Wednesday, October 10, 2012

IBR for everyone

A reader sent along the following two-year-old email from the University of Oregon's law school:


From: "John E Bonine \(UO\)" <jbonine@uoregon.edu>
Subject: law-fac-staff: Limiting student loan repayments - fabulous seminar organized by Jane Steckbeck
Date: 29 octobre 2010 16:32:49 UTC+02:00
To: "'Faculty & Faculty & Staff List'" <law-fac-staff@lists.uoregon.edu>
Reply-To: "John E Bonine \(UO\)" <jbonine@uoregon.edu>

Jane Steckbeck organized a fantastic seminar for students on setting up their own nonprofit organizations in order to gain benefits from the recent federal loan reforms for those practicing public interest law.  Congratulations and thanks, Jane!
The panelists included Susan Gary on setting up nonprofits, Jane on the details of the federal loan reforms, and two of our alumni—Doug Quirke and Loren Regan—who set up their own nonprofits to facilitate their individual practice of law.  Nancy Shurtz attended, as did I.  There were 17 students in the room (including one of our LLMs), deeply engaged and taking copious notes.  Jane recorded this for audio broadcast (is it on the Web yet, Jane?).
The new federal loan program, starting 15 months ago, made income-based repayment (IBR) a new option.  (New rules that took effect in July 2010 make it even easier for married students to use IBR.) 
Under this approach, if students don’t make much money, they don’t pay much on their loans.  They can cap them at 10% or 15% of their income.  This totally changes the outlook for our law students—including those going into private practice.
Add this to public service loan forgiveness (PSLF) for employees of tax-exempt nonprofits (and the possibility of a graduate forming her own nonprofit) and a whole new world of possibility opens up for UO law graduates.
Jane Steckbeck’s seminar is just the first of her initiatives to help our students imagine a career in public service and public interest.  Thanks, Jane!
John
 DJM has laid out why IBR is a trap for prospective students -- it is in effect a form of soft default or quasi-bankruptcy, which was created to deal with what are supposed to be unusual cases of market failure. It was never intended to be what it's clearly on the road to becoming, i.e., part of the standard "financial aid" package available to law students.  

The email above, which is two years old, was merely ahead of its time.   Here's a little experiment you can perform in the comfort of your own home or during the class you're sitting in now: google your law school + income based repayment.   There's an excellent chance you'll find that the school is more or less aggressively marketing IBR to prospective students as a potential payment option.   Remember, as a matter of law IBR requires that an applicant be suffering from a formally defined "partial financial hardship" in order to be eligible.  So law school are as a practical matter advertising their potential for subjecting future graduates to financial hardship as a selling point when trying to get them to enroll.

And indeed a quick and dirty estimate of how many law graduates are going to be eligible for IBR comes up with a fairly staggering figure.  Law School Tuition Bubble has just completed projections for what tuition will be at private and a few select public law schools in 2016 and 2021.   Sticking with just the former figure, median tuition at these schools, which was $39,500 last year, will be, at current rates of growth, $49,000 four years from now, when people currently applying to law school will be graduating (it will be over $60,000 at several).

What does this mean for debt levels? Note that people who graduated from private law schools in 2011 who took out any loans during law school took out an average of $125,000 in such loans. This means their average law school debt in the fall of 2011, when their first payments came due, was about $142,500 (The higher total is because interest accrues during law school. Interest accrual totals are going up starting this year because as of this summer the government will no longer pay interest during law school on the first $8,500 in Stafford loans a student takes out each year. This change by itself will tack another $4,000 onto the average student's debt total).

Now, what does this total tell us about how much IBR-eligible educational debt people who enroll in law school next year are going to have?  Behold:

(1) The class of 2011 at private law schools paid an average of about $36,000 per year in nominal tuition over the course of attending law school between 2008 and 2011. This resulted in about $142,500 in law school debt.   In other words, the class incurred 3.95 times as much debt as it paid in average annual tuition.

(2) Using LSTB's projections, people who enroll in law school next fall are going to pay, if they go to a private or non-subsidized public law school, an average of about $46,000 in nominal tuition over the course of their attendance.  If the ratio between tuition and law school debt remains the same for the class of 2016 relative to the class of 2011, this means the class of 2016 at the 130 or so law schools in LSTB's analysis will graduate with an average of $181,700 in law school debt.

(3)  If we are extraordinarily conservative and assume that law school graduates who enroll next year will have no more undergraduate debt, on average, than graduates of four-year colleges incurred on average last year, the average law student who enrolls next year at one of these 130 schools will have around $205,000 in educational debt by the time he or she graduates. 

(4) As a rule of thumb, someone is going to be eligible for IBR if his or her's salary is no more than 95% of his or her's total eligible educational debt (because of the 2010 changes in educational lending, essentially all educational debt going forward is going to be IBR-eligible).  How many people who enroll in law school next year will be making $195,000 the year after they graduate?  My guess is "none."

So we're rapidly heading toward a situation in which the vast majority of law school graduates are going to be enduring the "partial financial hardship" that makes someone eligible to enroll in the Income-Based Repayment program.

If something cannot go on forever, it will stop.

109 comments:

  1. I'm first. And I'm also a troll. You people are all a bunch of bitter losers!!

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    1. You're wrong! I'm a salty loser!

      Delete
    2. You're wrong! I'm a sour loser!

      Delete
    3. You're wrong! I'm a sweet loser!

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    4. Ran Out Of Flavors!October 10, 2012 at 8:01 AM

      What's in a name, anyway?

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    5. Top 10%, so by a law school measure I am a winner. Not bitter yet either, but getting there. If I am JD carrying, bar admitted barista nine months after graduation, and counted as employed by my law school I might be a bitter loser then. Ask me again in 16 months. :)

      :>>--

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    6. You're wrong! I'm an umami (savory) loser!

      Delete
  2. Great 7:39, attack a bunch of people you don't even know and not even comment at the subject at hand.

    It's ironic that many people who attend law school to improve their financial standing will end up with a "partial financial hardship."

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  3. We've evolved beyond trolling, we're *meta* trolling now...

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  4. Ok, I'll comment "at" the subject at hand. If you go into IBR, you're screwed for 20 years. Now that's gotta hurt!

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    1. Yup. It sucks. Looks better than the alternatives. Don't see getting a job that will let me avoid IBR when I graduate. (Not sure I am seeing any legal job either, but that is a different story.)

      :>>--

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    2. Screwed for *25* years, right? And then however long it takes to deal with the tax liability resulting from the loan "forgiveness"?

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  5. I wonder if IBR will become something that people opt into even when/if they have the means of paying the loan. Specifically, I wonder if parents who could afford to pay the tuition themselves will instead opt to pay their child's IBR payment. If IBR payments become cheaper in all or most instances, then all or most people will be on IBR. This thing will grow from somebody's idea to save people in "financial hardship" to a full blown entitlement program of mass proportions. Everybody will be on it.

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    1. Questions, questionsOctober 10, 2012 at 8:03 AM

      "Specifically, I wonder if parents who could afford to pay the tuition themselves will instead opt to pay their child's IBR payment."


      Hmmm. Does that become taxable income to the child?

      It would not have been taxable income (AFAIK) if the parent had simply paid the kid's tuition. But it smells more like taxable income with the parent (subsequently) picking up the payments on the existing debt.

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    2. You can gift like 13k a year tax free, so 26k from both your parents. Should be sufficient to cover IBR payments. Doesn't even touch the lifetime exemption.

      :>>--

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    3. Questions, questionsOctober 10, 2012 at 8:21 AM

      Dear ":>>--" (aka poster formerly known as Prince)

      - While the points you raise are relevant to the tax status of the estate of the parent(s), are they relevant to the question of whether or not the individual so gifted receives taxable income?

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    4. The gift/estate tax exist, because it wouldn't be taxable otherwise. It is there to close the loophole for large transfers of wealth, but small ones are still tax free, and they can also be fairly large, as long as they squeeze under the lifetime exemption, or are to large number of people (all under 13k per year), or no limit on gifts to non-profit orgs. If you are married, then your married parents could give you and your spouse up to 52k a year without touching the lifetime exemption. They still must file a form with IRS declaring this, but that is all. (IRS keeps track of the lifetime exemption using this.) It is all on the IRS website, if you are willing to wade trough it. Not fun, but not hard, just boring.

      :>>--

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    5. Questions, questionsOctober 10, 2012 at 1:45 PM

      Well, ":>>--", thank you for a 130-word, utterly irrelevant and non-responsive answer.

      It would have been a lot shorter for you just to say, "whoops, I was off track at 8:09 and don't know the answer here".

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    6. Since you aren't listening: It isn't taxable income. It is taxed as gift, if at all, and then the giver is the one that must pay the tax.

      :>>--

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    7. "Since you aren't listening: It isn't taxable income. It is taxed as gift, if at all, and then the giver is the one that must pay the tax."

      The one possible catch is how it is treated for the purposes of IBR eligibility. Even if it's not taxable income, does it count under IBR?

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    8. Questions, QuestionsOctober 11, 2012 at 8:32 AM

      Well, ":>>--", I wish you the best of luck in your future as a new lawyer in a couple of years once you graduate.

      Something tells me you're going to need all the luck you can get, once you begin communicating with clients and they start screaming at the relationship partner to keep you the heck off their matters.

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    9. Questions, Questions, you are an idiot. He answered your question. More than once.

      If you really need someone to spell it out, the answer is NO. Which he basically spelled out when he said "it isn't taxable income."

      Gotta love people that ask for free advice, then don't take the time to read it, and then berate the person who is giving the free advice.

      And for what it's worth, his advice is sound. Not taxable to either the donee or the donor at amounts that are less than 13K per year per parent.

      And Barry, the gifts will not affect the IBR payment amount because IBR is based on taxable income, which will not include the gifts.

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  6. But it could go on for a while.

    When I was applying in 2009 all the admissions people at the 30 to 40 schools I talked to touted IBR as the solution, and to not worry. Pretty sure I wouldn't have enrolled in Fall of 2010 without it. (Although I did not expect that IBR would be a near certainty. It seemed like a good fallback in case things didn't work out.)

    So even then they knew what they were selling. This things will go on for a while longer yet. No politician wants to be the one to say that the student loan king has no clothes.

    I just wonder when the academic collapse will come. Will it be when all the grad schools lead to certainty of IBR indentured servitude, or will it wait until all undergrad education leads to such IBR 20 year misery. Either way it will come. Just not as soon as some may thing, and it will kill many Universities at that point. (Of course technology, and distributed learning might do away with many of them by then, but that is different issue. If Stanford, MIT and such can give away free high quality distributed courses, then how can the non-endowed Universities compete, if such credential becomes acceptable to employers. And they can't, so there is many shake-ups on the way to the public University near you.)

    :>>--

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    1. Or in other words, when the student loan bubble burst, and takes down multitude of Universities it might not be a bad thing, and it might not even matter as far as education is concerned. It will still be a disaster economically of course.

      If all education becomes distributed, then 99% of professors will be out of jobs across the board, so I am sure the educational lobby will resist this, but the ease of technology, and the insane pricing of the campus experience are likely to win in the end.

      Current graduates might be the last generation with the traditional University diplomas as their credentials. It could become the thing of the past. Some of the last year's Stanford's distributed classes were free, and reached 168,000 people. They are expanding the program. Is that the first leak sprung in the dike defending the traditional University education? Possibly. If so this could be an interesting decade.

      :>>--

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    2. When I was in undergraduate school the accepted wisdom from the university administration was to study had and go easy on the social aspects. Now that on-line learning is seen as a threat to status quo suddenly "socialization", which can only be learned on campus, is the new buzz-word. They are "selling" drunken frat parties If I have my antennae is bolted on right. Whatever it takes.

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    3. Yes, universities nowadays have put entertainment ahead of study. Witness the prominence of football teams.

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    4. "I just wonder when the academic collapse will come. Will it be when all the grad schools lead to certainty of IBR indentured servitude, or will it wait until all undergrad education leads to such IBR 20 year misery."

      Or when IBR gets cut - from what people have been saying on this blog, it's a year-by-year budget item.

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  7. Any idea why the graduated repayment plan was excluded from PSLF?

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  8. Though, looking at payment calculators, someone who enters IBR with $205,000 in loans and a salary of $195,000 would be paying around $2,230 per month; the standard 10 year repayment plan monthly payment for that amount is $2,514 per month. If they paid around $2230 per month (IBR), the loan would be completely paid off in 12 years, well before the private IBR would kick in and entitle them to any forgiveness. If that person made biglaw market at $160,000, their loan would also be paid off with IBR payments only before they qualified for IBR forgiveness (around 18 years).

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  9. Re: The Student Loan "Bubble"

    First, there is no student loan bubble. Bubbles occur in asset classes. College is not an asset class, so market dynamics that occur in bubbles do not apply. These aren't tulips. They're non-transferable titles of guild membership. You can't have bubble in non-transferable goods.

    To the extent that there is a bubble, that bubble is in U.S. sovereign debt, although at this point it's just a major market distortion.

    The only thing that will "pop" the secondary education "bubble" will be the inability of the U.S. government to fund massive ongoing deficits.

    Absent that, you have to convince Congress to restructure the entire post-secondary education system.

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    1. I also find it bizarre that people here assume the very real problems with the cost of law school apply to all colleges universally. I spot checked a few public undergrads in my state and tuition there is still very reasonable.

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    2. I think that's wrong, JP.

      A debt is a right to payment. A right to payment is an asset and transferable. Most lending is direct federal lending now, but to the extent that private student lenders are relying on overly optimistic assessments of the creditworthiness of student lending, a bubble is an appropriate term. It was also an appropriate term for so-called "federal" lending (which was really private lending with government guarantee) until 2010. There is no market now for this government guaranteed lending, so the term "bubble" is less apt. That said, where the government forgives loan balances through IBR or where debtors default and the government cannot collect the money it is to be paid back on the original terms of the loan, then, if it's not technically a "bubble", the government will have experienced something very much like one.

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    3. "First, there is no student loan bubble. Bubbles occur in asset classes. College is not an asset class, so market dynamics that occur in bubbles do not apply. These aren't tulips. They're non-transferable titles of guild membership. You can't have bubble in non-transferable goods."

      I would say 'proof by assertion', except there is no proof :)

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  10. Damn, my browser is ignoring the "reply" buttons. To 7:58 and 8:06 above, the massive online courses from the like of Stanford and MIT do not award academic credits and are not transferable to physical institutions of higher learning. Furthermore, the day that a kid with a bunch of MITx certificates gets a job over an actual MIT grad is the same day that MITx starts to cost $60,000/year. These schools aren't that dumb.

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    1. That might not happen that soon, but a day when a kid with MITx certificates gets a job over an engineering graduate from a school the employer has never heard of before is nearly here. Thus MIT gets to kill their diploma competition with the certificates, and still manages to charge for diplomas. In this model the big school/well endowed schools survive, and everyone else goes away. The Hardvards and MITs of the University field have large enough endowment that tuition only contributes 10 to 20 % of the budget, so they could survive just fine without it. It is the schools without endowments, or serious state budget commitment that won't survive. We might end up with just community colleges, and the elite, and nothing in between.

      :>>--

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    2. "That might not happen that soon, but a day when a kid with MITx certificates gets a job over an engineering graduate from a school the employer has never heard of before is nearly here."

      Is it? I've never heard of that, even anecdotally (and I have had an IT person tell me face to face that any resume with an online degree was automatically sh*tcanned ).

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  11. Is there anyone else who adheres to the somewhat quaint notion that borrowing a lot of money you have neither the ability nor the intention of repaying, and advising people to do so for your own benefit is, well, dishonest? Not criminal, mind you, just dishonest. Just askin'

    RPL

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    1. Yes; yes I do.

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    2. I think we all do. I think we all also believe counseling others to do this, while also lying to them about their future employment prospects is just as dishonest.

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    3. Dishonest, immoral, and worthy of having one's bar card revoked, in my opinion. And that applies to everybody involved in this racket, both the identified individuals at UO as well as those at other schools who are cooking up similar schemes. Moreover, who do you think is going to end up busted when their "nonprofit" turns out to be not so legit? Not the sanctimonious "public interest" faculty members who did the advising, that's for sure.

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  12. Lawprof, I am a Biglaw c/o 2011 graduate from a top 50 private school with very little scholarship help....your debt numbers including "real" amount when payment 1 comes due are dead-on. You hit mine to within $100. I would assume the standard deviation is probably $3 grand, and within $5 grand your numbers are catchin 97% of 2011 grads (or whatever 2 standard deviations fits under the curve). Well done sir. And is this law school actively advocating fraud on the U.S. government/taxpayers by advancing the idea that a crim defense or immigration lawyer can set up a 501(c)(3), not pay themselves a dividend (just bleed it all out in "salary) and defraud the gov't. with PSLF?

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    1. To add to my post, I am not trying to trash those who are actually practising PI law for the good of others, I welcome their using PSLF, however, the fact that a law school would advertise this tactic to justify charging X thousand dollars to students is ludicrous and the American taxpayers deserve to know what's going on.

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    2. Which raises the question of what you did with the money from your 2L summer...

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    3. Paid for my 3L living expenses so that I did not have to borrow an excess of money, and paid for a wedding/honeymoon. To that end, LawProf, please add another $16K to that debt load, plus interest attributable to said amount. My ability to offset 3L expenses with 2L summer associate money is the exception, not the rule.

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  13. Do you have to work full time for a non-profit to qualify for the public interest IBR?

    Why not set up a dummy non-profit (chief executive office or balloon doogie rescue), work a real job, and discharge tax free in 10 years?

    If you can legally do this, you'd be stupid not to. The rich don't pay more taxes than legally required. Why should debtors be the only ones who follow the spirit not the letter of the law?

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    1. Working in one or more jobs for the greater of:
      •An annual average of at least 30 hours per week (or for a contractual or employment period of at least 8 months, an average of 30 hours per week); or
      •The number of hours the employer considers full-time, unless your employment is with two or more employers

      NOTE: For purposes of the full-time requirement with a Section 501(c)(3) non-profit or other private non-profit public service organization, your qualifying employment does not include time spent on job duties that are related to religious instruction, worship services, or any form of proselytizing.

      http://www.myfedloan.org/manage-account/loan-forgiveness-discharge-programs/public-service-loan-forgiveness.shtml

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    2. well, that sucks.

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    3. I would actually do this (I left the law and make money in a very non-traditional non-taxable way - and yes its legal, i.e. I'm not a male prostitute). But in order to get PLSF you have to be on IBR and I have to decide whether its worth not having the marriage deduction for ten years (which adds up to a total loss of at least $100,000) or have my wife's biglaw salary on IBR which would force her to pay more per month than she is currently paying.

      FML.

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  14. "Remember, as a matter of law IBR requires that an applicant be suffering from a formally defined "partial financial hardship" in order to be eligible. So law school are as a practical matter advertising their potential for subjecting future graduates to financial hardship as a selling point when trying to get them to enroll."

    Money quote.

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    1. Randomly Selected TTT Law School DeanOctober 10, 2012 at 9:51 AM

      "Are you currently experiencing economic hardship? Would you like to be?"

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  15. In terms of IBR as a system, yes, I see your/y'all's points and agree with many of the criticisms. But, as an individual, I am considering IBR as an option. In 2012, I will pay $20,050.80 toward my educational debt, and my after tax income is $52,563.68 (private sector). That is 38%. I have inquired about IBR before, but I was told I was ineligible (not sure if this is really the case). Should I try again to go on IBR for some of my debt? What would the short term and long term ramifications be for someone like me? I know this is not a personal advice forum, but I thought I would throw this out there because it seems that my situation might be a more common one. I have not been able to get a very objective answer out of friends, family, or people at the financial aid office of my law school.

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    1. Not very helpful unless you tell us whether the 20K is for a 10 year repayment plan or a 25 year plan.

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    2. The federal loans are under 10-year repayment through 2021 with a fixed amount of $781.71 and $460.75 per month. Principal balance outstanding of $66,466.37 and $34,043.00 as of the last statements I have on hand.

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    3. Why not just stick it out? After taxes and loan payments you have around 32K to play with for living expenses which should be more than enough.

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    4. Yes, that has been my thinking all along, except that my non-federal loans are on graduated repayment; my monthly payments for those will double in January, making total monthly loan payments about $2,200.00. I'm a budgeter, so I have been able to make it work, even in a city as expensive as Boston. I have so many friends and colleagues who take the approach "defer as long as you can and pay as little as possible because it's good to owe money right now," that I've been doubting my approach to repayment.

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    5. If your payments are high enough that you don't think you can make them you can always stretch it out to a 25 year repayment plan and then pay extra each month so you reduce it to say a 15 year repayment plan.
      Also, your income will probably rise over the years as well so keep that in mind.

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  16. Lawprof,

    This is an alarming, and excellent, post about how IBR works post-2010 changes, making clear that the higher education scam (it's not just law schools) will continue to oblivion so long as we offer only incremental tweaks to help our future graduates. Unless, of course, the powers-that-be begin imposing cost controls on tuition as a condition to government loans. Fat chance. It seems they're more comfortable adjusting the expectations and realities of our young to include mortgaging their future incomes to pay for the no-end-in-sight, unfettered and unjustifiable "arms race" in higher education.

    Perhaps you can help turn the tide by flushing out the impact of IBR in Salon and other general-interest sites-- raising the public's interest-- and in a public policy journal-- in the hopes of eventually drawing out a discussion amongst policymakers?

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    1. "...help turn the tide by flushing out the impact of IBR in Salon and other general-interest sites"

      "fleshing out the impact of IBR".

      FTFY.

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  17. IBR is the functional equivalent of the mortgage crisis.

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  18. Unfortunately, most of the mainstream really does see IBR as a solution to the student loan crisis. I was on a date with a PhD candidate a couple months back who told me that his plan for paying off his debt was to "get a job at a state college, and then there's this program that forgives most of your debt after 10 years!" He really thought IBR was a simple and easy solution to his debt problem. I tried to tell him no, but he brushed me off. I mean, that guy turned out to be a tool so I don't personally care what happens to him, but the perception of people who don't know as much about IBR as the commenters here is that it's a glorious panacea, student loan crisis is solved, etc.

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    1. IBR is a great deal at the individual level so he's not that far off the mark.

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  19. So lets see if I understand this correctly.

    1) Law school charges student X we'll call it 100,000 for tuition and fees.

    2) Student obtains loans which are provided for, or guaranteed by the Federal Government. (I'm shaky on this point) But let's say its for $100,000 which is the cost of tuition and fees.

    3) Student graduates and immediately ends up on IBR because they have a job paying $20,000 which is $2,000 a year in IBR payments. Lets say two years later the student gets a job for $3,000 which is $3,000 a year. three years later the student gets a job for 40,000 which is $4,000 a year. They then get a job five years later for 50,000 which they stay at indefinitely.

    So over a 25 year period the government collects:

    $ 4,000 (2 years)
    $ 9,000 3 years)
    $20,000 (5 years)
    $75,000 (15 years at $5,000) per year
    Total = 108,000

    Now here is the question. A some law school students will never earn 50,000 or more a year but some will earn a lot more. Under this scenario the principal gets repaid.

    How much does the government actually lose in terms of interest payments. (not expected revenue) I know they would loan the money out at 7 or 8% but what does it cost them to loan this money out?



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    1. IBR payments aren't 10% of gross income. They're 10% of AGI on income starting at %150 of the poverty line. Somebody owing $100,000 making $30,000 or less would have an IBR payment of zero.

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    2. LawProf,

      Assume student has AGI equal to 150% of the poverty line. Does that count as 1 year? Or does it not count toward the 20?

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    3. LawProf:

      Either that calculation is right or I'm paying more than I should be paying every month (i.e., not zero).

      On $21000, they're taking $60 monthly. I've got almost $200K with the feds.

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    4. IBR Calculator:

      http://studentaid.ed.gov/repay-loans/understand/plans/income-based/calculator

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  20. Ouch, okay. So under my model the government collects $95,000.

    So because the amount of interest payments grows geometrically, lets suppose that the person will end up owning JD Painter amounts. Perhaps $700,000 of which the government may get back $100,000 so the face value of what they lose the taxpayer is $600,000. How much do they actually lose if you calculate lose on the basis, not on the interest rate of what they loaned the money out, but on what their actual cost is.

    Otherwise each IBR receipient in this scenario is costing the government say, $600,000 for attending law school. I suspect this number is an exaggeration but don't know how to calculate the real loss to our treasury.

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    1. That's the important question and I've always wondered whether the Barclays study contemplates that or simply goes off the face amount of the write off.

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  21. Unless, under IBR, if you make $40,000 the government literally counts that at $10,000 in income, is that what you were saying law prof?

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  22. I am very curious as to what the perceived advantage of setting up your own non-profit is to taking the IBR route. Someone better at the tax and accounting issues should comment - but it seems to me that the idea that the proposers had was that by establishing a non-profit that the law graduate owned and controlled that lawyer could then manipulate their income - effectively lowering it - by for example making charges to the non-profit for what would otherwise be nondeductible expenses.

    Maybe I'm wrong, but I am wondering what the point of the idea is? IS the law school proposing an unethical business model (not always inequitable, but frequently.)

    Anyone with a better accounting and tax knowledge to me want to comment?

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    1. Umm...because you get your loans forgive in 10 years instead of 25?

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    2. And no tax consequence if nonprofit. The advantage is hundreds of thousands of dollars.

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    3. Unless your question is why should the grad form it themselves instead of working for an existing non-profit in which case the answer is the difficulty in obtaining those jobs.

      Delete
    4. 12:06PM and 12:17 - what you said. I'm not sure, but it did strike me that as a non-profit you could still charge low income clients something, take contingencies - just say that any profits are reinvested - but then provide yourself with a basic salary, a business vehicle, etc. as an expense.

      12:17 - and why not work for an existing non-profit.

      In non-profits the devil is in the expenses and package.

      Delete
    5. I answered that already. It's difficult to get jobs at existing non profits and presumably easier to form your own non profit.

      I assume 12:06 means that the discharge of student loans is nontaxable if you work for a non-profit.
      12:17 (who is not 12:06)

      Delete
    6. Establishing a non-profit for the sole purpose of avoiding taxes is illegal as far as the IRS is concerned.

      Delete
    7. I think the question comes down to what the non-profit is doing that makes it not a law firm.

      Unless there is a big donor it would seem to me that ultimately the non-profit would have to charge the clients. The non-profit could "employ" the lawyers and pay them a salary plus various benefits - but the salary could be pretty high without endangering the non-rpofit status so long as any retained surplus was plowed back into providing services.

      Firms I know already sort of do part of this, in that I know that in a pro-bono case a fee award or share in the damages is put aside to fund other pro-bone case expenses and disbursements.

      Delete
  23. Dear Professor:

    I find it outrageous and backwards that the same law school administrations and professors that encourage students to pursue social justice, equality, blah blah blah are also encouraging students to enroll in law school @50,000+/yr with the intent of using IBR. I guess the adminstrations and professors haven't gone one logical step further to realize that the more money the government plugs into IBR, the less money for the TRULY NEEDY.

    If the administrators and professors are so gung-ho about social justice, equality, blah blah blah, maybe there should be a pro-bono requirement for them?

    ReplyDelete
    Replies
    1. They live in a world full of pretty butterflies, unicorns, rainbows, and sunshine.

      They only see happy sparkle things.

      They think only happy sparkle thoughts

      They smile a lot and use colorful, powerful, luxuriant language.

      They want to bring glory to the most righteous profession under the sun, that of law.

      Delete
    2. ... They sucked you in, and will suck in many more uninformed undergrads.

      Delete
  24. IBR = public subsidy, private benefit. In that regard, it is as American as apple pie.

    I don't even recognize this country anymore.

    ReplyDelete
  25. This smells like fraud!

    ReplyDelete
  26. Maybe IBR is a good choice since when the apophis asteroid may hit smack dab into the mid Atlantic ridge in Easter 2036 we won't have to worry about that big tax bill. The USA and all the evil banks won't be around anyway!

    ReplyDelete
  27. What do the evil banks have to do with ibr?

    ReplyDelete
    Replies
    1. Nothing, please ignore the clueless sheeple who eats whatever it's fed by the media.

      Delete
  28. re: 10:56 am

    I, like you, am fortunate enough to be able to repay my loans, and count my blessings every day. However, as LP has often noted, if something can't go on forever, it won't. The amounts people are now borrowing are so ludicrous that there is just no way it will all be paid back, and at some point the government will have to step in and bail out/forgive student loans. As much as I want to rid myself of this debt, part of me feels like a sap for trying so hard to pay these things off, knowing that eventually they will probably just be forgiven anyway. I'm thinking about joining up with the "defer as long as you can and pay as little as possible" crowd.

    ReplyDelete
    Replies
    1. 10:56 here. What do you think is holding you back from taking advantage of IBR or deferral options, if your debt is eligible? I'm just curious because I think a lot of us feel a sense of duty, guilt, or pride (maybe a mixture?) in repaying our loans, even if resources like this blog give us ample justification for rejecting that compulsion to repay asap.

      Delete
  29. As some of the commenters above alluded to, this is going to be the pathway for a full blown entitlement program where the taxpayer eats the full cost for kids getting degrees. On the one hand, as a fiscal conservative who graduated LS debt-free, I am mortified. On the other hand, I derive a great sense of satisfaction from this. As the public and fake conservatives concentrate on blaming naive young people for this mess, all the while enjoying what is happening via envy driven emotions, the real culprits are going to walk away with a big smile on their faces knowing they stole and will continue to steal a fortune in tax payer money.

    There is a strange amount of justice in the world.

    ReplyDelete
    Replies
    1. Yes, an ironic end result to the moral outrage of a few primarily fictitious problem kids in the 1970s who decided they'd try for bankruptcy when they graduated.

      Basically Congress has just pissed all over its own shoes.

      Delete
  30. 10:56 -

    Sorry, my computer will not let me reply. I do think it is a combination of all of those (duty, etc.). Also, the idea of still carrying debt from my 20's with me into my 50's is truly frightening.

    ReplyDelete
    Replies
    1. Guess you'll never buy a house will you?

      Delete
    2. That's okay. He can rent from me.

      Delete
  31. thuuh luuh schuuls r reeely smardt aaahnd phuute thuh sthuuuhduntees onne unn aaahy....eye bee are ,,,,ahhnd arre vehry smarrrdt ahhnd mhakee luts ahnd luts of muunny ahnd that is ghhhuuud beeecuuuse thhtheythhey arrrhe uhhh reeely reely smarrrdt ahhhndth thuh reely smmardttt prufessurhsssurhrs rhuule evertytshthing peeriood ahnnywuy.

    aaanhd nhooow i ooowe luuuts ahhnd lots uuuf muuuny tuuu thuh guhvurnmunt annd that is baaad.

    baaad two peyy baaack wheeen i caaant uhfooord it,

    Charlie

    ReplyDelete
    Replies
    1. Johnny, that's just plain pathetic.October 10, 2012 at 2:02 PM

      .

      Delete
    2. Painter, you have been told to leave this site alone. This is a "character" you created earlier.

      You are pathetic.

      Delete
  32. thuh eye bee arrrhestth isth ghuud annh ahhnd reeely reeely ghuud putheticuit fur looot ahhnd luuts of muuunnuuuey ahhhhhhnd forrruh luhsuurs and lottts ahnnnd lottts uf loosuerusers inn thuh sooocieety.

    beeecuuuse ihhhht is ghuuud 2 ohue muuuney tuuu thhu ghuvvvernmunt.

    to the govurnmuuunt and cuul fooor liefe. annnd goooud smiiiley face :)

    looots anhd looooots of muuuny grrren.

    guuud!

    Charlie

    ReplyDelete
    Replies
    1. classic JD Painter, hope you're doing well buddy

      Delete
  33. For those of you who don't pay attention to the treasury market, I would like to point out that Treasuries have been in a secular bull market for about 30 years.

    Interest rates are now below 2% on the 10-year and the overall trend is down.

    It's true that if something can't go on forever it won't.

    However, it's also true that there's no debt service on 0% paper.

    ReplyDelete
  34. Also, if you want a weekly commentary on the insanity of the credit mess, particularly in the sovereign debt sphere, I recommend reading Doug Noland commentaries.

    ReplyDelete
  35. I'm on IBR. I make 70k a year and have 75k outstanding in loans. I started with 14k at 7.9% interest, the rest at 6.8%. I have made the minimum IBR payment on the 6.8% balance, while paying the 7.9% balance aggressively (about 5k to go). Once my 7.9% balance is paid, I am going to snowball the the rest of my loans. I estimate it will take me about 11-12 years, which doesn't sound bad, but the opportunity costs I will pay are enormous. The money that I am paying to my loans each month (around $800), would have gone a long way towards retirement. Consequently, I will be about 40 years old when I begin to save for retirement, which is starting way, way way behind. Really depressing, especially knowing that there will be no social net for my generation when we get old. I am "lucky" in that I have a job and I can afford to pay $800/month, and yet I am, in the long run, totally screwed.

    ReplyDelete
  36. Also, why 6.8%? I'll pay off my loans as I promised, but can't I get a break and have my interest rate lowered to 3.4%? This would help me become self-reliant long term (retirment) and would be helpful to our consumer based economy. If I had an extra $300 to blow every month, it would help a lot of people.

    ReplyDelete
  37. why 6.8%?

    So your payments can make up for those that cant or wont pay. Sorry, it sucks being the responsible one paying off your obligations.

    ReplyDelete
    Replies
    1. I'm not the original poster, but I agree, why 6.8% when others are paying 3.4%? My loans are locked in forever at 6%, merely because I was dumb enough to consolidate them when that's what the interest rate was. Why no refinancing option?

      Delete
  38. Charlie at 1:58 & 2:27 - Maybe time to cut back a little on reading Finnegans Wake? William Ockham

    ReplyDelete
  39. Secretary of Education Arne Duncan is taking questions via Twitter this week on the student aid programs, including IBR and student loans.

    The readers of this blog should send polite (emphasis on "polite," I've read these comments), reasonable questions linking to the excellent posts of LawProf and DJM on this topic.

    He is taking student aid questions under the hashtag #AskFAFSA. His handle is @ArneDuncan

    http://www.ed.gov/blog/2012/10/askfafsa-office-hours-with-secretary-arne-duncan/

    ReplyDelete
    Replies
    1. Yes you've read them obsessively over the past 14 months.

      Delete
  40. Excellent & remarkable post! I have been visiting various blogs for my Thesis writing help. I have found your blog to be quite useful. Keep updating your blog with valuable information.. website

    ReplyDelete

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