A reader wrote in an interesting analysis of the student loan situation and currentl legislation that caps and forgives loan repayment, and how the legislation may simply be enticing students to spend more, and schools to charge more, since in the end the government picks up the tab:
One important thing entirely overlooked by the current coverage of the growing student loan debt, including on your blog and the Fed Reserve’s ridiculous whitepaper, is how the College Cost Reduction and Access Act of 2008 plays into this debacle for graduate and professional schools.
The Act gives students the option to enter into an “Income-Based Repayment” (IBR) schedule; it is very different from the income contingent repayment schedule you may be familiar with. IBR allows students to cap their repayments at 10 or 15% of discretionary income. After a set amount of time, the balance of the loans is forgiven. The set amount of time is 120 months for students working in the public interest, and 240 or 300 months for students working in other jobs. After a certain level of indebtedness, this Act removes any incentive for students to choose options that would decrease their total indebtedness level.
My example, see below, illustrates this from the public interest perspective but it remains true for those working at small firms. If a student graduates from a school with $150,000 debt load, the interest alone is accumulating at around $11,000 a year. In the long run, most of the law school graduates will end up having their loans forgiven under IBR instead of repaying the total amount.
For example, take a student who is interested in working for a state government after graduation. The student is accepted at both Duke, with a $20,000 a year scholarship, or Columbia without a scholarship. Consider that the total costs for a student is nearly identical at both schools – Columbia lists its annual cost at $77,000, and Duke lists at $72,000. Here are the outcomes if the student went to either school:
• Duke would leave the student $156,000 in debt, after the scholarship is taken into account.
If the student took the job I now have in state government, the student would start off paying ten percent of their annual salary, or $285 a month or $3,420 a yr. After 10 years, the student’s balance would be forgiven.*
• Columbia would leave the student $231,000 in debt, significantly more than Duke, because there’s no scholarship. But it doesn’t matter if Columbia costs more, the student will still only pay 10% of their salary per year after they graduate.
If the student took the job I now have with state government, the student would start off paying $285 a month or $3,420 a yr. After 10 years, the student’s balance would be forgiven.*
Notice how payments are the same? More examples of the math can be found in Professor Schrag’s article on this. Look at pages 13, 14, and 16 of the PDF (pages 39, 40, and 41 of the article). IBR removes any incentive for students, even those interested in government service, to control costs.
In fact, knowing what I now know, going to Columbia Law School would be preferable because it has a Loan Repayment Assistance Program (LRAP) that would cover my monthly costs. Duke has one as well, but its covered jobs are not as extensive. Enhanced LRAP like programs encourages students to go to the more expensive schools because they tend to have better LARP programs.
No one realizes how quickly law school tuition is exploding; just look at the average indebtedness level of graduates from law schools that are somewhat less known: John Marshall in Chicago is $165,178, Univ. San Francisco is $137,234, and Stetson is $133,082.
Obviously, I am using this loan forgiveness plan. But I can’t help but see it as funneling massive amounts of federal money to public and private universities, giving them no incentive to cut costs.
I was paying $650 a month to service my student loans all the way back in 1990. That’s how much I was paying to rent my studio apartment at the time, $650 a month. I was only making $33,000 a year working for the government (unlike my private sector classmates who made two and three times that amount). I’d have loved to have been paying $275 a month instead of $650, and those last five years – $39,000 worth of payments – would have been written off? Damn.