Tuesday, October 30, 2012

The debt spiral

One problematic feature of institutional decision making in particular is that the effects of a decision often don't begin to be felt fully until several years later.  Taking this lag effect into account is both difficult and essential.  Consider the relationship between law school tuition rates and law graduate debt.

The relationship between tuition and debt is is not complex: increases in tuition have basically a one to one relationship with increases in law school debt.  (This isn't surprising given that increases at the margin in the cost of law school are going to be almost completely debt-financed).   Here's how the lag effect works in regard to how much law school debt current 1L will carry, on average, when their first payments on that debt are due six months after graduation:

(1) The mean amount of law school loans taken out by 2011 graduates who took out loans was about $105,000.  (This NLJ story reports the average for private schools was $124,950 while that public schools it was $75,728. About 65% of law school graduates graduate from private schools. In addition the public school debt figure is probably understated because of things like Georgia State reporting an average graduate debt of $19,971, which is obviously a single-year figure.  Months ago I spoke to Bob Morse at U.S. News about correcting this number, which it continues to post on its website, along with equally ludicrous figures for Drexel, Southern, and Texas Southern.  It's curious that in these litigious times the administrations of these schools continue to do nothing about correcting the only public record regarding the average debt of their graduates).

(2) Law school tuition and law graduate debt have been climbing by an average of 6% per year.  If we estimate conservatively that the growth rate in these figures for the current 1L class will be 5%, this yields a mean amount of law school loans taken out for this class of $128,000.

(3) The current 1L class is the first that will graduate without the benefit of subsidized Stafford loans, on which the government paid the accrued interest on the first $8,500 per year (this benefit was  eliminated this past summer).  This change has now been incorporated into GULC's handy online debt calculator, which reveals that the $128,000 in law school loans which will be taken out by the average current 1L will result in a total debt of $151,588 when the first payment comes due.  This will require monthly payments of $1,791 on the standard ten-year repayment plan, and $1,110 per month on the extended 25-year plan (the latter will require the graduate to make $333,003 in payments over the course of the loans).

(4) These figures don't include other educational debt.  If the average 1L is carrying $20,000 in educational loans at the beginning of law school (payment is deferred on such loans while the student is in school, but interest accrues on them), then the average current 1L at the average ABA-accredited law school who graduates with educational debt is going to have around $175,000 in such debt when he or she receives his or her bar results.  (The median debt figure for the current 1L class will be somewhat higher. Indeed it's quite possible that half of current 1Ls will be carrying at least $200,000 in educational debt when their first loan payments come due).

How many law schools are generating short and long-term employment outcomes that make accruing $175,000 in educational debt a reasonable investment?  To put it another way, what percentage of current 1Ls are going to have to go into IBR -- assuming it still exists -- three years from now?  IBR is a form of "soft" default, or if you prefer a kind of quasi-bankruptcy for educational debt.  If it's the "solution" to this problem, then law schools themselves are bankrupt, in both a metaphorical and literal sense.


77 comments:

  1. You're also describing the current situation that the United States Government is in. The debt spiral has begun. The question is what is the equivalent of IBR for our government?

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    1. Not quite. Law students are NOT monetary sovereigns, unlike the US government.

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  2. I think the gov't. will forego the debt cancellation and institute an educational "tax" where you service your debt until death, at "X%" of your net income. It is simply not politically (or fiscally) palatable to erase the debt. The "mainstream" American thought process and political spheres haven't even begun to consider student loans yet. As worried as we are about Medicare/Defense spending, wait until we realize that a.) a generation is essentially without disposable income or a way to grow their personal wealth and b.) the gov't. is eating it on a daily basis due to that generation. It's a fuster cluck. Unintended consequences from a government induced market innefficiency/failure. The market must correct, and it will be violent.

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  3. Recent law graduates I talked to said their student loan debt exceeded $200,000.

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    1. That is insane. Someone needs to explain the value of $200,000 to these law students.

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    2. I'm sure some people have over $300,000.

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    3. I wonder how high the amount would have to go before these people realized that it was real money.

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    4. This comment has been removed by a blog administrator.

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    5. When you're paying $2000 per month for INTEREST ONLY and it is half of your monthly income, you will painfully learn how real that money is.

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  4. Hard hitting post to see what current student loan debt really hits. Thanks, LawProf. What I have pointed out on numerous blogs is what 7:40 above points out: what effect does this have on the general economy when you have a generation who has no disposable income?

    Could this be, oh great powers that be, the reason why we cannot get out of this economic slump? Kind of hard to get the economy going when a generation is holding off buying homes, cars, starting families and making purchases because of student loan debt.

    I am not sure why people don't see this. All that election stuff about how to improve the economy and which candidate has the better idea. And everyone ponderously scratching their head about how to make the economy better while I am in the corner jumping up and down w/ my hand raised saying "I know why the economy is bad. I know! I know. I know, I know, I know."

    And we'll spend another 20 years talking about it before the lightbulb goes off in some important person's head that saddling a whole generation w/ inescapable debt really DOES affect the economy and their spending habits. But by then, of course, we'll have to wait another 20 years for implementation to take effect. And by then, we will all be looking towards China, which will be the world leader by then.

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    1. They don't see it because the children of the elite don't have this problem. I was talking to a friend this weekend -- educated guy, very successful/wealthy, 3 kids in primary school, staunch Obama supporter. And it blew his mind that I think educational debt is a serious issue that this country needs to address now. All the responses were some variation on "they signed up for it," "I paid my loans off, it takes awhile but they'll be fine," and "education is so valuable, it's worth going into debt for."
      I tried to point out the flaws in his reasoning but it didn't take. This is a guy whose kids won't have to take out any education loans, nor will the children of anyone he mixes with socially. So to these people, it's an abstract, and it's going to remain an abstract until there are enough debt ridden young people causing chaos in the streets. That's maybe the only way this message is going to get to the people who need to be reached by it. Less than that, to the people who make policy in this country, is just so much talk about someone else's problems. In one ear and out the other.

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    2. Really, to pay $500,000 per child for college and grad school at today's rates with three kids, for a total of $1.500,000) anyone who does not have a net worth in excess of about $40 million would notice the hit. It is not nothing. No wage earner is secure that he or she will continue to earn the amount he or she earns at age 41 until his or her kids are in college.
      People with young kids may be removed from the cost and may not realize how educational costs have spiraled. Most of the affluent with young kids will wake up to the fleecing soon enough.

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    3. Probably not PosnerOctober 30, 2012 at 12:11 PM

      Perversely, I also think that you often see children of the elite paying less for law school than others. Why? Their prestigious undergrads, time off spent studying for the LSAT, internships they get though connections, luxury MAs and PhDs, etc, all make them more likely to get merit scholarships.

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    4. Not to mention their purchased LSAT scores (thousands of dollars spent on tutors) and their "admissions consulting" (thousands more for that).

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  5. Why is the government propping these schools up. It is pound-your-head-against-the-wall stupid, any way you view it. Let these institutions die. We will all be better off.

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    1. "Why is the government propping these schools up."

      Because the professors and administrators kick back a decent amount of their salaries (sourced directly or indirectly from government spending) into campaign contributions.

      Political patronage/bribery never stopped in this country, it just took a different form.

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  6. IBR is a way to ensure that education is fair, regardless of income, and that the same quality we've expected from universities and law schools continue for the students of the future. It's a way for everyone to finance the cost of their education over a lifetime of increased earnings.

    -- At least that's the Bullshit they're selling, right?

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    1. Exactly, and that's the bullshit they'll continue to sell until the House and Senate decide to eliminate IBR as part of a budget negotiation (let's be painfully honest here -- we all know that day is going to come eventually). Then they'll sell the new bullshit that IBR "was flawed from the beginning" and "was never a good option". The folks who are on IBR at the moment the program is cut will quickly be shuffled into new loans with hefty new 'processing' fees.

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  7. We need 10 percent of the law schools that we have. The rest can disappear without any consequence to anyone. We'd never notice a shortage of lawyers for at least 20 years.

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  8. The student loan situation is disaterous for law students who caught in it. No doubt about it.

    But the public in general is not concerned about the law students debt. First, most people dislike lawyers. Even my mother makes fun of me for being a lawyer - and I cover a lot of her bills!

    Seconnd, oout of 40,000 law school graduates, about 10,000 or so will do ok and some of those will do really good. So 30,000 lost souls a year in a country with a population of 314,000,000 is rather insignificant in the grand scheme of things. Every year about there are about 3.5 million new 18 year olds entering the workforce or going to college. 30,000 unemployed or underemploiyed lawyers is a drop in the bucket.

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    1. Suggestion: quit covering your mom's bills and devote that $$$ to a "worthy" law student's debt.

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  9. Just in time for Halloween.

    Student Loans, a horror story
    http://www.funnyordie.com/videos/052bde3630/student-loans-a-horror-story

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    1. Amazing weblog. I experienced studying your content. This is truly an excellent study for me. I have Saved it and I am awaiting studying new content.Keep up the good work.

      Delete
  10. IBR is to Law Schools what TARP, QE1-Infinity, and the change in accounting rules were to the large banks in 2008.

    The banking system is insolvent. The country is insolvent. The government changes the rules so that we can pretend that it isn't so.

    Same with IBR default. It's a game of lets pretend.

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  11. IBR is the only way the scam survives. It's not for students; it's for faculty.

    End IBR and end the Scam. Down with IBR!

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    1. Correct - but the general taxpayer/exploited 80% of law students have to be informed/educated about the situation.

      Otherwise the wallet-padding, myth-making BS of the profiteering Academic Left prevails.

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  12. Otherwise rational and educated friends of mine can't be convinced of letting educational loans be dischargeable in bankruptcy.

    To them, it's welshing on a debt. Or they think of every time they have had to pay a debt and, hell, no, someone else should not enjoy a free ride.

    I explain that BK is not painless, that it has serious consequences, and that BK filers pay in the form of fewer options in the future.

    Doesn't matter. People think every penny of educational loans should be paid back, because they paid back that $17,000 they owed in 1986.

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    1. Concern Troll is ConcernedOctober 30, 2012 at 8:46 AM

      Hey now, no need for the ethnic slur.

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    2. I would support any proposal that allowed BK discharge of student loans, so long as the proposal limited itself to loans originated by entities other than the federal government. As long as the BK process doesn't directly harm federal taxpayers, I don't see any issue.

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    3. No one except the government would ever make these loans. It's like Sallie Mae buying a $400,000 mortgage from a bank when the house, really, is not worth the expense of tearing it down

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    4. I work in the corporate department of one of the top two debtor side firms. The idea that a student who is completely unable to pay their loans shouldn't have bankruptcy relief is ridiculous.

      No one ever tells our huge corporation clients that they borrowed the money so they have to pat it back. No one even condemns them for leaving employees without retirement benefits or health care.
      If the average person understood what corporations get away with in bankruptcy, they would have no concern allow pauper students to discharge some of their debt.

      No company assumes that because they borrow money they are terrible people if they don't pay it back. It is just business and the banks were stupid enough to lend to them - it is the lenders fault.

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    5. The claim that, in the absence of BK protection for student loan originators, no one but the feds would generate loans might be true, but I bet you could risk-price loans to kids going to, say, HYS such that the loan product would be viable.

      As has been discussed on this blog at length, the doubts as to whether most lower schools would find lenders for their students really just speaks to the need to have probably 70% (or more) of current law schools close their doors. There is a HUGE surplus of JD holders ready and willing to meet legal services demand for at least the next decade.

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    6. Well, Harvard is starting the phony job biz for new graduates to make their stats look good, are they not? Doesn't bode well for loan repayment, even from the self-styled elite.

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    7. Well, why shouldn't they? $17,000 was a lot more back then, and I'll bet many of them paid way more than that. If they ever do forgive all the student debt, the real chumps will be the people who worked hard and honored their obligations. Any debt cancellation package should also give a fat check for the amount of tuition plus interest to the people who have already paid off their loans. By the way, if they "forgive" student debt, no student in America will ever get a single penny of loans again. College will once again be the EXCLUSIVE province of the wealthy elites - which might actually be a good thing, when you think about it..

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  13. "(2) Law school tuition and law graduate debt have been climbing by an average of 6% per year."

    This doesn't tell the whole story because schools at the top are increasing tuition 3% or less as they have begun to recognize law school already cost too much. On the other hand, some unranked schools are increasing tuition over 10% to cover operating expenses. It is my opinion that this strategy will put these unranked schools out of business in 2-5 years. Think about it. If a school is charging 40k a year increases tuition 10% a year for five years that would bring tuition to 64k. Can you imagine these schools surviving if they were actually charging more than Yale? I highly doubt it.

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  14. Imagine the situation for the poor souls who default on their loans - or who need to put their monstrous student debt into deferrment, while they look for work.

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  15. Good point Nando, Lawprof, should we be estimating not the "6 month grace period", but instead perhaps 15-24 months of extra interest accrual? There is no gaurantee someone has a job to even start on IBR in 6 months, perhaps at least a 12 month of extra interest accrual (6 month grace + 6 months of "looking for job deferral") should be a more accurate calc.

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  16. The shitty grad loan debt situation is starting to spur some interesting innovations on the lending/refinancing front. SoFi, for instance, is a new alumni lending fund that lets grads from certain approved law and business schools take out new loans or refinance their debt at 5.9% fixed--not variable like most private loans and way better than current PLUS or Stafford rates, with comparable repayment plans (although no public interest repayment eligibility). It's not a solution to high tuition amounts, though, and you won't find most lower-tier or mid-tier law schools on the SoFi approved list, for good reason--Eligibility is tied to employment prospect stats, among other things, and the loans are backed by alumni investors, so you have to have a critical mass of successful alums to make it work.

    http://refer.sofi.com/a/clk/37cZ6v

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  17. Do the Bar period loans that I know myself and many of my non-rich friends had to indulge in count towards this average figure? If you didn't have a job lined up before graduation you almost had to get one of these (especially if you could be convinced the Bar and the Bar exam courses were mandatory) and they were usually in the 10k-15k region. Even if you did have a job, if you weren't from a well-to-do background, it seemed like it was normal to go for the loan. I just wonder if because that's technically "post-graduation" it wouldn't be added. And what percentage get them.

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    1. No these numbers don't include bar course/bar period loans. I'm not aware of any stats on how many grads get such loans (I believe these are private loans as the federal loan programs can't be extended to post-graduation costs). This would be good to know as I suspect the number of grads who take them is high and rising.

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  18. @9:31 & 9:40

    I would say add more like a year and a half of deferred payments - you're forgetting the mandatory year and a half of unpaid internships most of us end up doing before we are even considered for hiring. Seriously, I querried numerous grads and came up w/ an average of about 5 unpaid internships before someone lands a paying job nowadays - if they land a paying job. If you realize that two will probably be done after first year and second year, it means the average grad will do about 3 unpaid internships AFTER graduation before landing a paying job.

    So deferment lasts at least a year and a half after law school based on the numerous unpaid internships one is expected to do nowadays.

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  19. http://thinkprogress.org/security/2012/10/30/1110901/bush-fema-director-katrina-hits-obama-sandy/?mobile=nc

    Why am I not surprised Michael Brown was a law professor at some point during his profession career. The position of law professor these days, with its emphasis on credential leadership instead of real world achievement, seems to be especially attractive to a certain breed of candidate...

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    1. Exactly - and Dear Leader Obama himself was another worthless boomer law prof.

      Today's academic left is all about the $$$ and the bling. It's hard to imagine a time when they actually stood for something other than their own self aggrandizement.

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  20. Probably not PosnerOctober 30, 2012 at 12:01 PM

    Again, it's worth bearing in mind that avg. college debt is only about 26K. While a significant amount, this number is far lower than the amounts needed to attend law school. So, educational debt in general might not be getting so much political attention in part because professional school are outliers in the debt levels their students are assuming.

    http://www.nytimes.com/2012/10/18/education/report-says-average-student-loan-debt-is-up-to-26500.html?ref=education

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  21. A dean actually said "reducing tuition will be a top priority." I really want to believe him.

    http://www.law.com/jsp/nlj/PubArticleNLJ.jsp?id=1202576483906&slreturn=20120930151544

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    1. he's just doing a Dean Wu.

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  22. This comment has been removed by a blog administrator.

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    1. Please delete this rubbish. Some jackass insists on posting it every day.

      Delete
    2. Don't hate the player, hate the game. I find it an amusing take on the scam.

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    3. Ask and it will be given to you; seek and you will find; knock and the door will be opened to youOctober 30, 2012 at 7:07 PM

      Wow, uber-anonymous 6:40 asks for a sanction, and 20 minutes later said offender gets sanctioned.

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    4. First they came for the JD Painter Guys, and I said nothing. And when they finally came for me, there was no one left to speak up...

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  23. Anybody familiar with this venerable outfit–“Society of American Law Teachers” (SALT), which calls itself “a community of progressive law teachers working for justice, diversity, and academic excellence.” SALT's national office is housed in that citadel of academic excellent, Touro College, Jacob D. Fuchsberg Law Center.

    http://www.saltlaw.org/

    http://www.saltlaw.org/sections/view/networking

    These righteous law professors run conferences, dinners, and social justice retreats and publish a newsletter and a blog in which they seek to address injustice. As to the injustice that is law school, they seem to mention defects in “diversity” and “access” and “pipeline” (aka recruitment) about 200 times for every mention of tuition and job outcomes.

    See e.g. http://www.saltlaw.org/contents/view/470

    Maybe SALT needs to realize that they do nobody, minority or non-minority, any favor by providing entree to a fourth tier law school that will saddle them with massive debts, limited job skills, and meager job prospects.

    Indeed, SALT runs a blog in which a member of their 30-member Board of Governors, Professor SpearIt [too cool for a last name] of that trainwreck of a Third Tier, St. Louis University, made some shockingly arrogant and callous statements about these issues. To appreciate his comments, realize that SpearIt has a Ph.d. in religion, has never practiced law a day in his life, likes to yap about radical pedagogy, and has a good claim to being the most unqualified law professor in the United States of America.

    http://www.saltlaw.org/contents/view/2011_boardofgovernors

    http://www.jdunderground.com/all/thread.php?threadId=35139

    SpearIt says:

    * “Among his [Law Prof’s] contentions is that law professors are “absurdly overpaid” and do “almost no work.” Such careless statements betray the profession.”

    * “Given the differences in seniority and experience, you might say that his [Law Prof’s] view comes from the top-down, whereas mine is from the bottom rung.”

    * “Taken wholly, when the hours for scholarship, service and teaching tally, a professor’s workload rivals the hardest working lawyer at any firm. Professors don’t just sit around and toast themselves, but operate in a competitive and demanding profession.”

    * “Another defect in his account is in assuming that law schools are only supposed to produce lawyers. Rather than short-sighting law schools as a manufacturing plant for attorneys, legal education might be encouraged beyond. Whether one aspires to business, politics, public service, or scholarly pursuits, law school may be a worthy investment.”

    * “To be certain, law schools can hardly compete with private sector pay.”

    http://www.saltlaw.org/blog/2011/08/29/unmasking-anonymity-whos-scamming/#more-2808

    dybbuk

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    1. This reminds me when I worked at Yale medical school. I remember hearing so much about how Yale wanted to help the underprivileged - as long as those underprivileged were in some fancy foreign land. When it came to New Haven with its awful poverty, not so much.

      The point being that self-righteousness is so easily practiced, even among those who spend countless moments concerned about injustice in the world.

      Funny how the rich are so concerned about injustice -as long as it's far away.

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    2. Imagine the sort of pretentious fuck would call himself "SpearIt". Jesus H Christ.

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  24. Professor SpearIt? . . . Does he actually bring a spear to class to “take care” of unprepared students?

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  25. It's going to get to the point where it doesn't matter how much students borrow. Be it $200,000 or $1 billion, IBR ensures that there is no relation between the cost to the student and the amount borrowed.

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    1. No relation at the moment. At forgiveness time, though, the cost to the student in terms of income tax will be noticeable.

      But that's way off in the future and most kids haven't been taught to think of debt as money owed, right now.

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  26. Step 1: Leave the country -- you can now qualify for the foreign income exclusion, meaning your AGI will be $0.
    Step 2: Get a job as a teacher -- you can now qualify for the public service loan forgiveness plan, meaning the whole nightmare ends in 10 years.
    Step 3: ?
    Step 4: Profit.

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    1. Are you willing to live in Tanzania for 10 years?

      Delete
    2. Check the regs. Unless I'm way off base, teaching is explicitly limited to domestic teaching in them. I looked it up a while back when I was considering going to Korea.

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    3. Probably not PosnerOctober 30, 2012 at 6:40 PM

      Ironic, of course, that a large number of people in law school taught abroad before going back to school :)

      Delete
  27. No, probably not Tanzania, but I might consider one of the other 190+ countries in the world.

    ReplyDelete
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    1. So who is stopping you?

      GTFO.

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    2. So who is stopping you?

      GTFO.

      Delete
  28. "So who is stopping you?

    GTFO."

    Already done, and haven't made a payment on the loans all year. IBR, the Obama-phone of the educated "elite."

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    1. hahaha! IBR is rubbish for everyone involved. If the gov't is really taking a loss on IBR, why don't they front-load the loss and write down loans so the oppressed can better buoy the economy - buy houses, have kids?? Oh yeah, because we only bail-out fraudsters not fraud-victims; we reward gov't-cozy monopolists, not those who paid a monopoly rent! WAR ON YOUTH. TIME TO STAND UP.

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  29. This may go more to yesterday's post.

    Found this place where you ask a lawyer a question online and you only pay if you like the answer.

    Legal zoom is only forms and free legal advice on their Facebook page twice a week- this is - you post a question, a lawyer answers and if you don't like the advice, you walk away without paying .

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  30. 2008 graduate here with 70k in private loans and over 150k in federal loans. My monthly payments are over $1k. My monthly take home is less than $3k. I'm thankful to have a job (ITE) but I wish I never went to law school because of the debt load and lack of jobs to service my loans. It's unbearable. I rent a room and drive a beater. I'm in my 30s, and can't even afford to think about having kids or buying a house yet. I'm ashamed and depressed. Yeah, I know I drank the law school kool-aid but I still feel guilty for ruining my life (at least this last decade and for the foreseeable future).

    Bottomline...If I had known that this is what higher ed leads to, I would have never gone to school. I'm honest and hardworking. I want my money to support a family, not the fat cats at some bank.

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  31. "My school is a T2 in a major population center (top 10 in population city)."

    What does T2 mean? Is it on the old 4 tier scale or the newer (and more meaningless) 2 tier scale? (but for all intents and purposes, it's basically a non T-14)

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    1. sorry, responded to wrong blog post

      Delete
  32. The very opening sentence that says about one of the problematic features of institutional decision making should have accompanied an example. That’s what I feel being a writer now for almost 3 years. Anyway, I agree with you on this point that the outcomes of institutional decision makings are often felt when several years have passed and sometimes when the purpose of the decision making is submerged. That’s ridiculous, right? However, the theme that spiraling debt burdens for law school graduates and an approximate $124,950 of debt after graduating is really creepy as if not provided with a govt. job, you are not going to make a good living and repay your debts.

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  34. But what point can you score when you besiege a home of an opposition leader? What is the real worth of your regime when a whole police institution sends out a tweet denying the attack on the home of your opponent by saying he was scared of police of foot patrol? sms lån

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