Friday, March 5, 2010

It's Payback Time!

No, readers, Esq. Never isn't about to go out and settle the score with the law school deans and their apologist sycophants once and for all as the title may suggest. Instead, I'm writing about repaying student debt. Specifically, I'm writing about the new Income Based Repayment Plan (IBR) that allows graduates with federal loans to make payments based upon their annual incomes.

I have mixed feeling about the IBR. I definitely appreciate most of its provisions. After all, if it wasn't for the IBR, I'd probably be writing Escudero Nunca from Costa Rica right now. I do, however, fear that it may create some new problems down the road.

For those of you unfamiliar with the IBR, it's a new loan repayment plan that ONLY applies to federal loans (excluding Parent PLUS loans). It DOES NOT apply to private loans.

The one nice thing about graduating in 2009 from law school (and I do mean the ONE nice thing) is that we were the first class that could borrow the entire cost of attendance via both Stafford and Grad PLUS loans (both part of the federal program). This means, that the entirety of our educational debt for law school is subject to the IBR.

The key provision of the IBR is that it allows graduates to pay back their federal loans as a percentage of their income. Moreover, for repayment purposes, one's income is considered to be one's adjusted gross income less 1.5 times the poverty level (based upon family size). The statutory percentage is set at 15%, but because the income that is being assessed is less than one's actual take home pay, the effective rate for most people is around 10%.

If one's income is low enough, it's actually possible to have monthly payments of $0. Moreover, income is determined based upon a person's tax return. In lieu of using a tax return, a borrower can also petition the lender (and can always consolidate with the Dept. of Ed.) to use an alternative method for assessing one's annual income.

This can be particularly useful if a person's income declines over the year and is not properly reflected by past tax returns. It doesn't appear, however, that if a person's income increases over the year that he is obliged to report the higher income until the next annual assessment.

Aside from people with incomes that may fluctuate wildly (usually those who are self employed and independent contractors), these repayment terms are very favorable and will allow many debtors to enjoy a pretty normal lifestyle without the crushing penalty of debt.

There are some problems with the system. Married couples must either use their jointly reported incomes or file separately to use the IBR. (Filing separately can cost some families more in taxes than they would otherwise pay.) This marriage penalty seems unnecessary since it should be easy enough to separate each spouse's individual incomes particularly since the Dept. of Ed. permits borrowers to prove their incomes via other means besides using past tax returns.

The other problem is that interest continues to accrue (but not compound) on all loans except for subsidized Stafford loans (and the subsidy lasts for only three years). This means that one's debt can balloon considerably over time if one sticks to just the minimum payments. This can make getting future financing for something like a house more difficult in the future. (Not because your credit rating will be hurt if you make timely payments under the IBR but because your debt to income/asset ratio is going to be uglier than Dean Matasar wearing a Speedo.)

As I joked in A Law School Carol, the IBR is long as you don't plan on getting married or owning a house for the next 25 years.

These, however, aren't my biggest concerns about the IBR. The marriage penalty is unfair, but it's not like most of us TTT losers are going to get a chance to get married anyway. (Driving your old '87 Ford Taurus back and forth between your "job" earning $15.25 straight at the local doc review sweatshop and your mom's basement isn't exactly the best way to woo the opposite sex.)

As for the accruing interest, the choice is left up to borrower as to whether he wants to just make the minimum payments or wants to try to pay down his debt before the Battle of Armageddon takes place. Moreover, if a person goes into public interest work, he can have his debt forgiven in ten years and can see his debt forgiven after 25 years (possibly 20 under a proposal by President Obama) if he works in the private sector.

The real problem with this system isn't that it doesn't provide relief to borrowers. It does. The problem is that it continues to perpetuate the current corrupt system. The only difference is that it begins to shift the burden from the borrowers to the tax payers.

The law school deans (and their higher education cohorts) aren't necessarily evil; they're greedy and self important. By that, I mean that they don't necessarily relish seeing their former students thrust into poverty thanks to high monthly loan repayments and unhelpful degrees. If that is what it takes to allow them to rule over profitable educational empires, so be it, but if they can have the same results by sponging off a less visible source of revenue (the US Treasury), then they'd probably prefer that.

Save the IBR, we could otherwise be witnessing the destruction of the law school scam. Tuition at some schools (even some absolutely horrendous schools) is approaching $50k a year. Throw in living expenses, and it's hardly unreasonable to believe that plenty of students could graduate with debt closing in on $200,000 or more in just principal.

On top of the debt, the legal market is still collapsing. Firms aren't hiring summer classes. Those who do get hired are getting deferred. Federal jobs are getting record applicants. States are having trouble funding their DA and PD offices. Small firms are hardly hiring and are offering starting salaries south of $30k a year. Document review work has all but dried up in most cities (and many projects require years of experience).

This combination of absurd debt burdens and limited (if not non-existent) job opportunities is a recipe for mass defaults on students loans. That's the sort of thing that could get a lot of attention and force the law schools and their phony statistics to come under greater scrutiny, which would either force most of these dumps to close or require some massive reform as to how law schools (and probably other areas of higher education) operate.

The IBR, however, is going to provide an escape hatch for most entry level attorneys who are getting hit the hardest by the collapse of the legal market. It'll also provide a bit of a cushion for those with a mixture of private and federal student loans. In fact, the ABA recently proposed helping out older borrowers by encouraging the federal government to buy up their private debt and allow the borrowers to pay it back as Grad PLUS loans (and thus benefit from the IBR).

Over the long term, the low monthly payments are going to deprive the government of significant revenue. Moreover, the hit to the treasury is going to be even harder when the government needs to write off all of the forgiven debt (either under the 10 or 20/25 year plans).

Of course, the real effect of the IBR won't be felt by the taxpayers for decades, which, of course, buys the law school cartel and their buddies plenty of time to continue jacking up tuition and churning out worthless degrees with relative impunity. If they can actually get the government to assume to the private debt, they'll have muted the only constituency that's still is at serious risk for default.

With manageable monthly payments, the law school industry is rightfully banking that most of its graduates will just grumble about their experiences but end up finding other work and moving on. If the economy picks up, all the better. The mistake of going to law school won't hit individuals as hard as it used to while the law schools and allied companies will continue to be able to feast on the continuous flow of student loans.

For those who love to throw out the canard that law schools should be absolved of their behavior because students should have done more research, this is something that should be of concern to you. In the past, you guys claimed that we should have to pay for our educational myopia. Thanks to the IBR, now you'll also have to pay for our mistakes and what we call the Law School Scam.


  1. The IBR has saved my life. Most of my loans are federal loans, and I have a lot. I can pay off the private loans in a few years, but I doubt I'll ever pay off all of my federal loans in 20-25 years (or 10 years if I ever find a public interest job). So at least for me, the majority of my federal loans will likely be forgiven as I plan to pay the minimum amount or $0 for as long as I am underemployed. For someone who only has around $50k in loans, it is better to just pay off the entire amount ASAP rather than have interest accrue since it is likely that person will have to pay back the entire amount of the loan. I doubt the IBR will last long because, as you correctly pointed out, the treasury is going to have a boat load of problems writing off all of that forgiven debt.

  2. I beg to differ on the getting married part. Really depends on the person's looks, gender & the dating pool they're working with. I NEVER had problems getting dates, getting respect & didn't come from money.

    Try online dating but it's easier if you're an attractive woman or at least have a personality, which the average lawyer just doesn't have. For the record, I could care less about a man's money & some women are capable of making their own success w/out having to sponge off a man.

  3. >>For those who love to throw out
    >>the canard that law schools should be
    >>absolved of their behavior because
    >>students should have done more research

    I too love it when these Law School Apologists forget that it's not just an Unemployed Lawyers' Problem, it's a Taxpayers' Problem. Every American Taxpayer is jointly and severally liable for every student loan default/forgiveness.

    25 years from now, when all these IBR Babies' student loans are "forgiven," every taxpayer will be on the hook for it, the Apologists included.

  4. The IBR is great for people who have only federal loans and work for the government. When my ten years are up, the amount forgiven will be $20k more than I originally borrowed.

    I don't know about it affecting getting a house, but if you have a government job and your loan payments are small, I think it's possible.

    As for a wife, you need to start thinking outside the box, and by box I mean country. The Philippines (which was part of the US for many years) has a never ending supply of young, educated, gorgeous, Christian, (sort of) English speaking women who would literally cut their own hand off for the chance to marry an American.

    Your ability to give a green card alone still makes you a huge stud in most places.
    There is an income requirement for the fiancée visa though; I think its $25k/yr so you do need some kind of job.

    Personally, I prefer the slightly more exotic Thai/Viet/Indonesian girls, but the language barrier is far more limiting. I also get the sense you're a church going type and women from these places typically don't pray to Jesus.

    I also don't understand why you care so much about shifting the "burden" to taxpayers. That's what the government is for. Unless you went to private school for K-12, you're being a hypocrite if you complain about the government paying for education.

    The point is that the IBR is allowing me to live a middle class lifestyle on my low government salary by reducing my loan payments by over $1100/month. The public loan forgiveness program means in the end the government will have paid me to go to law school. It also means the government gets to keep me for 10 years, at which point will probably turn into forever.

    If that's not a win-win situation I don't know what is.

    Oh, I'd also like to point out that since the recent unpleasantness it has become fashionable for conservatives to point out that government workers make more than private sector employees and how that's more proof that government is the problem and so on. Don't forget it was George Bush who signed the IBR/Public Service Loan Forgiveness into law back in 2007. Makes you wonder who the real socialists are.

  5. Odd comment @ 11:52, but I try to answer all criticism, so I'll respond.

    For the purposes of the Esq. Never blog, I take no stances aside from objecting to how the law school system operates.

    I do have two LS related political views. One right-winged: end the federal student loan program (possibly though not necessarily with a corresponding bailout for existing borrowers). One left-winged: make all private student debt dis-chargeable in bankruptcy.

    I think your comment makes assumptions about me that may not be true, but as I mentioned, I keep my non-LS beliefs to myself on this blog.

    My statements about getting married are intended as (perhaps bad) humor. I believe a bunch of my fellow anti-LS bloggers are actually married.

    I think the provisions under the IBR are very fair to borrowers (with federal loans). I do not want to see it abolished.

    My concerns about shifting the burden to the taxpayers has nothing to do with opposing (or supporting) publicly funded education in general.

    What I object to is the federal government underwriting an inefficient system of legal education. The LS system confers very little benefit to anyone (aside from those who run the schools and related industries). The number of students who will recognize little to no utility from their degrees is astounding.

    If you believe taxpayers should have to underwrite sound educational endeavors, fine. They, however, should not have to underwrite a wealth generating scheme for the law school deans, bureaucrats, etc.

    To the extent that I advocate a "free market" in higher education, I do so only because the loans artificially raise the cost of attendance and allow a bunch of diploma mills to engage in rent seeking behavior.

  6. Instead of throwing free money at deadasses and illegal aliens, whose children we already have to educate for free, this moron we have running the country should be focused on forgiveness and/or amelioration of student debt burdens facing those in the country who actually attempted to better themselves through education.

  7. I disagree strongly about the "not being able to purchase a house for the next 25 years." I think you were probably exaggerating, but my DTI is quite fine. I make little money, but have very little monthly debt, including a $0 a month student loan payment. Now, if my payments were DEFERRED, I would have to show paper work that they will be deferred for the next two years in order to qualify for a mortgage, whereas with the IBR, since it's technically a "payment," it's included in the DTI and perfectly fine to use that as my qualifying debt. So, with very little other debt, I actually do qualify for a mortgage. I'm 25 and about 2 years out of college. I know that might sound anecdotal but it's quite the position I see a lot of people in. Even with today's strict lending practices, I can still get a home, and I'll actually be paying about $200 less a month than I am on renting a one bedroom apartment right now.


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