could be that easy.

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  9. It is that easy. I already have a large group of ex-pat friends, who have done precisely that within the past 2 years. Like it or not, this system is going to collapse. The bottom-line is that the government and lenders can't make people pay for loans, when here is no income sufficient to maintain the payments. Either way, the lenders will not get their money, and I look forward to hastening the collapse of this system.

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  10. Remember the USA was built by immigrants who, when the times became difficult, ran and started over. Since Queen Victoria, no western country will enforce a civil debt without a statute of limitations or without the ability to discharge and start afresh.
    Flee or revolt.

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  11. @Anonymous at 12:11 PM

    "Can MBAs, archetiects or engineers expect a better return on their educational investment?"

    Engineers can. They only require a bachelors. I got mine at roughly 10K a year in tuition at a state school a few years ago. I had no debt because I found engineering internships that paid $16-18/hour. Started as a patent agent which paid well and I am going to law school after work. Frankly I learn a lot more about patent law in 3 months of work then I have learned in 3 years of law school.

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  12. ENJORLRAS:
    Do you hear the people sing?
    Singing the song of angry men?
    It is the music of a people who will not be slaves again.
    When the beating of your heart echoes the beating of the drums,
    there is a life about to start when tomorrow comes.

    COMBEFERRE:
    Will you join in our crusade? Who will be strong and stand with me?
    Beyond the barricade, is there a world you long to see?

    COURFEYRAC:
    Then join in the fight that will give you the right to be free.

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  13. I am conflicted over the IBR cop out. I don't like to see students with crushing debt the rest of their lives. However, I and other taxpayers should not be forced to face the consequences of other people's poor decisions (whether it be the college or students). We really need to cap the amount of money lent to college students. Seriously you should be spending more then 80K on education via govt loans.

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  14. Not to split hairs, but isn't the repayment period 25 years? Also, I know with my loans I received a 2.5% interest reduction for signing up for automatic payments although I'm not sure if this benefit is still being offered?

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  15. "No one planned for things to turn out this way. No one wanted any of this to happen. "

    I can think of a whole slew of people whose interest lay in "this' happening. Same difference.

    "However, I and other taxpayers should not be forced to face the consequences of other people's poor decisions (whether it be the college or students)."

    Yea I know, let's just get more bank bailouts while not replacing executives who perpetuated real estate fraud and midwifed this crisis.

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  16. Just thinking out loud -- can't a creditor sue you in Canada? Two hundred thousand dollars are worth some collection effort.

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  17. LawProf,

    Just to clarify, law students can only borrow up to $20,500 in Unsubsidized Stafford Loans (thanks to the debt ceiling bill). The aggregate limit of undergraduate debt and $20,500 graduate debt is $138,500. For example, if a law student has $130,000 of undergraduate debt in Stafford Loans, he or she will only be able to borrow $8,500 in Unsubsidized Stafford Loans while in law school. Other financing will be necessary.

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  18. LSTB, is that $20,500 TOTAL in USL money, or per year of law school? If it's the former then pretty much all the money to go to law school is going to have to be borrowed at 7.9% in PLUS loans (assuming the student has good credit and can do that).

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  19. The $20,500 is total USL money, no more than $8,500 per year(For readers: 1L: $8,500; 2L: $8,500; 3L: $3,500). Yes, the bulk of the remaining tuition will come from Grad PLUS loans in most cases.

    I forgot, thanks for the link and kind words!

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  20. Re: other professional degrees.

    The situation is much the same for students pursuing the MLIS, the degree required for professional librarians. The situation is much the same, though on a much, much smaller scale. The job market for librarians is the worst it's been in 30+ years; library schools are cranking out more grads than ever before; plenty of students attend schools that cost $30k/year or more to obtain this degree and graduate with $60-80k in debt, and have you ever heard of a rich librarian? No. Library schools pull much of the same tricks that law schools do, in regards to fluffing up or outright obfuscating job numbers. I have 10+ years of library experience and finished my MLIS this spring. I live in a university town, and attended library school here, so the surrounding area is flooded with MLIS grads. I've worked with people who've had their MLIS for more than two years now and are unable to find anything more than part-time work with no benefits.

    I've been keeping up with this blog and others because I just so happen to work as staff at a law library. I've been interested in going to law school but, with the situation I've faced with my MLIS and the VERY SMALL debt I have (debt I still struggle to pay), I've been scared off. BTW, I make $12/hr at the law library I work at. While the fat cat deans and administrators pull in over $150k. The dean of my school makes over $300k. It is sick and I feel for you law grads.

    I'm in my late 20s and our generation has been sold a bunch of lies about education and jobs, and we're just supposed to suck it up and be cool about it. I'm glad some of us are finally getting steamed about it and exposing the baby boomer generation for the frauds they engineered. During the 2008 presidential campaign, I remember reading about how Joe Biden "worked his way through law school" as a janitor. Do you guys know any janitors these days who make $60k/year? I don't. That's the difference between their generation and our's.

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  21. http://www.finaid.org/loans/studentloan.phtml

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  22. sorry, I was a little quick on the trigger:

    20500 yearly limit, based on that site.

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  23. Let's see if Leiter, Kerr, or Althouse have anything to say about these numbers.

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  24. This is where it starts to get scary, and the Executives, or in this case professors, realize that the company is a fiction fueled by cheap debt.

    I'd short the crap out of SLABs if they'd tranche them.

    Going. to. Zero.

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  25. @ LibrarianSue -- If you're really interested in law, I wouldn't write it off before taking the LSAT. If you score in the top two percentiles on the LSAT and have excellent undergrad and grad school grades, then you have a good shot at getting into one of the top half-dozen law schools. Going to one of those schools is still a good career move if law is what you want to do and your alternatives aren't great.

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  26. "@ LibrarianSue -- If you're really interested in law, I wouldn't write it off before taking the LSAT. If you score in the top two percentiles on the LSAT and have excellent undergrad and grad school grades, then you have a good shot at getting into one of the top half-dozen law schools. Going to one of those schools is still a good career move if law is what you want to do and your alternatives aren't great."

    Palm, meet forehead.

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  27. 1:31, William Henderson of Indiana supposedly once responded to the accusation that his schools creates indentured servants by saying, “What you don’t understand is that most of those students come from wealthy families, so they aren’t taking on a bunch of debt for the degree.”

    http://thirdtierreality.blogspot.com/2011/04/pig-in-sheeps-clothing-indiana.html

    (I'm not that blogger by the way. I remembered the quote and googled it.)

    Law professors are probably completely clueless about debt.

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  28. Palm, meet forehead.

    Why?

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  29. "Why?"

    Oh, nothing.

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  30. @1:37, Been there, done that. I'm one of those people who doesn't do well on those types of tests, and my practice LSAT scores indicate I'm nowhere near the top 2%. I spent a year studying for it. The frustration from that combined with fear of the debt has pretty much changed my mind. Besides, law isn't what I want to do- if anything I'd get a JD to be a bonafide "law librarian," but again, those jobs are even fewer and further inbetween. Working at a law school as extremely low-paid staff and reading these blogs leaves a really bad taste in my mouth about the idea of ever working long-term for another law school. I don't want to be part of the machine that's killing my generation.

    @ 1:40, I'm right there with you.

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  31. Actually, and unfortunately, lawprof has significantly understated the debt most graduates must repay upon graduation.

    For one, interest begins accruing the moment funds are dispersed to the student. So taking out $60,000 dollars of loans with an average interest rate of 7% to pay for your 1L year will have generated $12,600 dollars of interest.

    Second, once repayment begins, the accrued interest is added onto the amount originally borrowed. So instead of $60,000 at 7% interest, the $12,600 is added to the principal, and now you are paying 7% interest on $72,600.

    Similarly, for the $60,000 you take out your second year, you will end up owing an additional $8,400 dollars of interest, so the cost of the second year is really $68,400. The third year will cost $64,200.

    Therefore, upon repayment a law student who borrows $60,000 each year at 7% interest will have an outstanding balance of $205,200. That means your monthly payment is $2382.55 per month over 10 years. Note that this is significantly higher than the $1743 payment.

    Lastly, this estimate does not include any sort of bar stipend or expenses for taking the bar and waiting for results. It assumes repayment begins in August after the 3L year, despite the fact that repayment usually begins 6-9 months after graduation, or November after the end of 3L year.

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  32. So you meant to say:
    "For one, interest begins accruing the moment funds are dispersed to the student. So taking out $60,000 dollars of loans with an average interest rate of 7% to pay for your 1L year will have generated $12,600 dollars of interest"...at the time repayment begins at the conclusion of law school.

    makes sense because most law graduates I know couldn't make payments for a year or two after getting their bar results and had upwards of 250k in loans to repay.

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  33. "That means your monthly payment is $2382.55 per month over 10 years. Note that this is significantly higher than the $1743 payment."

    And . . . boom goes the dynamite.

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  34. Making law school loans unsubsidized and dischargeable would not solve the problem, unless you think that effectively eliminating law school loans across the board would solve the problem. The only thing that really solves this problem is managing the cost of law school as a whole.

    I graduated in the mid-1990s with about $35K in law school loans. That was a reasonable amount of debt to incur; I could have taken on more.

    Today, I don't think anyone should be graduating with more than $75K-$100K in debt. That number -- call it the maximum fair debt burden -- ought to be the starting point for these discussions.

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  35. I was using the $150K debt figure as an illustration, since that's probably a good rough guess regarding what the average debt will be for students currently enrolling in law school by the time they graduate (at least for private schools).

    Good point about interest accruing though -- I'll edit the post to reflect it.

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  36. One other bit of advice for law students is to live at home. Don't be this person:

    http://temporaryattorney.blogspot.com/2007/05/imelda-marcos-law-students.html

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  37. Isn't the repayment period 25 years when you have over $50K in loans?

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  38. Unless you opt for a longer period of repayment, the default is usually 10 years (this may depend on the lender).

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  39. Right, but you're allowed to have 25. It's still a bad situation, but at least it presents realistic numbers.
    Also, please account for interest rate incentives from signing up for electronic payments. This may not be offered anymore at schools that don't have preferred lenders.

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  40. The period is infinite with IBR. What is your point? And there is no interest discount with the government loans.

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  41. 2:39, stretching the loan to 25 years only drops the monthly payment $66, from $1163 to $1097, and you pay many thousands of dollars more in extra interest for that benefit.

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  42. LawProf, I apologize, Anon 1:31 is right, and I misread the government's website. Law students can borrow $20,500 per year in Unsubsidized Stafford Loans, which is a lot better than loading up on Grad PLUS loans.

    For other readers who may be wondering: the government's site has not been updated to include the changes made in section 502 of the Budget Control Act Amendment of 2011 (aka the debt ceiling bill), so ignore the "$8,500" in parenthesis.

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  43. Lawprof - I wasn't trying to suggest it changes much, but I think it presents a stronger argument when you use the loan terms people will actually have.

    2:50 - Did the no discount on interest change in the last few years? I graduated in 2009 and my loans dropped 2.5% by using online payments.

    2:39

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  44. I truly believe IBR will be the default payment plan for all grad/professional students within 2-3 years. IBR is going to be improved in 2014 to no more than 10% of income above poverty level and the remainder will be discharged in 20 years. At these terms it makes sense for the vast majority of people in these programs to enroll in IBR. Example:

    Grad takes on a modest $150,000 and starts at $100,000 salary with raises equal to inflation

    Loan Forgiveness: 20 years
    Total Unpaid Interest: $7,223.05
    Balance Write-off: $111,829.09
    Total Forgiveness: $119,052.13

    Run the numbers for yourself at http://www.finaid.org/calculators/ibr10.phtml

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  45. Is it possible that, if IBR is "too good," it will prevent the law school bubble from deflating?

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  46. I doubt they'll leave it so wide open that someone making $100K can use IBR. That would be a scam on taxpayers. Someone making $100K should be able to pay off $150K in loans in 6 years.

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  47. @3:30 p.m.:

    No, but it will burst in the hands of the federal taxpayer as well as the law students who have yet to receive their forgiveness and/or discharge.

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  48. Don't forget that carrying around this type of debt for a decade or more, with only bigger debt as a result,

    will drive anyone flippin' nuts.

    Depression, anxiety, despair, suicidal thoughts, hopelessness, helplessness, anger, resentment, dark and gloomy corners of the mind within which to venture, sarcasm, bitterness, bile, hatred, miserableness, a sense of futility, a sense of no future, a sense of no meaning anywhere and everywhere.

    Debt is a curse, and an indication of a society that is sick to the core.

    A savage society that has allowed the higher institutions of learning to be corrupted.

    And when that corrruption; that rot; and that decay eats into the legal profession....

    well...we all know about the trouble that River City had.

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  49. IBR, while fantastic at preventing default short term, leaves more questions than answers. The combo of no contractual right to remain on it plus renewal requirements and a vague statute, the whole thing is eerily similar to HAMP. And that worked so great....

    No more bandaids. Regulators at a minum need to at a minimum clear up the rules and Congress needs to exempt the forgivent amount from income tax. There also should be a much higher limit on loan deductions than 3000. What a joke. I mean the whole system is gonna blow up before 25 years anyway so let's at least give kids hope hope.

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  50. LawProf,
    I distinctly remember that at the mandatory loan exit counseling for the class of 2010 at my school, the rep from the loan servicer said that our median debt was something like $78,500 (people protested that they had much more.) The USNWR says my school’s debt average is about $118,000, so based on these two figures I’d say that the $118,000 figure is probably the mean . . . but I only have 30k in debt (and I loved law school), so I have absolutely nothing to complain about.

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  51. Can this be an option? Suppose a lawyer with lots of student loans has good enough credit to be able to transfer the student loans to credit cards. Then the lawyer waits three years or so and files for bankruptcy. The three year wait should avoid a claim of preference payments. My understanding of federal bankruptcy law (limited as it is) is that the state cannot discriminate against you, ie, take away your license, because you filed bankruptcy.

    Feasible?? I only bring this up because I am doubtful there will be any bailout on this. Rather than being too big to fail, I am afraid us indebted lawyers are too little to be helped.

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  52. You cannot make Grad PLUS or Stafford payments using a credit card.

    Private loans may be different.

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  53. I agree. The three thousand dollar limit on student loan interest deductions is rediculous. Particularly annoying is that for my wife and I it's not doubled since we file jointly, nope, still limited to $3,000.00. But we must get rid of the estate tax!! That is a nationality priority. This country is at war with the middle class. F**ken vermin all of em.

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  54. "(and I loved law school), so I have absolutely nothing to complain about."

    Yes but the rest of us sitting around you certainly did, eager beaver.

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  55. I can get the cash paid to me by the card company, hell, they send me blank checks all the time, and then pay the student loans out of my own account.

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  56. I'm the same commentor as at @3:51, just wanted to make a correction: the USNWR debt average for my school (a T4) is just over $132,000.

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  57. "Someone making $100K should be able to pay off $150K in loans in 6 years."

    What are you smoking? I want some.

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  58. An indebted former law student has access to over a hundred grand of credit?

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  59. "I'm the same commentor as at @3:51, just wanted to make a correction: the USNWR debt average for my school (a T4) is just over $132,000"

    So do tell us how you managed to get out with only $30k in debt.

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  60. Exactly how much cash do you think you'll be getting from your credit card?

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  61. @ 4:04 "I can get the cash paid to me by the card company, hell, they send me blank checks all the time, and then pay the student loans out of my own account."

    1. You will pay an immediate interest rate of at least 18% (most likely higher) for a cash advance.

    That means you would be swapping the 7-8.5% rate of a student loan with an 18-25% interest rate on your cash advance.

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  62. Also, I'm not sure, but I recall reading somewhere that actually a court will look through that and then basically call your credit card "student loans" which you won't be able to discharge. In other words, I'm not so sure that "student loans" necessarily means loans within a particular student lending program or private lender categorization. I think it means more along the lines of any money borrowed to pay for education. Could be wrong, but I suppose that if they won't accept a credit card for payment, then there's no way that's going to happen. Cash advances deposited into a bank account and then paid out, I guess, would be the only way you could swing it, but, again, I'm not sure that won't get found out.

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  63. "That means you would be swapping the 7-8.5% rate of a student loan with an 18-25% interest rate on your cash advance."

    Yes but his intention is to file bankruptcy on all of it.

    "So do tell us how you managed to get out with only $30k in debt."

    He went to a T4 but probably could have gone to a T2 so he received a scholarship. Sounds like what more of you should have done.

    /here to answer all your questions.

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  64. You just have to be able to service the debt for two or three years and then let it all come crashing down. Then file bankruptcy. Let's just say this particular law student has done a good job of generating a good credit history and somehow has managed to amass about $150,000.00 worth of credit limits.

    To 4:10, what's 18% of zero, because thats how much you'd be paying after the bankruptcy.

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  65. "So do tell us how you managed to get out with only $30k in debt."

    small (2/5ths tuition for first year) entering scholarship, tuition grant from state govt, and minimal living expenses.

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  66. I love how at my school they started a Alumni of the Month award. And I find it hysterical that seemingly every month they honor the same two people who managed to get jobs at SullCrom. Geee, copy work at SullCrom all day? Let's make you Alumni of the Month. You'll see this all over the website. You'll also see a "representative sample" of all the places alumni supposedly work. I propose that if you are going to do this, you should be required to have a disclaimer that states how many of your alumni have ended up at each firm you claim as a part of the "representative sample" of employers.

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  67. @4:17

    Cash advances are limited to 20-25% of your total credit limit.

    So assuming a student has at least 600k of credit, that's a great plan.

    An equally unrealistic plan would be to purchase a house with little to no money down, take out a HELOC, repay student loans with the HELOC, and then declare bankruptcy. This plan was much more realistic circa de 2004.

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  68. "2:50 - Did the no discount on interest change in the last few years? I graduated in 2009 and my loans dropped 2.5% by using online payments."

    LawProf has the interest rates in his article. They're around 7%.

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  69. ***Important note about IBR***

    It completely destroys your credit. That huge loan on your credit report will make it much harder to get a car loan / mortgage / whatever. It won't hurt your credit score much, per se (unless you miss payments) but it will harm your ability to borrow.

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  70. If you can, do. If you can't, be a law professor or social media expert.

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  71. "***Important note about IBR***

    It completely destroys your credit. That huge loan on your credit report will make it much harder to get a car loan / mortgage / whatever. It won't hurt your credit score much, per se (unless you miss payments) but it will harm your ability to borrow."

    Yeah but there's really no other option if you can't afford the ten-year plan.

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  72. Oh yeah 4:38. I'm on IBR. My required payment on over $200,000 of debt is $0 this year if that gives you a sense of how little money I make.

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  73. @4:42: Hah! Agreed . . . both on the debt load and the sentiment. Honestly . . . 4:38 . . . my credit score is like . . . 9. Or something. I don't know. It's so low it actually makes me feel better about life because it amuses me so. All my creditors threats are very much like beating a dead horse. It's just never going to get up and run for you, and now the spectacle of them just wailing (sp?) away is just so Three Stooges-ish that I, frankly, could not have a better time talking to these folks on the phone.

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  74. While we're asking technical questions, can someone answer this?

    Person X makes $30,000 per year. Under the IBR calculator, their maximum monthly required payment is $200 per month.

    Person X has both private student loans with Citibank and government student loans serviced by Sallie Mae. The required payment under the private loans is $150. The required payment under the government loans, ignoring IBR, is $2,000 per month.

    Is X's payment under IBR

    (A) $150 per month to Citibank and $50 per month to Sallie Mae

    or

    (B) $150 per month to Citibank and $200 per month to Sallie Mae?

    Thanks

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  75. "All my creditors threats are very much like beating a dead horse. It's just never going to get up and run for you, and now the spectacle of them just wailing (sp?) away is just so Three Stooges-ish that I, frankly, could not have a better time talking to these folks on the phone."

    Yeah. I haven't had to deal with debt collectors yet because I'm making all of my payments (my zero payment to IBR is pretty easy to make and I'm finding a way to pay the private student loans) but I've heard stories. Debt collectors will try to scare you into doing stuff you don't legally have to do (like borrow from family to pay them, or pay more than they can legally garnish, or not pay rent to pay them, or sell your car to pay them . . .) and it gets pretty hilarious. If they're getting really abusive you should get a phone recording device, advise them that you are recording when they call (google voice does this really well) and start filing lawsuits for shits & giggles, and to gain experience as a lawyer.

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  76. Another issue with IBR that has previously been touched on indirectly but must be clarified: I believe you are only eligible so long as your income remains at or below a certain level. If your payments are not sufficient to meet your interest and, eventually, you do somehow obtain a job that pays you beyond eligibility for IBR, you get kicked off of IBR and get zinged with all of the deferred interest you haven't paid.

    So, basically, if you choose IBR (which, unfortunately for many people is the only way at this point to avoid default) you are essentially betting against yourself and your earning potential for 25 years. For, if one day you are fortunate enough to earn a salary sufficient to justify the investment of law school, BAM. Back at square one plus years of deferred interest.

    One last thought: I am unsure whether a spouse's income is factored into eligibility for IBR (my hunch is that it probably does). Which means it makes financial sense for certain people not to get married who otherwise would to avoid getting hit with years of deferred interest. Yet another casualty of the law school debacle.

    The American Dream is now the American catch-22.

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  77. IBR is indentured servitude. It tells people, "this debt will grow and grow and follow you for the rest of your life."

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  78. @ Anon. 5:04:

    I think the IBR payments don't take into account your private loan payments. I know they ask for them when you sign up on the program, but I think when it comes to setting your payments, it just gets calculated based on your income. So, $200 to Sallie.

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  79. "LawProf has the interest rates in his article. They're around 7%."

    Mine was 6.8% too during law school. When I graduated and signed up for automatic payments it dropped by 2.5% so it's now 4.3% (no Plus or private loans). I know some people didn't get that benefit after the preferred lender scandal a few years ago but I was wondering if it was eliminated completely?

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  80. "Mine was 6.8% too during law school. When I graduated and signed up for automatic payments it dropped by 2.5% so it's now 4.3%"

    ------------------------

    Well there ain't no such thing with IBR.

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  81. http://www.guardian.co.uk/world/2011/aug/24/chile-student-leader-camila-vallejo

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  82. I graduated law school in 2004 with about 120k in debt from undergrad and law school combined. The vast majority of this debt was from law school. I had jobs paying about 40k / yr from 2004 until 2008, when I finally landed employment that pays much better (about 75k now). I make about $800 / month in student loan payments. The credit card debt also came into play during the end of law school and the time after graduation when finances weren't so good. Those payments take up another $300 a month. I had never carried a credit card balance until law school.

    Basically right now I pay out $1100 to service debt that exists because I went to law school. Every month when I pay these bills it strikes me that there are all kinds of things that I could be doing with this money besides giving it to Aunt Sallie and Mr. Direct Loan and Cousin Visa.

    Does it strike anyone else that some kind of loan forgiveness program might actually help the economy? Instead of going to debt servicers in little bits over long periods of time, the money being spent to pay student loans now might be put to better use paying for food or clothing or cars or electronics or housing or whatever else.

    Some sort of loan forgiveness might help productivity and the mental stability of a whole lot of student debt holders. Its hard to be positive or energetic or creative when there is a constant cloud of debt hanging over everything you do. At a certain point, you stop giving a crap about what happens and just start wishing the problems would all go away. People with this sort of mindset (which included me for a few years after law school) aren't likely to take risks or try big things. They are likely to do just enough to stay one step ahead of the bill collectors. This is not a recipe for success. Its a recipe for trouble.

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  83. They have changed the calculation so that a married couple with student loans can combine their debt total...just don't file jointly if your spouse is debt free or makes a large salary. So marriage is fine but filing jointly isn't in many cases (for the purposes of IBR).

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  84. "Does it strike anyone else that some kind of loan forgiveness program might actually help the economy? "

    Keynsians might think so, but unfortunately politics is completely controlled by the money'd classes (those whose money was lent to you) so don't expect any loan forgiveness anytime soon. Unless, of course, you mean that the government should pay off all the loans then forgive them, which is politically highly unlikely.

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  85. Actually, we should be making bankruptcy a much less punitive consequence. If you liquidate debt of all kinds through the system, you can get people spending a bit more eventually. When you think about it, for the consumer economy, discharging debt is the same as paying it off. Obviously, it has consequences for the institutions that are owed money, but to opt for protecting those interests you basically have to assume that people will eventually pay their debts, and at this point that's a very doubtful assumption.

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  86. "Instead of going to debt servicers in little bits over long periods of time, the money being spent to pay student loans now might be put to better use paying for food or clothing or cars or electronics or housing or whatever else."

    Oh don't worry, your money is being put to use to pay for all those things listed....just not by you but by the people who profit from all this. Hence the title of this blog.

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  87. I found this blog today and, as an undergraduate student considering law school, have had my eyes opened.

    Thank you.

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  88. Bankruptcy attorney here, setting aside the fraud issues, charging an otherwise non-dischargeable debt on a credit card (e.g., student loans) does not alter the original dischargeability of the loan. The credit card companies can object to the dischargeability of your debt; however, the creditors have to notice it and file an adversary. There's a 3 1/2 month objection period for dischargeability in Chapter 7 from the date of filing. Add another year if fraud is involved.

    The "preference period" is only the 90 days prior to filing the bankruptcy case, but the farther from the date of filing you pay off debts, the less conspicuous your bankruptcy filing looks.

    If you're really serious about getting rid of the loans, it'd have to be a multi-year process. The better credit you have, the easier.

    How to Get Rid of $100K of Student Loan Debt:

    If you land a job after graduation making $40,000 per year, after taxes you're making $2,600 per month. If you spend your 33% on rent and 15% on transportation (car payment), that leaves $1,300+ to spend on student loans. All your utilities, food expenses, clothing, gas, etc. can be put on credit cards (you typically can't pay rent and car payments on a credit card). The key is that you're paying your student loans out the WAGES you earn.

    $1,300 over 60 months = $78,000.

    If your credit is decent, you can keep swapping balance transfers to defer payments or call the credit card companies and negotiate 0% for multiple months. More card offers will come in the mail. As long as you don't default on the cards (i.e., minimum payments), you'll maintain fair credit. I just met with a woman tonight who makes $30k per year and had over $53,000 in credit extended to her in the last 5 years and a 700+ credit score. I'll be wiping out all of her debt via Chapter 7 bankruptcy in 3 months time.

    In addition to the above, you should set up a couple of shell bank accounts, and start taking out as many payday loans (via the Internet and in person) as possible. All you need is a pay check and a bank account. Don't use the bank account you actually want to keep - because these people are bastards. You can easily rack up $22,000 of payday loans within a year (once again, I've seen clients with multiple filing do this). They key is to diffuse a large amount of debt over many creditors. By keeping the debt amount small, but the creditors multiple, you lower the risk of an objection. This additional $22,000 should be paid off to student loans incrementally ($367/mo over 60 months). Oh, by the way, payday loans rarely report to the credit bureaus either, so it's not likely to hurt your credit score.

    You should also be able to take out some cash advances and personal loans to supplement the above plan - also dischargeable in bankruptcy. Once again, keep them small and plentiful across a variety of different creditors.

    I would wait at least a year from my last student loan payment just to let the dust settle before filing the case. Given the volume of bankruptcy filings, I would say it's highly unlikely that anyone would detect your scheme. The major credit companies are the only ones who retain counsel. If your only charges are necessary living expenses, it's unlikely they will ever object.

    Also, once you've passed the state bar character and fitness requirements, filing bankruptcy shouldn't be a big deal. We have older bankruptcy attorneys in our district who filed bankruptcy, including one who discharged his student loans back in the 1980s.

    Enjoy.

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  89. Sorry for the typos in the above post - tired and lazy.

    Also, don't let people tell you bankruptcy ruins your credit for 10 years - that's not true. I have clients buying houses with 1 year after filing. Almost anyone making $40k per year who is a single filer should qualify for Chapter 7 in any district in the US.

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  90. You know the problem has almost reached a tipping point when the above provides hope

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  91. lol @ 839. true. i read every word of bankruptcy lawyer's post.

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  92. Except that if you have a job the payday lenders will garnish your wages. You did after all provide them with a paycheck so they know where you work...

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  93. "Except that if you have a job the payday lenders will garnish your wages. You did after all provide them with a paycheck so they know where you work..."

    You do understand the concept of bankruptcy?

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  94. 9:15
    You would have to file the bankruptcy pretty soon after you took out the payday loans, most of which have a term of 2-4 weeks. They are pretty aggressive about recovering money when they know you have steady employment so you'd probably have to file no later than 4 months after you took out the first loan.

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  95. Also, a lot of payday lenders will send collection agents to your job. I don't know enough about the payday loan business model to say when it's worthwhile for them to come after you but my guess would be anything above $500.

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  96. @9:19

    reread bankruptcy atty's post again.

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  97. Educational loans for law school should be non-dischargeable and non-subsidized. The first so that the market for the loans exists. The second because there's no way the state should be subsidizing professional degrees, except, possibly, those who go into public service.

    Bankruptcy lawyer at 8:29 appears to be encouraging fraud. He, and anyone who takes his advice, should be disbarred. Because the world's given you lemons, that doesn't mean you should throw them at someone else. Your debt, your responsibility.

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  98. At 3:39,

    Defrauding pay-day lenders and credit card companies? They traffic in human misery and are owned by large banks that the government bailed out. I could sleep pretty easy.

    Funny how law school is turning us into criminals by necessity.

    As the boss says, "I've got debts no honest man can pay."

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  99. I agree that average debt doesn't tell the whole story. A certain percentage of law students, perhaps as much as 20 to 30 per cent are from wealthy families which pay much or all of the tuition and also are in a position to pick up the student loan payments if their son or daughter is unable to.

    Another chunk of law students, perhaps another 10 percent, are Black or Hispanic kids who are offered generous grants which are called "financial aid" but which are really just a special discount to encourage the person to enroll.

    So that the situation for middle class White kids is probably a lot worse than the average debt figures tell you.



    If you average in these fortunate souls

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  100. Problem with bankruptcy attorney's post, it seems to me, is that the second the payday loans start defaulting, they'll usually go to collections agencies, many of whom DO report their activity to the credit reporting agencies. Most good collections agencies look at a credit report first thing and try to see where the money's going, if there's fraud, etc. When they're collecting on behalf of the CCs and payday loan companies, they're going to see a giant student loan balance that's being cut down in a hurry with a very high number of trades. It's not going to take a genius to figure out that they're siphoning the money to the student loan. The odds of an objection might be low, but when you involve 25+ creditors in this scheme, the odds of an objection go up, and all it's going to take is one for the bankruptcy judge to figure out what happened. Remember that all of these people have access to your credit report and the student loan balance will show long after 1 year.

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  101. "Bankruptcy lawyer at 8:29 appears to be encouraging fraud. He, and anyone who takes his advice, should be disbarred."

    Right, but the law schools using cooked employment statistics to trick people into going into that debt should be allowed to continue doing what they do.

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  102. "I agree that average debt doesn't tell the whole story. A certain percentage of law students, perhaps as much as 20 to 30 per cent are from wealthy families which pay much or all of the tuition and also are in a position to pick up the student loan payments if their son or daughter is unable to."

    Where did you get that number? You sound like Professor Henderson from 1:41pm.

    And using your desperately needed retirement money to pay your child's student loan isn't prudent and parents shouldn't have to do that.

    You're a professor trying to contrive excuses for your gravy train.

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  103. "Another chunk of law students, perhaps another 10 percent, are Black or Hispanic kids who are offered generous grants which are called "financial aid" but which are really just a special discount to encourage the person to enroll."

    WTH?

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  104. I haven't read through the comments, so I don't know if this was mentioned already, but the other big issue that should be considered when talking about debt is that the merit scholarship programs offered by law schools create a debt disparity that ironically results in graduates who get the highest paying jobs having the lowest amount of debt.

    For example, I had a good undergrad GPA and a great LSAT score and was offered a full tuition scholarship from a T30 school. I still had to take out some loans for living expenses but graduated with about 40k of debt instead of 140k+. But the real disparity appears when you consider that I graduated in the top of my class and therefore I got the BigLaw job. So now I'm a year out of law school making 150k a year with 40k debt and my friends in the middle of the class who didn't have scholarships have all the debt and no jobs (or low paying jobs).

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  105. "Where did you get that number? You sound like Professor Henderson from 1:41pm."

    Just my general impression from talking to other kids. I myself am from such a wealthy family. My parents didn't need to take out a mortgage on their house to help me. Over the last 20 years, they have probably paid about $250,000 for my college, law school, and in general to help me in life. Probably it was worth it to them if only so that they can tell their fancy friends that their son went to a top 5 college and law school.

    My parents still had plenty of money to retire early.

    "You're a professor trying to contrive excuses for your gravy train."

    Not at all, I think that law school needs to be reformed. I think that the government needs to introduce price controls, i.e. if schools want to be able to accept government loans then they must keep their tuition below a certain level.

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  106. Congrats, 9:23. Most of the rest of us just have middle or lower-middle class parents who either can't foot the bill or could pay it with desperately needed money in their retirement accounts or use the home equity they don't have anymore. Maybe they can help with a roof (or basement ceiling) over our heads and some food, but they can't make those payments to Aunt Sallie. And the numbers seem to suggest the kids graduating with large numbers of debt outnumber the ones who don't.

    I agree with the price controls though. Schools should either be able to justify their 50K tuition through demonstrated biglaw or high paid jobs (through an auditing system so they can't game the stats) or have it capped at 20-25K.

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  107. It occurred to me during the whole financial meltdown of 2008 that if we truly wanted to stimulate the economy, the solution wasn't to bail out bankers, but rather to forgive student loans.

    What would an army of educated masses, yearning to be upwardly mobile yet burdened with $500, $800, $1200+ in monthly loans, do with all that extra cash? Why they'd follow W.'s advice and go shopping! You want increase demand for American goods and services? You want to kick-start the next housing bubble? Just take the debt monkey off the backs of hundreds of thousands of potential big-ticket consumers and watch us spend with a vengeance. Debt forgiveness for all!!

    But then I remembered that we aren't just talking government loans but private loans too, issued by private banks. And we can't waive those obligations - that would be socialism! And we can't have that.

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