Editor’s Note: The author of this post is the head of an organization aimed at making law school more transparent and affordable.
By Kyle McEntee, Executive Director, Law School Transparency
As law school — as well as other graduate and professional programs — become ever-more costly, the viability of the current federal student loan program wanes. The latest evidence comes from President Obama’s 2017 budget proposal, released last week.
But first a little history.
Before 2010, private lenders issued student loans guaranteed by the government. If you didn’t pay, the lender got paid anyhow. In 2010, Congress decided to stop allowing banks to socialize losses from unpaid loans. By directly lending to students through the Department of Education, taxpayers still covered the losses, but interest would be paid to the government and cover some or all of the losses.
Interest rates for direct student loans issued by the government are not based on creditworthiness; there are no underwriting standards and the rates are uniform each year. Rates are set this way in part because our federal loan system is designed to provide access to education for those who cannot otherwise afford it. If you are a first-generation college graduate from a low-income family, have no assets to secure a loan, and no credit history, you would pay a double-digit interest rate if you could get a loan at all.
Years before this change, in 1993, the government recognized the need to allow people to make student loan payments more slowly than scheduled. Income Contingent Repayment schedules were income sensitive and forgave the remaining balance after 25 years. Then in 2007, the federal government introduced Income Based Repayment, a more generous version of ICR. Over the last few years, President Obama and the Department of Education have adjusted the hardship programs. For law school graduates, the adjustments pivoted from more to less generous.
Changes to IBR happen in the context of the Department of Education’s broader policy goals. The 2017 budget succinctly highlights these goals:
• Access to higher education through a financial aid program that provides grants to low-income students and loans to those who need them to afford school;
• Debt management programs that help graduates get and stay on their feet;
• A law and policy apparatus that maximizes the number of students who complete their degrees and minimizes the proliferation of predatory colleges.
The Obama Administration has taken the position that too many of IBR’s benefits are going to graduate students with high incomes — a position that Jason Delisle from New America Foundation has been trumpeting for several years . Here’s what he has to say about the 2017 budget :
[In 2014, the Obama administration] implied the problem wasn’t all that serious when it said the [IBR] rollback would save only about $600 million a year . Flash forward to the latest budget and we see the administration now estimating about $5 billion a year in savings for the same proposal (or $49 billion over 10 years). That is not a typo. It’s gone from millions to billions.
You won’t find any explanation in the budget for that change. A call to the U.S. Department of Education reveals that the Obama administration changed the estimate after conducting a recent study using data from the U.S. Treasury. The kicker? Benefits for graduate students were the driving factor.
The $49 billion in savings comes from seemingly minor changes to IBR that target benefits for graduate students. More graduate students needed to enroll in IBR than anticipated. When the Obama administration asserts that it wants its programs “better targeted,” the administration indicates that it wants to orient policy towards the aforementioned goals and away from graduate students. The “savings” — higher payments, more payments, and less forgiven debt — are spent on these goals instead of graduate students.
Scaling back IBR benefits is not the only way the Obama Administration has targeted graduate students. Each of the President’s last three budget proposals has suggested capping Public Student Loan Forgiveness . Under the proposal, after making 120 loan payments while working for a nonprofit or the government, the Department of Education would forgive $57,500. If you owe more, you must still pay the balance on a new schedule (these are the savings). Currently PSLF forgives the entire balance after 120 payments.
Further curtailing IBR benefits or capping PSLF would not comfort prospective law students. Two years ago, when the Obama administration first proposed capping PSLF, law students and recent graduates collectively freaked out. In the last year, the ABA started Save #Loan4Giveness in response to Capitol Hill murmurs.
Prospective and current students presently have a backstop that covers downside risk if they don’t end up with the high-paying job necessary to afford their astronomical debt payments . If these proposals ever come to fruition — and Congress has already shown bi-partisan distaste for law school games — demand for law school at the current price point will fall and put even more financial pressure on law schools.
But it actually gets worse for law schools. The government’s best borrowers — such as large firm associates — are fleeing to the lower interest rates offered by bank and non-bank lenders. This weakens the federal loan program’s viability; interest payments from graduates capable of making on-time payments help lower interest rates for higher-risk borrowers. If altering IBR or PSLF causes even more people to refinance, the graduate lending program becomes even more expensive to administer and even more of an albatross for the Obama Administration’s broader policy goals.
For law schools, the result won’t be pretty if the Grad PLUS loan program craters. My advice? Make drastic efforts to reduce tuition to under $20,000 as soon as possible.