The problem with IBR

By Brian Tamanaha

In Failing Law Schools, I argue that the economics of legal education don't work for the bulk of students because the high cost of a degree exceeds the economic return they obtain. In 2011, only 55% of graduates nationwide landed full-time jobs as lawyers; the average law school debt of private law school graduates was $125,000 (not counting undergraduate debt and interest accrued), and the median salary was $60,000. A law graduate who earns the median salary cannot manage the monthly payments on the average debt.

Phil Schrag has written a strong critique of my analysis, which I encourage everyone interested in these issues to read. He criticizes me for directing a "nuclear weapon" at the structure of legal education, when "small arms fire, to curb a few evident abuses, would have been a more appropriate response." The Income Based Repayment program (IBR) solves the economic problems I identify, he argues. IBR allows graduates to make monthly loan payments based upon their income (10% of income above 150% of the poverty rate), and forgives the remaining balance after 20 years. In a section called "Sarah gets rich," Schrag shows that law graduates on IBR end up doing very well. He also argues that, contrary to concerns I expressed, their credit scores (FICO) will not be adversely affected by the fact that their loan balances will remain very large (and in many instances grow), because creditors will care only about their fixed and manageable low monthly payments.

My main confusion, according to Schrag, was caused by a too literal reading of two central elements: I erroneously believe that the ten year "standard" repayment period really is (or should be) the baseline; and I erroneously believe that the statutory eligibility threshold for IBR--"partial financial hardship"--really means that graduates in IBR are suffering from "partial financial hardship." He argues that students in IBR are not in fact in financial hardship. A more accurate perspective, he argues, would see IBR as the "'standard payment' or 'standard payment for high debt borrowers,'" and the 10 year term as "accelerated repayment."

Schrag makes a convincing case. The recently implemented version of IBR is far more generous than the formula in place when I wrote the book (15% of income above 150% of the poverty line, forgiveness after 25%). Under the previous program, a student on IBR would end up paying more each month and a much higher amount of interest on the loan before forgiveness. (Critics of the new formula, from both the left and the right, argue that it offers almost no benefit to low income earners, while being very generous to graduates who earn $50,000 or more.)

It bears pointing out that Schrag's positive take on the situation downplays the fact that the balance forgiven at the end of twenty years is treated as taxable income (a nasty tax bill awaits them), and he is less troubled than I am by the fact that our graduates will not be free of their law school debt until deep into their middle age (when paying mortgages, and saving for retirement and their children's college tuition). But those differences aside, his argument is sound.

That said, in my view IBR does not solve the basic underlying problem of the warped economics of legal education, but actually has the potential to make it worse. I will identify just two reasons to doubt Schrag's assertion that no big changes are necessary.

First, I find it alarming, not reassuring, to be told that IBR should be viewed as the "standard payment" for contemporary law grads. This very assertion confirms the argument of my book that, as a systemic matter for the bulk of law students, the income they earn coming out (and for years thereafter) cannot support the amount of debt they took on to obtain their law degree.

Now, given this recognition, legal educators can take the position that we should engage in fundamental reforms aimed at rectifying this systemic economic mismatch; or we can leave the situation basically as it is and be thankful that IBR saves us from making hard choices. My stance is the former, not just because I believe the economic mismatch has many bad consequences, but also because I believe it is unwise to count on the existence of a government program that might well be cut back or restricted in the budget cutting battles that lie ahead. As Schrag recognizes, the forgiveness aspect of IBR operates as a subsidy for law schools, covered by taxpayers. When this becomes widely understood, at least in Congress and the Department of Education, I doubt that it will enjoy much support.

The second reason for concern is that the operation of IBR exacerbates the situation in several ways. Because monthly loan payments under the program are tied to salary, not to the amount owed, IBR renders the size of the debt irrelevant. For example, a student who owes $130,000 will pay exactly the same amount over the 20 years as a student who owes $200,000 (assuming the same income). Consequently, students might be less concerned about whether law school is a poor economic risk (their downside is limited), and they need not think about the magnitude of the debt they take on because all will be forgiven at 20 years.

Besides encouraging inefficient economic decisions by students, IBR will artificially keep alive law schools that should not exist. There are a bunch of law schools where graduates have debt well in excess of $130,000, only a third or so of graduates land jobs as lawyers, and most grads who land jobs earn between $40,000 and $60,000. Without IBR these law schools would likely go under--or drastically slash their tuition--because few rational students would enroll. Owing to IBR, however, these law schools can entice students by telling them that they should not be afraid of the size of the debt they take on because their monthly payments will be capped at a manageable level and the remaining debt will be forgiven in the end. A number of law schools are making this pitch today (Cal Western is cited as an example in the report linked above). The intended purpose of IBR is to rescue grads who find themselves drowning under large educational debt--but it was not set up to be utilized by schools (fighting for their own survival) as an inducement to persuade prospective students to leap into risky financial waters that will likely leave them foundering.

Finally, the fact that IBR makes the size of the debt irrelevant means that law schools can increase tuition without worrying about adverse consequences for our students. The added debt that follows from tuition increases will not be borne by them because anything added to the bottom line will simply be wiped away at forgiveness.

Law schools benefit from and are happy about these aspects of IBR. But legal educators should also consider whether they are good for our students and for society.