This market belongs to you and me

Acceptance is easy in the aggregate. Law deans and professors look at national employment figures and shake their heads. They acknowledge that law jobs are disappearing and that salaries are declining.

But they don't believe the statistics are true of their school. We're in the top ten, they think--or the top quarter, the top half, the top three-quarters. Or we have a special regional advantage, or a top-rated program in health care/intellectual property/trial practice....

Unfortunately, this is an equal (non)opportunity market. The changes that are sweeping law practice have affected hiring at every law school. The shifts are different at each step of the law school hierarchy, but the changes are everywhere. Starting from the top, here are a few examples (statistics come from the ABA's 2011 employment reports and school websites). All statistics report outcomes nine months after graduation:

• Harvard funded 33 full-time, "long-term" (at least one year) jobs for its 2011 graduates--that's 5.7% of its graduating class. This is a new program: the positions did not exist for 2009 and 2010 graduates.

• The University of Pennsylvania is tied for seventh in US News, but only 84% of its 2011 graduates obtained full-time, long-term ("FT-LT") jobs that required bar admission. Exclude the four jobs funded by the school and the percentage slides to 83%. That's almost one out of every five grads from a top-ten school without a FT-LT job requiring bar admission.

• Penn tracks salaries more closely than many schools, which allows us to see how those numbers are falling. According to Penn's website, its 25th percentile starting salary was $142,500 in 2008, with 95% of the graduating class reporting salaries. In 2009, the 25th percentile salary fell to $125,000; in 2010, it was $73,408; and in 2011, just $62,688. That's a drop of more than 60% in three years. The percentage of graduates reporting salaries also fell, so the decline probably is even worse than these numbers suggest. 

• Things aren't much better at Virginia, another seventh-ranked school. In 2008, Virginia sent 216 graduates (54% of the class) to firms of 500+ lawyers. In 2011, it sent only 96 graduates (25% of the class) to those firms. Virginia did place 95% of its 2011 class in FT-LT jobs requiring bar admission--but only because Virginia paid for 18% of those jobs. Sixty-four Virginia grads took those fellowships, earning a median salary of $27,000. 

• UCLA ranked fifteenth in US News, but placed just 61% of its 2011 class in FT-LT jobs requiring bar admission. Starting salaries? UCLA doesn't report overall figures, but the 25th percentile for graduates in private practice fell from $132,000 in 2010 to $85,000 in 2011. The percentage of graduates getting private practice jobs also fell, as did the percentage of those grads reporting their incomes.

Outcomes at the top 15 schools don't affect just those schools' graduates; they reflect broader market trends and create ripple effects of their own. If bottom-quarter salaries have fallen so far at Penn, and if Virginia grads are taking jobs that pay $27,000, what do you think is happening at other schools?

Here's a first peek at the next thirty-five, the schools (like my own) that rank in the top tier of U.S. News, but outside the top 15. Using the ABA Reports, I noted the percentage of 2011 grads at each school who found FT-LT jobs requiring bar admission by nine months after graduation. In the right-hand column I adjust the raw percentage to eliminate FT-LT jobs funded by the school itself:

2011 Graduates Obtaining Full-Time, Long-Term

Jobs Requiring Bar Admission

U.S. News Rank	School	Raw Percentage	Adjusted Percentage
16	Texas	69.9	69.6
16	Vanderbilt	73.7	73.7
18	USC (Gould)	64.7	64.7
19	Minnesota	59.4	59.4
20	George Washington	81.3	65.8
20	University of Washington	52.7	51.6
22	Notre Dame	62.1	61.1
23	Washington University (St. Louis)	59.3	59.0
24	Emory	68.9	57.8
24	Washington & Lee	55.0	55.0
26	Arizona State (O’Connor)	68.2	68.2
26	Boston University	50.9	50.9
26	Indiana-Bloomington (Maurer)	63.6	63.6
29	Boston College	68.4	68.4
29	Fordham	55.7	54.0
29	University of Alabama	78.0	78.0
29	UC Davis	56.4	56.4
29	Iowa	65.6	65.6
34	University of Georgia	61.2	61.2
35	William & Mary (Marshall-Wythe)	54.9	54.9
35	University of Illinois	51.1	46.8
35	University of Wisconsin	62.6	62.6
38	University of North Carolina	68.4	68.0
39	Brigham Young (Clark)	51.4	50.0
39	George Mason	60.0	58.8
39	Ohio State University (Moritz)	58.4	58.4
39	University of Maryland (Carey)	47.1	47.1
43	University of Arizona (Rogers)	75.3	75.3
44	UC Hastings	46.5	46.2
44	University of Colorado	55.7	54.0
44	Wake Forest	56.3	56.3
47	University of Utah (Quinney)	68.7	67.2
48	University of Florida (Levin)	59.4	58.9
49	American (Washington)	35.8	35.3
49	Pepperdine	42.8	41.0

These results tell us two things: First, some schools are supporting a significant number of their grads for a full year after graduation. George Washington paid for eighty members of its Class of 2011 to work full-time for a full year. That's 15.4% of the class. Illinois paid for eight full-time, one-year positions--a much smaller number, but still 4.2% of its graduating class. And remember, these are just the full-time, "long-term" positions funded by a school; almost every school in this top tier paid for some part-time and/or short-term positions.

Second, the number of real lawyer jobs available to these graduates is far too low to support the time and money students are devoting to the traditional three-year degree--even at schools within the top quarter of all accredited schools. On average, after eliminating school-funded jobs, only 59% of students at these thirty-five schools obtained full-time, long-term jobs that required bar admission. Entering students: Look two seats to your left and two to your right. Among the five of you, only three will manage to find a semi-permanent, full-time job practicing law within nine months of graduation.

And that's just the basics. I'll have more to say soon about the stability of those three jobs, the salaries they may pay, and their prospects for long-term advancement. We also need to look at the remaining three quarters of law schools, where the outlook is even grimmer.

This job market is everywhere, faculty colleagues: at my school and yours. What's our next move?

Five stages of grief

Updated with Online Link

James Leipold, the Executive Director of NALP, has a striking column in this month's print issue of the NALP Bulletin. For an online version, click here. Leipold begins by noting his surprise that "a number of law schools, through their dean or their office of career services, have called on NALP generally and on me specifically to develop a more positive message about the entry-level job market. One request went so far as to urge me to describe the entry-level legal employment market as good."

Shocking but, sadly, not surprising. Law schools have had to disclose their sobering job outcomes, but they want to reassure applicants that the market is "fundamentally strong" and will "turn around shortly." Fortunately, Leipold points out that he can't say things that are false.

After summarizing the dismal job statistics for recent graduating classes, Leipold turns to the future. Is all of this due to the recession? Can law schools assure applicants that the legal hiring market will return to the highs of 2006 and 2007?

Leipold, who has been reviewing law school job outcomes for years, gives an emphatic "no." "[O]ne thing we know for sure," he asserts, is that the job market for the Classes of 2016 and 2017 "will be different, and probably dramatically so, than it was for the Classes of 2006 and 2007."

Why? After pointing to steeply declining outcomes for the Classes of 2009 through 2011, Leipold writes: "We also know that the large law firm hiring model is different than it was before the recession, and is not likely ever going to look like it did in the last years before the economic collapse. That is because the business environment for large law firms has changed in significant ways that are likely to be permanent, or at least it has changed because of trends that are not likely to reverse themselves."

There you have it. Leipold is someone who hangs out with BigLaw partners and recruiters; BigLaw is the backbone of NALP. He also has every incentive to portray legal hiring as optimistically as possible; see above on pressure from law schools. If Leipold thinks BigLaw will not revive its ebullient hiring practices, then it almost certainly will not.

Leipold offers three further specifics, which have been noted on this blog and elsewhere, but are worth repeating:

• The legal market for corporate services has shifted from a seller's market to a buyer's one, and "that shift is not likely to reverse itself even if the U.S. economy improves significantly."
• Corporate clients have learned the lessons of disaggregation: They are "breaking up legal matters and sending the different pieces to the lowest cost provider," including offshore centers and domestic outsourcing companies. Again, economic recovery will not alter this conduct.
• Corporate clients are demanding alternative and capped fees, rather than open-ended hourly billing, for an increased percentage of their work. These demands are increasing, despite signs of economic recovery.

All of these trends dramatically reduce demand for new associates at BigLaw firms. If a client will pay only $10,000 for a legal service, the firm wants a lawyer who knows how to get the job done quickly. If the client is sending all document review to outsourcing, the firm doesn't want dozens of highly paid associates sitting around with nothing to do.

Leipold doesn't mention this fact, but the firms themselves have learned the outsourcing lesson: Why hire full-time associates, who you have to keep busy or pink slip with notice, when you can hire outsourcing firms as needed? Firms can mark up the outsourcing charges, so why not leverage that work rather than the output of high-maintenance associates?

As one measure of the shift in BigLaw, Leipold observes that starting salaries of $160,000 accounted for 25% of the NALP-reported salaries in 2009--but just 14% of those salaries in 2011. If we look at the total pool of graduates (since almost all $160,000 salaries are reported), we can translate those figures to these:  About 4,878 members of the Class of 2009 secured salaries of $160,000; that's 11.1% of that year's graduates. In 2011, just 2,608 graduates obtained that entry-level salary--only 5.9% of the full class. Top BigLaw salaries are almost as rare as giant pandas.

But this isn't just about BigLaw. As entry-level opportunities close in BigLaw, those graduates move into MidLaw, government, and other markets. They displace the graduates who once secured those jobs; those graduates, in turn, move down to SmallLaw, smaller government, and solo work. And all of these middle and smaller markets have experienced their own contractions.

Leipold's message is crucial because it acknowledges that BigLaw is not going to revive entry-level positions. If those positions are not coming back, then the same pressures will appear in smaller markets. Indeed the hiring effects may be more dramatic downstream because they will reflect both displaced BigLaw associates and direct market forces.

After offering these insights, Leipold returns to the "words and actions of many of those involved in legal education and the legal profession generally." He clearly is troubled by law schools that want him to pronounce a strong, recovering job market when just the opposite is true. Faced with this dissonance, Leipold recalls "Kubler-Ross's five stages of grief: denial, anger, bargaining, depression, and acceptance." He concludes that "there are quite a few people in law schools, law firms, and other legal services settings around the country who have yet to reach acceptance."

Indeed. Too many law schools are in denial--or, even worse, inviting deception. We need to get past denial and skip quickly over the rest of our grieving. There's not much point in getting angry at economic trends or trying to bargain with them. And depression won't help our graduates or the profession. It's time for acceptance, and then action. More on that soon.

Vanguard of the precariat

ITLSS is hosting its two millionth site visit today, which provides an occasion for looking back on what has happened over the fourteen months of this blog's existence.

Some signs of real progress:

(1)  Overall awareness regarding the existence of the law school scam has increased enormously.  In the mainstream media, the claim that the cost of law school no longer bears any reasonable relationship to the value added by a law degree has gone from a man bites dog to a dog bites man story in the space of less than two years.

(2)  As a consequence, total law school applicants are down sharply -- 23% since 2010 -- and while final totals for the class of 2015 are not yet available, preliminary figures suggest that this fall's entering class will feature around 15% fewer matriculants than the class of 2013.

(3)  The ABA Section of Legal Education has been pressured successfully into requiring schools to publish far more employment data than was available even a year ago.  For example, elite law schools are no longer able to hide the fact that they are hiring large numbers of their own graduates into short-term "jobs" that in many cases are classified as long-term for ABA reporting purposes (it's difficult to recall that twelve months ago there was almost no public acknowledgement of this fact).

(4) Prospective law students are gaining a better understanding of the emptiness of the once all-powerful USNWR rankings, and beginning to focus their attention on the only two factors that matter when choosing a law school: costs and outcomes.  (My new book Don't Go To Law School (Unless) provides, among other things, a concise guide on how to go about doing this.)

Going forward, it will be crucial for advocates of law school reform to connect their message with broader calls for reform in higher education generally.  Legal academia's combination of out of control costs, increasingly poor employment outcomes, and life-wrecking graduate debt totals (applicants in this current cycle are likely to graduate, conservatively, with an average of more than $200,000 in educational debt) can serve as a kind of canary in the coal mine in regard to the growing crisis in American higher education, which has generated more than one trillion dollars in outstanding student loan debt, while leaving a lost generation of young and increasingly not so young people with nowhere to go in our post-industrial economy.

The law school scam, in other words, is just the tip of the iceberg.  That is obviously very bad news, but it also contains a kernel of hope.  For if it were only or primarily law graduates who were being scammed out of their futures, it would be difficult to impossible to achieve any systemic change.  But this is the opposite of the truth.  We can even hope that the tens of thousands of law graduates who every year discover their degrees are worse than worthless may in time become a potential vanguard of the precariat -- a source of leadership for their so expensively educated and so badly under-employed generation.

Going to zero

Last night I started reading Michael Lewis's The Big Short, which is about the financial meltdown of 2008.  I don't have time to write much about it today, but it would be an understatement to say the story Lewis tells has some relevance to the topic of this blog. 

Here are just a few quotes from the opening chapters of the book:

[Meredith Whitney's] message was clear: if you want to know what these Wall Street firms are really worth, take a cold, hard look at these crappy assets they're holding with borrowed money, and imagine what they'd fetch in a fire sale. The vast assemblages of highly paid people inside them were worth, in her view, nothing.

"It was a fast buck business," says [Sy] Jacobs. "Any business where you can sell a product and make money without having to worry about how the product performs is going to attract sleazy people."

When [Steve Eisman] was done, he had an explanation for the unpleasant order wafting from the subprime mortgage industry he had detected. These companies disclosed their ever-growing earnings, but not much else. One of the many items they failed to disclose was the delinquency rate of the home loans they were making.

The interest rate on the loans wasn't high enough to justify lending to this particular slice of the American population. It was as if the ordinary rules of finance had been suspended in response to a social problem. A thought crossed his mind: How do you make poor people feel wealthy when wages are stagnant? You give them cheap loans.

"If you are going to start a regulatory regime from scratch, you'd design it to protect middle and lower income people, because the opportunity for them to get ripped off was so high. Instead what we had was a regime where those were the people who were protected the least."

Eisman asked, "Are any regulators interested in this?"
"No," said Sandler.
"That's when I decided the system was really, 'Fuck the poor.' I now realized there was an entire industry that existed basically to rip people off."

The original cast of subprime financiers had been sunk by the small fraction of loans they made that they had kept on their books. The market might have learned a simple lesson: Don't make loans to people who can't repay them. Instead it learned a complicated one: You can keep making those loans, just don't keep them on your books.

"You have to understand, I did subprime first. I lived the worst first. These guys lied to infinity. What I learned from that experience was that Wall Street didn't give a shit what it sold."

 We've seen this all before.

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.

A frank exchange of views

Dear Professor Campos,

I just read with much disappointment the article in the Business Insider, which attacks our efforts to begin a new law school in Fort Wayne, Indiana.  I am quite surprised that we are the only new law school that is being attacked when there are also new schools in Tennessee, Idaho, and Texas that have either opened this year or are slated to open with us next year. I believe that each person is entitled to his or her opinion on this topic, but I find your quote within that article to be outrageous and completely inappropriate.

In the piece, you are quoted as writing, "Chutzpah has been defined as murdering your parents and then pleading for mercy because you're an orphan…How about setting up another legal diploma mill in a hyper-saturated market, while claiming that what will set your school apart is its emphasis on 'ethics' and 'professionalism'?"

You have no idea about the details of our school. We are NOT a “diploma mill.” You have not read our Prospectus that details how the school will operate and what we intend to accomplish. Additionally, you have not taken the time to reach out to me to learn anything about the true mission and purpose of our school. Finally, to equate the opening of a law school with murdering one’s parents is reprehensible. You should be ashamed, but people who throw incendiary devices into conversations rarely have any shame. If you have any integrity, I would invite you to contact me before you misrepresent the mission and purpose of our law school any further.

I would invite you to be more professional in the future and do your homework before you attack a very serious effort to train law students in a new and different way. There are people, like me, who have left established law schools and who have moved families to a new community because we believe in the vision that Indiana Tech has for its law school. Your remarks do more harm than good—not because of the content of your statement, but because you have obviously not done the work necessary to be armed with the facts!

Sincerely,

Peter Alexander

Dean and Professor of Law

C:         Dr. Arthur E. Snyder, Indiana Institute of Technology President

Law School Faculty

Dean Philip J. Weiser, University of Colorado Law School

Read more: http://www.businessinsider.com/new-indiana-law-school-to-open-in-2013-2012-10#ixzz28oHrpnFr

Peter C. Alexander

Dean and Professor of Law

PCAlexander@indianatech.edu | www.indianatech.edu/law

Ph: 260-399-2834 | 1-855-TECHLAW

1600 East Washington Boulevard | Fort Wayne, Indiana 46803

Dear Dean Alexander:

I have in fact read the Prospectus for your law school, which is available on line here:  http://www.indianatech.edu/Academics/Documents/Law-School-Feasibility.pdf

It makes what in my view is an extremely unconvincing case for your enterprise.  Your belief that there’s anything unusual or unique about what you’re proposing to do is mistaken.  What you are proposing to do is to grant law degrees at a high price to people who in most cases will not be able to obtain employment, legal or otherwise, that justifies the cost of their investment in those degrees, while paying yourself a high salary out of the money these people pay for the privilege of attending a seriously overpriced institution, that will leave them worse off than they were prior to their enrollment. 

Naturally you find this evaluation of your conduct outrageous and reprehensible, but “it is difficult to get a man to understand something when his salary depends on his not understanding it.”  (Upton Sinclair).

Sincerely,

Paul Campos

Professor of Law

University of Colorado

 

IBR: the trench

I suggested in an earlier post that the Income Based Repayment program is digging a trench under our economic future. Here's why:

Degree holders make up our middle and upper-middle classes. They are the consumers who renovate houses, buy hybrid cars, wait in line for the latest iPad, and pay for their kids' orthodontic work. That demand powers the U.S. economy. When the middle and upper-middle classes have less to spend, the economy suffers.

Our economy is already suffering from a serious shortfall in jobs: Grads in every field are going without the jobs they trained for. That's catastrophic for the individuals, but it's also a serious threat to the economy. People without jobs can't buy the goods and services that create jobs; without new jobs, they won't get hired. It's a vicious economic cycle, one that both economists and policymakers worry about.

Now, though, we have another problem: The escalating cost of higher education, combined with IBR, is intensifying that cycle. Even the grads who find jobs have significantly less of their income to spend. IBR currently takes 15% of a debtor's discretionary income; if current reforms take effect, the percentage will fall to 10%. Grads paying IBR may feel lucky: They, at least, have jobs--and they're able to support a modest lifestyle. They may pack their own lunches rather than eating out; use older model laptops and cell phones; put off thoughts of buying a house; and wear their old suits for a few more years. It's not what they hoped for in college or graduate school, but they're holding on. 

Meanwhile, what are all of those empty restaurant seats and houses, as well as those unsold laptops and dress suits, doing to the economy? A 10% cut to middle-class discretionary spending has serious economic impact. To see how significant that 10% could be, consider the huge furor over extending the Bush tax cuts for middle-class taxpayers. If those cuts expire at the end of this year, tax rates will rise 3% in the middle brackets. People who currently pay 25% will pay 28%; those who are now paying 28% will pay 31%, and those who are paying 33% will pay 36%.

Almost everyone agrees that those increases would cause significant economic damage. When taxpayers send 3% more of their marginal income to the government, they reduce other spending. The resulting decline in consumption would leave lots of goods and services on the shelf. Businesses would close or contract; jobs would disappear; families would spend even less...the whole ugly cycle would accelerate. 

For just this reason, both Republicans and Democrats oppose increasing tax rates for the middle brackets; the only dispute centers on how to treat the top income bracket. But while we're all swooning over 3% decreases in discretionary middle-class spending, we're blithely ignoring a system that will take up to 10% out of middle-class incomes for years to come.

Some money paid through IBR is tax deductible, but the amounts are limited. Most grads will feel some IBR bite on top of their tax bite. The economy will feel that same bite, in the shape of reduced discretionary spending by graduates. The money you send to the Dept of Ed won't buy new furniture or running shoes.

The IBR bite wouldn't matter if graduates were earning significantly more due to their degrees. If college graduates today were earning 10% more than they did ten or fifteen years ago, then they could afford to pay off their loans while still spending as much in the marketplace as earlier grads did. Unfortunately, though, degree holders are not earning significantly more today than they did ten or fifteen years ago. The National Center for Education Statistics, a division of the federal Dept of Education, reports that young adults with a college degree earned a median income of $45,000 in 2010. In 1995, they earned about the same amount ($44,300) in inflation-adjusted, constant 2010 dollars. The numbers for graduates with an MA or higher are even worse: Those incomes declined from $56,700 in 1995 (using constant 2010 dollars) to $54,700 in 2010. 

Nor would the IBR bite matter much if educational loans were limited to a small percentage of the workforce; our economy could continue to prosper based on spending by other middle-class consumers. But a recent study by the Pew Research Center shows that 19% of all US households held student loan debt in 2010. A whopping 40% of under-35 househelds held that debt. And average debt amounts are increasing each year.

All of this paints a grim picture: Degree-holders are earning no more than they did in the past, but they are significantly more likely to hold student loan debt--and to owe more of that debt. Under IBR, graduates will pay off that debt as a percentage of discretionary income every year for the forseeable future. The impact will be close to a 10% increase in the marginal tax rate for each of those debtors. That's got to hurt the economy, impeding creation of the very jobs that these graduates need to pay off their debt. 

The primary flaw doesn't lie in IBR itself; the problem stems from the ready availability of guaranteed loans and from the extravagant rises in the cost of higher education. But IBR is lulling more students into assuming this debt--and allowing educators to tout loans as an affordable way to earn costly degrees.

Affordable today, perhaps, but we're siphoning that money directly from tomorrow's economy. IBR lets us see just how damaging this debt will be to the future: It will affect consumer spending as much as a major tax increase. Let's hold the next Presidential debate on that issue.