Will IBR/PAYE be good for future law school graduates?

Starting with the incoming class of 2013, [edit: Actually people who took their first federal loan no earlier than 2007 and have taken at least one loan since September 2011 are eligible for PAYE.  This means many current law students and even some people who graduated from law school this past spring are eligible for the program] almost all educational debt incurred subsequently by law students will be eligible for payment through, and eventual discharge by, Pay As You Earn (PAYE), the new version of IBR.  Will PAYE be a good thing for law graduates?

The answer, I think, is it may well end up being a good thing for a discrete and insular minority of law graduates, but the overall effect of the program on law graduates as a class will be bad.  Here's who in this class the program may benefit:

Moderately to highly financially successful lawyers, especially those with high-earning spouses, who incur high (which is to say typical) levels of law school debt.

Here's who in this class the program is likely to hurt on net:

Everybody else.

For the purposes of this analysis, I'm going to assume that PAYE will remain in its present form for the foreseeable future, and will not be pared back or eliminated.  This is an optimistic assumption.  Higher education debt in America is spiraling out of control (outstanding educational debt, not counting accrued interest, has gone from $220 billion in 2000 to around one trillion dollars today, and is growing by 15% per year), default rates are rising rapidly, and a very large percentage, possibly one half, of student loans are not currently in repayment.  In regard to student debt law graduate debt is merely the canary in a coal mine that seems headed for a catastrophic cave-in.

I'm also going to assume that law graduates will end up enrolling in PAYE in large numbers.  (This is in fact inevitable unless either the price of law school declines drastically, or big law firms start hiring 15,000 people per year rather than 5,000, or law school becomes an enclave almost exclusively for rich kids.) 

But let's assume our overlords continue to conclude that back-end quasi-bankruptcy and soft default for a series of lost generations is an acceptable price to pay for keeping the 99% reasonably quiescent.   If you're willing to gamble on this, and you can get and keep a real job as a lawyer that pays decently, and you have a high tolerance for uncertainty, and a spouse who has a similar attitude toward the fact that you have an enormous unsecured debt that you're never really going to pay off, you may do just fine.

PAYE is remarkably generous to people in such a position (By contrast it provides little benefit to low earners with relatively low levels of debt.  A college graduate who has $30,000 of educational debt, who gets a job that pays $30,000, and who is earning $65,000 per year 20 years later in nominal dollars, will get a total of about $7,500 of benefit from PAYE in terms of net present value).

The problem, of course, is that most people going to law school today either won't have real legal careers at all, or will wash out of the profession sometime over the next decade or two, after enduring a series of financially and psychologically undesirable jobs.  For these people, PAYE will end up being a bad thing, to the extent it enticed them to go down a path they otherwise would have avoided.

The defenders of PAYE underestimate, in my view, the following factors:

(1) The effect of PAYE on the cost of law school.  If PAYE is employed widely by law graduates, this will encourage law schools to keep raising tuition, since the debt incurred by law students will come to be viewed by both them and law schools as essentially a form of monopoly money.  (The tuition paid by these students will, however, remain delightfully real).  This will destroy any possibility of law schools reforming their cost structures in such a way as to bring the value of a law degree in line with its social cost.  Of course to the sufficiently cynical and shameless within legal academia this is a feature not a bug.

(2) The effect of (1) on graduate debt.  If PAYE remains in place average educational debt for law graduates will within five years top $200,000, while at private schools it will be more along the lines of $250,000.

(3) The psychological effect of (2) on the very large percentage of law graduates who will find themselves carrying fantastic debt loads while being unable to earn a reasonable middle class living as lawyers, or who indeed will never be lawyers at all.  Keep in mind that PAYE doesn't create a single new legal job, or add a dollar to anyone's salary.  The graduate toiling away in a $50,000 per year cut and paste office will be paying an 7% or so surcharge on top of an effective tax rate of around 25%.  As DJM points out this is both a significant individual and social cost.   Does the "prestige" of calling yourself a lawyer compensate adequately for a take home pay of $2,800 a month, while watching your $200,000 debt balloon ever-higher, and hoping that the political process doesn't ever decide that you actually have to start paying it back?

And what about the large percentage of graduates who won't have even that compensation, because they won't be lawyers?  I suspect that for these people, their debt is going to feel very real, even if they're allowed to remain on what they will understand is a straight-up welfare program for a generation of over-educated and under-employed young pseudo-professionals.

In short, PAYE, to the extent it lasts, is just delaying the day of reckoning for higher education in America in general, and law schools in particular.  It's just another classic example of how we're managing to shuffle off social costs from the present to the future.  But, as the economists like to say, "no costs are external to the world."   Unpaid bills eventually become due, one way or another -- even for law schools.