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.