Well I got a job and tried to put my money away
But I got debts that no honest man can pay
So I drew what I had from the Central Trust
And I bought us two tickets on that Coast City bus
Bruce Springsteen, Atlantic City
Part of the function of this blog is confessional, so I will begin with a confession. When, five weeks ago, some of the first comments on this blog referred to IBR I did not know what those initials stood for. How ridiculous is that? And how sobering is it to consider that if someone like me didn't know, how many law faculty at this moment do you suppose are even aware of the existence of Income Based Repayment? (I"m pretty sure all the deans know what it is though).
The reason I didn't know is because as an upper class person who has never been in any real danger of defaulting on a debt (and who didn't take Bankruptcy in law school -- ah life's little ironies . . .) I had no real idea what happens when people can't pay their debts. So, even though I have for some time now been well aware that a huge percentage of law graduates have been graduating with educational debt loads they cannot possibly service based on the jobs (if any) they acquire subsequently, I hadn't inquired into what happens next. What happens next for an increasingly large number of them is the Income Based Repayment program, which to the best of my still-sketchy knowledge works like this (corrections are welcome in comments of course):
After the expiration of the grace period for the repayment of a graduate's federally guaranteed loans (this includes all educational loans issued directly by the federal government, as well as private educational loans issued before the summer of 2010, but not since then) graduates whose monthly debt load from eligible loans is above a certain percentage of their adjusted gross income can opt to enter the IBR program. The program allows them to pay less than the 25-year amortized payments than would otherwise be due on their loans. During their first three years in the program, the government pays whatever portion of the interest on the subsidized portion of the loans the debtor isn't paying (the subsidized federal loans are limited to $8000 per year at present). The rest of the interest not paid by the debtor accrues, increasing the principal debt accordingly. If the debtor stays eligible for the program for 25 years (the debtor will not be eligible in years, if any, in which his or her AGI is too high) then at the end of that period the debt is forgiven, although the forgiven debt is treated as income by the IRS. (It appears this debt can in turn be discharged after three years if the debtor then files for Chapter 7 bankruptcy).
In what follows I'll offer some (very tentative) thoughts about what all this means for graduates, taxpayers, law schools, and prospective law students.
First, graduates. Going into IBR would appear to mean that debtors, as long as they're in the program -- and of course the longer someone is in the program the harder it becomes to get out -- are accruing an ever-larger unsecured debt that will make it difficult or impossible for them to obtain many other types of credit, in particular home loans, car loans, and some types of unsecured consumer credit. Given that we have a heavily credit-based economy, this would seem to pose huge practical problems, as well as a major psychological burden, for people in IBR. (Here's a family law hypo: If you go into IBR then get married, does the accruing portion of your educational debts still count as marital property even if you always file separate income tax returns in order not to have your spouse's income count in the calculation in re eligibility?).
Second, taxpayers. Obviously taxpayers pick up the tab for IBR, both for defaulting government-guaranteed private loans and for government issued loans that aren't repaid in full. How big of a problem is this going to be in the context of our many other current fiscal difficulties? Total outstanding student loan debt is about to hit one trillion dollars, which for context is more than the total outstanding credit card debt in this country. In addition there are apparently various financial derivatives floating around which are securitized by private student loan debt. As we saw in the housing crisis, these kinds of financial instruments can have a multiplier effect as regards the solvency of the institutions that hold them. Whether this could be a problem as far as the higher education tuition bubble goes strikes me -- as should be obvious I know nothing about this sub-topic -- as a question which might well merit some attention from the smartest guys in the room, before we have another bad accident or two. Even if student loan debt poses no danger along these lines, it would seem plausible that having an entire generation of quasi-indentured servants in thrall to their educational loans for a quarter century (this has been reduced to 20 years starting in 2014) is not a good thing in purely economic terms, without even getting to questions of inter-generational justice. That fact might provide a lever for politicizing the issue of student debt in general, and law student debt in particular, in ways that resonate outside the academy.
Third, law schools. It seems probable that the existence of IBR is already playing an important role in keeping a lot of law schools open. How many graduates of the class of 2011 will be eligible for IBR when the initial grace period on their loans expires in a few months? No one, as far as I know, has tried to figure out the answer to this question, so I'm going to give it a shot. Here are some preliminary numbers that ought to sober up even law school administrators who are still intoxicated by their own rhetoric about what a wonderful thing legal education really is in America today. The phony NALP stats claim that the median "starting salary" for the class of 2010 was $63K. We all know this is a serious exaggeration, as it's based on the self-reported salaries of the of 2010 grads who were employed full-time and reported their salaries (this group includes far less than half of all 2010 grads). But lets mainline some Prozac and treat these numbers as real. How much federal or federally guaranteed educational debt (not just law school debt) do you have to have to be eligible for IBR with an AGI of $63K (the reported salary numbers are higher than what AGI will be but this is close enough for government work)? The answer, for an unmarried graduate with no dependents living in the lower 48 is $50,690. If we adjust the median salary to a far more realistic but still extremely optimistic estimate of $50K, people become eligible for IBR with a total educational debt load of $36,570. Drop it to 40K (which is finally something like a realistic estimate of the true number in my view) and you're eligible with a total educational debt of $25,800.
How many graduates in the class of 2011 have educational debt of at least $26K and $37K and $51K? Nobody knows anything like the exact number, but it's not too difficult to extrapolate a rough guess. Look at these figures, then tack on (conservatively) another 10% for average undergrad debt, and another 5% to 10% for the effects of rising tuition in terms of principal and interest on the classes of 2010 and 2011. Then consider that somebody with $150K in educational debt is eligible for IBR if he or she has an AGI of $158K. Given the true employment/salary numbers, this means that almost everyone who graduated from most lower tier schools in 2011 is going to be eligible for IBR. A huge percentage of upper tier grads will be in this boat as well. And since there's a strong lag effect with rising tuition, this tide is just starting to come in. The class of 2014 is going to graduate with much, much larger debt loads than the class of 2010 (the latest class for which figures are available). How many people working inside of law schools are thinking about any of this yet?
Finally, prospective law students. An interesting question is the extent to which prospective students are taking into account the existence of IBR when deciding whether to enroll. Such students are in effect buying what they already understand is a six-figure lottery ticket, which is very unlikely to pay off -- although being human beings they will overestimate the chances it will pay off in their particular case -- with the understanding that the possible price for buying this ticket is 25 years of servitude. Several commenters have suggested that this is or at least is becoming a common mindset. My purely seat of the pants guess is that I think this is still probably quite unusual. If prospective law students know very little about the real employment numbers, does it seem likely they're up to speed on the intricacies of IBR? On the other hand, maybe a lot of them have already taken on enough undergrad debt that they're far more knowledgeable than the average law professor about this grim subject.
This post is already too long, but there are a bunch more issues I haven't even touched on, such as the fact that IBR could go away tomorrow (or more realistically in 2013 if we become the United States of Texas). Anyway this is an extremely rich subject which almost literally hasn't even been mentioned yet in any of the ten thousand law review articles that are published every year (I checked). I would suggest that some of you junior faculty who are just beginning to wonder if your jobs are even going to exist ten years from now might want to start looking into this, instead of coming up with another theory of how to interpret the equal protection clause.
One additional thought: IBR could function as a very simple measure for whether law school is a good investment. If going to law school throws you into 25 years of debt slavery to the US government then the answer would clearly seem to be no. A key piece of achieving law school transparency then becomes, how many graduates of the class of X are eligible for IBR? The feds could force the ABA to force law schools to cough this very easily obtainable information up, as a minimum prerequisite to keeping the gravy train running.