Will IBR bail out law schools?

Here's a nice little puzzle for people who put a lot of stock in models that assume people are rational maximizers of utility: Why are law school applications cratering even as the long-term cost of attending law school is (arguably) declining sharply?

The argument for declining cost is very straightforward: as of now, no one has to actually pay back their loans any longer, because of IBR/PAYE, which limits liability for federal loan repayment to 15% or (for most law students going forward) 10% of that portion of your annual AGI that’s more than 150% above the poverty line, for the next 25, 20, or ten years.   Sure you get hit with a tax bill at the end if you’re not in PSLF, but only to the extent you’re solvent at that point, and besides when you’re 23, 25 years from now might as well be in the year 2525.

As IBR/PAYE’s growing booster club within legal academia is starting to point out, this means it makes literally no difference whether you have $100,000 or $250,000 or (just wait a few more years) $500,000 in educational debt: your loan payments will be the same.

That sounds like a pretty sweet deal, and it’s one whose existence was almost completely unknown within legal academia even three years ago, let alone to law school applicants (I doubt one in a thousand law school applicants during, say, the 2009-2010 cycle had even heard of IBR, which was brand new and  unadvertised by the government at that point).

So why did 88,000 people who thought they had to repay their loans apply to law school in 2010, while in 2013 perhaps only 53,000 will apply, when many of them will know it’s all monopoly money anyway?  (How many is unclear, but IBR is a much-discussed topic on forums such as TLS and JDU).

Some possible explanations:

(1)    Not enough potential applicants have heard that law school is becoming a genteel version of the Roman Legion (20 years of service to the Emperor and your debts are wiped out).   This probably plays a role, but I would guess not a particularly big one.  The Obama administration has been pushing IBR hard lately, and Kids These Days are all on Facebook so they hear about stuff like this.

(2)    A variation on (1) is that, although potential applicants may have heard of IBR, law schools are still soft-pedaling it, relatively speaking, for a couple of reasons: First, because it’s politically tricky to advertise that your operation’s budget is based on the assumption that taxpayers will pick up the tab for the large percentage of the loans your graduates take out that won’t be repaid.  That’s the kind of thing you probably want to keep on the down low to the extent possible.  Second, it’s important not to underestimate how much denial still grips legal academia.  Telling law professors that they’re peddling worthless degrees that generate enormous debts that won’t be repaid naturally injures their amour-propre, so they tend not to believe it, statistics be damned.

(3)    Potential applicants are skeptical about whether IBR/PAYE is really going to work as advertised.  Perhaps it will be cut back or eliminated altogether over the years, as the political process para-glides over an ongoing series of fiscal cliffs.

(4)    Some people believe they should pay their debts, even if they’re legally entitled to escape or minimize them, and dislike the idea of getting bailed out as if they were politically well-connected investment banks.

(5)    Special Snowflake Syndrome may be coming back to haunt law schools in a particularly ironic way.  Here’s how: Many potential law students lack the necessary combination of realism and cynicism to go to law school on the basis of the availability of a soft-default/backdoor bankruptcy option, which is what IBR is.  Telling overly optimistic potential law students it’s OK if they rack up debts they can’t possibly pay because Uncle Sam will pick up the bill is tantamount to telling them they’re not so special after all.  And they don’t want to hear that, so you can’t really pitch IBR to them, which means IBR does law schools no good when it comes to a key portion of their customer demographic. Update:  As DJM and other commenters point out, a better way of phrasing this might be, IBR/PAYE sends what is, in terms of the economic interests of law schools, an unfortunate signal to two groups of potential applicants: those who have unrealistic expectations about the likely value of a law degree, and those who have realistic expectations.  In different ways, the program sends very negative messages about law school to each group.

To the extent that any of these explanations other than (1) are valid, IBR/PAYE isn’t going to end up saving nearly as much legal academic bacon as many an increasingly panicky administrator now imagines it will.