Income-Based Repayment: Lifeline for Law Graduates, Certain Loser for Government

Recent modifications to the Higher Education Act were probably not intended to result in large losses on legal education debt for the government, but they will. Restoring standard consumer bankruptcy protections to student loans would make more sense.

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What's being said

  • Michael

    Hi Matt,

    Wow! That was a very thorough analysis. I'm wondering if you might be willing to render some advice based on your expertise on IBR.

    My wife is a physician with 250k in student loans. They are consolidated at ~4% interest. Her gross annual income is ~$150k. I'm not sure what our AGI will be on average, but I assume it will be over $100k. Since I've primarily been a stay-at-home dad, my earnings have been negligible up to this point. I am currently searching in the job search, but when I find a job, I expect our gross combined income to be around $200k.

    Currently, we are in IBR. It is our second year on the plan. Our monthly payment is just over $200 right now. My question is this. Suppose I find a job this year and our combined gross income is just under $200k.

    Some questions:

    1. When I file our 2013 tax return in 2014, should I file it jointly with my wife or each of us separately?
    2. Should we do our best to pay off the $250k in student loans ASAP or stay on the IBR indefintely?
    3. Will we pay more in interest over 25 years (or 20 years) than we would have it we'd just attempted to pay off the student loan in full as soon as possible?
    4. Should we be concerned that the feds will change this program entirely? Is that possible and what would be the implications for our strategy?

    Best regards,

  • Jeff Heerspink

    Obviously, a law degree is a specialized degree that is not applicable to many fields (with exceptions). Most law students plan on being lawyers, and most law students are intelligent enough and capable. But when there are large numbers of people looking for work and very few available jobs, the situation becomes serious. Education is irrelevant if there are very few opportunities to apply for. In my opinion, the government is responsible for creating the mortgage loan crisis and deregulating corporations so outsourcing would become possible. It would make sense for the government to pass laws that improve our economy; our government is not acting for the people when it remains deadlocked, and I doubt our current administration will actually tax the rich at a fair rate or outlaw outsourcing. Therefore, the job market for lawyers and everyone else will probably not improve significantly for quite a while.

  • Jeff Heerspink

    I am a 2002 graduate of Thomas M. Cooley Law School, one of the largest law schools in the nation. After passing the bar exam, I was faced with a job market that did not seem to need entry-level attorneys. So many experienced attorneys were unemployed or underemployed that firms did not need to hire entry- level employees. And why would they when they can find someone with 3-7 years of experience willing to work for entry level salary just to avoid looking for a job outside of the legal profession. Outsourcing and the global economy is significantly weakening our country from the inside out. Unfortunately, lawmakers are not interested in changing policies that benefit large corporations and hurt everyone else. American greed is the root of the problem.

  • Hammer Time

    @ Ken O'Conner

    "We can't blame victims here since they took loans to go to school to better themselves." What? The students who took out these loans were adults who could have or should have made a decision to go to law school based on an analysis of its costs and potential earnings. Students who make that decision incorrectly or thoughtlessly may deserve sympathy, but they don't deserve a free lunch.

    Rewarding people for making thoughtless decisions to attend terrible schools for hundreds of thousands of dollars only provides incentives for more such thoughtless decisions. Why is the government subsidizing even *more* students to enter an oversaturated legal market right now? We already have more law graduates, and more college graduates in general, than the market can support. Unless you have a great plan, some connections, or are accepted into a top 14 law school, you shouldn't go to law school right now. If demand falls, so will prices (tuition).

    The Federal Government should end all loans and loan subsidies and let borrowers take into consideration the full cost of law school when making that decision. As of now, all we are doing is incentivizing tens of thousands of people to get worthless law degrees from third-rate institutions. If the federal loans weren't there, they would be much less likely to go to that worthless school, and much less likely to end up in debt-servitude.

  • Anon E. Muss

    "Some debtors may have taken out private loans, but my hunch is that's unlikely because Grad PLUS Loans are unlimited and have a lower, fixed interest rate." WHAT? What about those of us who are not 2011 grads and who are swamped in private loan debt from the early 2000s?

  • Ken O'Connor

    This is an excellent article Matt, and really needs to be on the top of the list of things to consider before any student enters law school.

    Would those unable to repay their law school loans back be part of that 47% that Romney recently referred to? We can't blame victims here since they took loans to go to school to better themselves. It's an unfortunate misallocation of resources.

    Allowing student loans to be dis-chargeable in bankruptcy would force student lending to change underwriting standards. The Federal loan program could no longer blanket guarantee all Stafford loans as it currently does. Some people would simply be denied their loans. But the challenge would be what criteria to consider on an approval or denial of a federal loan? GPA? Major? School Choice?

    Also interest rates would have to price in this additional risk of bankruptcy so they would have to increase.

    This article is just the tip of the iceberg when it comes to this topic.

    Also, you mentioned that private student loans can carry high rates. This is true for many, but not all individuals.

    My company specializes in providing a private student loan consolidation to help get a lower rate and eliminate debt. We are backed by not-for-profit credit unions that really want to help recent graduates:

  • dan borinsky

    I recall an article when Bill Clinton was President that he participated in a Yale plan similar to this and did not complete paying back his Yale law school debt until he was President.

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