Home / General / Income-Based Repayment and the economics of higher ed

Income-Based Repayment and the economics of higher ed


GULC professor Philip Schrag has a forthcoming review of Brian Tamanaha’s Failing Law Schools that criticizes Tamanaha for failing to acknowledge that Income-Based Repayment, especially in its new form that will become available to most law students as early as next year, “solves” the problem that law degrees now cost much more than they’re worth. (Tamanaha responds here).

In his book Tamanaha presents the case of Sarah, a hypothetical graduate making an entry-level salary of $63,000 (this was NALP’s — needless to say quite inflated — “median” salary for the class of 2010). Tamanaha points out that if Sarah has $100,000 in law school debt she will be unable to service that debt via the standard ten-year repayment plan, and she will still struggle to do so under the 25-year extended payment option. “In 2007, however,” Schrag announces, “the United States Congress solved Sarah’s problem,” by creating IBR.

The new version of IBR, Pay As You Earn (PAYE), has been fast-tracked via executive order by President Obama, who is displaying either a touchingly naive belief in the investment value of higher education, or a ruthlessly cynical willingness to exploit that belief. PAYE reduces the loan payments graduates must make from 15% of disposal income (defined as income beyond 150% of the federal poverty line) to 10%, and reduces the period of payment prior to debt forgiveness from 25 to 20 years (it remains 10 years for those who qualify for PSLF by working in the non-profit sector).

Schrag argues this program makes law school eminently affordable for graduates making moderate incomes, without regard to their debt levels, and that thus it undermines the central thesis of Failing Law Schools, which is that law schools are failing because they cost too much.

Indeed from the perspective of universities in general and law schools in particular, IBR appears to be the budgetary equivalent of manna from Heaven. Note that, if she remains eligible for IBR, it makes literally no difference whatsoever how much money Sarah borrows as an undergraduate and while in law school: she will make exactly the same total loan payments over the next two decades in any case.

Let’s see how this works. Using this handy calculator (which Schrag warmly recommends to prospective law students), we will assume that Sarah gets a $60,000 entry-level job, and that her income will increase by an average of 3% per year over the next 20 years, i.e., she will be making around $108,000 20 years after graduation. If Sarah incurs $100,000 of total educational debt (this assumes all the debt is IBR eligible, which for people who entered college after 2007 it almost certainly will be), she will initially make loan payments of $360 per month, which will rise to $470 after ten years, and be up to $632 when she is making a six-figure income after 20 years in the program. She will make a total of $116,200 in payments over 20 years — the calculator estimates that this is equivalent to about $65,000 discounted to present value — which all go toward interest. In fact she will not have paid nearly $30,000 in the interest she owed on her loans, meaning that she will have $128,775 in debt (all the money she borrowed and then some) written off when her loan is forgiven. This debt will be treated as income by the IRS, and she will have to pay the tax on it to the extent that her net worth exceeds the forgiven amount (Or something like that. Consult a tax law professor or better yet a real lawyer to get the gritty details).

Note that $100,000 in total educational debt is a far lower figure than will be incurred by people currently applying to law school. I estimated recently that the average educational debt of members of the class of 2016 who graduate from private law schools and incur educational debt will be around $205,000. How much will Sarah pay if she graduates with $205,000 in IBR-eligible debt? The answer is $116,200. Her payments will be exactly the same — but after 20 years the government will write off nearly $400,000 ($396,299.07) in unpaid principal and interest (Again, $200,000+ educational loan balances will be typical for people now entering law school by the time they graduate, and $300,000 balances will be far from rare).

Is this a good deal for Sarah? That, as we shall see, is far from clear. What is clear is that it’s an unbelievably fantastic deal for law schools. You don’t need a Nobel prize in economics to figure out what will happen to the cost of law school if that cost no longer bears any relationship whatsoever to what a significant portion — indeed quite possibly a majority — of law graduates actually end up paying for their degrees. (As Matt Leichter recently pointed out, a huge percentage of law graduates going forward are going to be IBR-eligible. He also quotes the rather Zen-like economic aphorism that “debts which can’t be repaid, won’t be.”)

But let’s leave behind the world of law school administrators, who are no doubt fantasizing even now about opening taxpayer-subsidized International Environmental Space Law summer programs in Ravenna, and return to Sarah. Does IBR make law school a good idea for her?

Well . . . consider what our hypothetical graduate has been hypothetically bequeathed :

(1) A real job.

(2) A real job that pays $60,000.

(3) A real job that will lead her to make an average of between $60,000 and $108,000 every year for the next 20 years.

That, to put it mildly, constitutes a terrific career outcome for the average current law graduate. How good of an outcome?

Percentage of all 2011 ABA law school graduates who were reported to acquire jobs paying $60,000 or more: 21.4%

Percentage of all 2011 non-T-14 law school graduates who were reported to acquire jobs paying $60,000 or more: 17.6%

How many of these people are going to stay continuously employed as lawyers for the next two decades, while averaging at least COL raises over that time? In other words, how many Sarahs are law schools graduating right now?

There are a whole lot of problems with Schrag’s claim that IBR is a good thing for law students (let alone for the public as a whole, which of course is picking up this particular bill), but I’ll leave those for another day. Here I’ll stick to a much simpler and more fundamental point:

Sarah’s real problem is that she’s not getting a job, or if she does get a job it’s not paying $60,000, or if it does pay $60,000 she’s not going to be able to keep it.

Law professors tend to live in a bubble where they imagine that Sarah’s hypothetical career path is a typical outcome for people who don’t make the big bucks in Big Law. That’s why arguments about “affordability” end up assuming a series of can openers, consisting of solid salaries, career stability, and other features that have very little to do with what the large majority of current law graduates can realistically expect to obtain in return for taking out ever-more enormous piles of taxpayer-funded debt that will never be repaid.

And of course IBR has implications for the financing of higher education in general that go far beyond the world of legal education. Total outstanding student debt has grown from around $220 billion in 2000 to around one trillion dollars today (more if you count accrued interest, which the government doesn’t). Half of all student loans aren’t even being paid at present, either because they’re in deferment, forbearance, delinquency, or default. This simply isn’t a sustainable economic model, but it’s an all too characteristic example of how we finance the American Way of Life by making future generations bear its present costs.

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  • Manta

    “This simply isn’t a sustainable economic model, but it’s an all too characteristic example of how we finance the American Way of Life by making future generations bear its present costs.”

    Why? Isn’t simply a (not very efficient) way of subsidizing higher education?

  • This is one of those things which is just nuts and makes the UK’s move toward fees even more obviously stupid.

    If we want to subsidise schools, let’s just do it. Do it upfront. Do it with tons of strings attached and loads of accountability. The UK university system used to do exactly that and it seemed really sensible. Tormenting students, discouraging attendance, and installing perverse incentives is really really dumb.

    SO frustrating.

    • Paul Campos

      We can’t subsidize higher education in America directly because socialism makes the baby Jesus cry, so we’re doing it by backdoor bankruptcy and soft default for people who will pay far more for degrees than the increased earning potential (if any) those degrees will confer.

      • Observer

        Professor Campos,

        It appears that you are admitting that the product you produce (law education) is no longer valued by the marketplace and as such, requires subsidizing either by a front or back door.

        Should we also subsidize Hostess Twinkies?

        Either the intrinsic value of a legal education has declined or the number of lawyers being pumped out is too many. Either way, the answer is less supply, not subsidization.

        Fix the problem….not the symptom.

        • L2P

          A. Hostess has little to do with the market. The government subsidizes debt-financed corporate takeovers. That is a thing that happened repeatedly at Hostess to the point that they can’t compete because the company’s been gutted by debt. The market doesn’t appear to hate twinkies.

          B. Education has little to do with the free market. It’s filled with lack of information, monopolies, distortions, and blah I could go on but if you think the “market” has anything todo with supply and demand of education you’re simply crazy.

          C. Given that, you can’t fix “the problem” without fixing ” the symptoms.” They are the same thing. Supply goes away if the funding does. Supply remains if the funding remains.

          • Observer

            Supply should go away. That’s the point.

            Why should the public subsidize, directly or indirectly, your legal education which admittedly is not even worth the money?

            • Hogan

              Supply should go away.

              Unnecessary overpriced supply should go away. That may not include all supply. There are still makers of snack cakes out there who are doing fine.

            • L2P

              A legal education is TOTALLY WORTH THE MONEY. Just not for about half to 2/3 of the people getting it. For them, it totally blows.

              The point is that the Market, in it’s infinite wisdom, is never going to correct for this. And if the government isn’t involved, we get a nasty situation where very rich people get to go to Harvard and similar places and get nice, well paid jobs that the middle class get to wave at.

              So the answer isn’t “no subsidies for legal education.” The answer is “fix the system.”

        • tt

          Do you not realize that Campos is on your side here?

      • RIght. We’re subsidising it in an extremely stupid way. Not the stupidest (since letting the banks take the profit was stupider) but pretty damn stupid and exceedingly harmful to 1) most people, 2) the whole system (eventually), and 3) the goals (indeed, all of the normal goals of subsidising higher ed).

        And the UK is moving toward this model! Yay!

        • BringTheNoise

          England and Wales are. Scotland are still going with the direct subsidy model (thank you SNP).

    • Or perhaps not subsidize them, but nationalize them. I think most people agree that K – 12 is much better nationalized than subsidized.

      On top of that, the requirement to attend law school should be removed. If you can pass the bar, that should be enough. A number of Supreme Court justices , as well as Clarence Darrow, never had a law degree. If someone has the capability to learn on their own, they shouldn’t be forced to go into massive debt to become a lawyer.

      • Richard

        I doubt very much that most people believe that K-12 education should be nationalized. Any support for this statement?

        • Nationalized as in government takes control over it. Not as in the federal government calls the shots.

          • Malaclypse

            I’m genuinely unclear on what you think the distinction here is.

            • Nationalized vs. Privatized. Often used shorthand to denote public vs. private, not as in federal. Given the fact that states run K-12, I should have used “public” instead to avoid confusion.

              • Malaclypse

                I’m still confused, but this could be a result of large amounts of eggnog whilst decorating the Solstice tree.

                • Eh. I may as well retype the whole thing then. Most people, especially on the left, understand that public funding for K-12 education works much when the money goes to public schools, rather than giving people vouchers for private schools (or, eh, “letting the market handle it”). Right now a lot of federal money going to higher education, such as pell grants, go to school vouchers (or loans, which are even worse).

                  We recognize that K-12 vouchers are a bad idea, but we have the same system for higher education. Now I understand that a free colleges like City College (pre-1976) aren’t going to pop up all over the country anytime soon. Even options like having a system of developed and well-funded four-year community colleges won’t get much traction. But we should be aware that there are other options, even if they’re not currently politically feasible.

              • Hogan

                I don’t think that’s standard usage in the US. The part of passenger rail service that was nationalized became Amtrak, but that doesn’t include New Jersey Rail.

                • “I don’t think that’s standard usage in the US.”

                  Yeah…probably not.

  • Hogan

    taxpayer-subsidized International Environmental Space Law summer programs in Ravenna

    [don’t show this to the dean don’t show this to the dean don’t show this to the dean]

  • mpowell

    I am, generally, quite confused why liberals apparently don’t like this model for funding HE. In the UK there has been a lot of whining because it used to be close to free, but seriously, someone is paying for it and if it’s the users who benefit the most, I don’t see it as a bad thing. This is an incredibly low risk loan for the recipient so arguments about disadvantaged students from low income backgrounds don’t get very far in my opinion. It makes quite a lot of sense for a large portion of the cost to be funded this way.

    That being said, why should the government be funding law education? Does having more lawyers provide any social value at all? Unlikely. This would be a great route to go, if the laws school were on the hook for the unpaid debt. Otherwise we’re just letting them steal from the public and their students. Terrible.

    • wengler

      Because our parents got education at little to no money and then created a system to screw over our generation for decades.


      • mpowell

        Your parents’ parents paid for their education, not you. So quit complaining. It’s not about what your parents got. It’s about what the right policy is today.

  • Jess, Esq.

    I see that hungry new lawyers are falling into some (not so clever) scams:


    • Sherm

      More like falling for some not so clever scams.

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