Thursday, June 7, 2018

Some Debt is Good, More Debt is Even Better

STEP ONE: We find an expensive degree, a surefire flop. STEP TWO: I raise a million bucks. Lots of naïve millennials out there. STEP THREE: You go back to work on the books, two of them - one for the government, one for us. You can do it, Bloom; you're a wizard!...
What should be done about escalating law school tuition costs, or higher education costs in general?  Well, students should just keep payingad nauseam:
In this symposium essay, I argue that for IDR [Income-Driven Repayment] to meet its goal of providing affordable higher education to everyone, the federal government needs to raise the individual borrowing limits on Direct Loans and issue substantially more debt than it does today. This perhaps counterintuitive proposal — help students by increasing debt — follows from the observation that an IDR student loan is conceptually not at all like traditional debt and is more akin to a tax instrument.

If a borrower promises only to pay a percentage of income, the nominal amount of the debt is not as crucial. [emphasis added]. Furthermore, if a student cannot cover net tuition with federal student loans, the student may be forced to use private loans or to work excessively, which can lead to worse outcomes.

Oh, it's counterintuitive, all right. Let's see, we charge a high price tag for a service to start out with and get paid up-front. Through a complicated series of negotiated agreements, different people will pay different amounts for the same service. On top of it, they will pay those negotiated amounts over time for decades, because the negotiated price is still a fat sum of money for 90% of John and Jane Q. Public. But it won't be so bad, because the alternatives are worse, you see. And by no means can costs be reduced, as that would deny access to others. War is peace. Freedom is slavery. Ignorance is strength.

Boy, this sounds familiar - but since it has worked so well for the health-care industry, I'm sure it will work just as much or more for the education industry. What's a few extra billion among (taxpayer) friends, when the current system has produced $1.5 Trillion worth of debt over the decades and keeps growing? Well, it's not "as crucial," apparently, because at the national level it is all monopoly money anyway, or something.

Unemployed Northeastern's comment sums it up well, a portion of which is reproduced here:

Except that those forgiven balances is treated as realized income. Whoops. Let's not forget about that in our discussion of affordability. The WSJ actually had an article this very weekend on a mid-30s dentist who is holding more than a million in federal student loans (private dental schools can sticker at nearly $150k with living expenses, and the interest builds quickly while in residency and such). He's on IBR (duh), even with a $225k/year income. Per the paper’s calculations, by the time loan forgiveness comes around, his balance will be a bit north of $2 million and his realized income hit in the ballpark of $700,000. So when he is in his mid 50s, with house payments and kids' college bills, he's going to owe the IRS nearly 3/4 of a million dollars. But yeah, sure, "income-based payments mean no one has to care how much they borrow" is a serious argument we should take seriously.

Incidentally Georgetown Law stickers at $85,500 in total annual cost of attendance and 44% of students pay sticker (per their 2017 Form 509). Toss in tuition increases, interest, and bar expenses, and we're easily talking $280k or more by the time one passes the bar exam, exclusive of undergrad debt. Playing around with a PAYE repayment calculator, even if we presume such a Georgetown Law grad makes $150k/year on average for his or her career, with such a debtload on PAYE they would make $254k in payments over 20 years and have a forgiven balance of $361,390. Combined with that $150k income of theirs, that $361,390 in realized income will give them an additional tax bill of about $125,000, or MORE THAN IT WOULD HAVE COST TO PAY STICKER FOR A LAW DEGREE FROM GEORGETOWN TEN YEARS AGO. (2007-2008 tuition was $39,390). So that "not crucial" nominal debt can and will actually cost current GULC students the equivalent of a second, slightly used law degree from GULC.

But again, let's not ask hard questions. Those open-road narratives can't come cheap, you know. Now, get back to paying your monthly higher-education tax in exchange for your bar license...


  1. "Except that those forgiven balances is treated as realized income."

    The comment doesn't address under what scenario the forgiveness is taking place. If the student loan debt is forgiven under the auspices of working in certain public sector employers, then it is not deemed income.

    The IRC provides, in pertinent part:
    (f) Student loans
    (1) In general
    In the case of an individual, gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of any student loan if such discharge was pursuant to a provision of such loan under which all or part of the indebtedness of the individual would be discharged if the individual worked for a certain period of time in certain professions for any of a broad class of employers.

    Again, I am commenting on an anonymous poster's comments which are not entirely specific.

    1. No doubt there is something to explore on this point, especially in a PSLF case. Unfortunately, PSLF is coming more and more under fire. The text itself states "certain period of time" in "certain professions", so the devil is in the details as they say.

      Overall, I think the concern is that the metes and bounds are not well defined, yet "this should be done" because of a benefit to certain select parties.

    2. UN here,

      PSLF: forgiven balance is NOT considered realized income.
      IBR, PAYE, and REPAYE: forgiven balance IS considered realized income.

      If you comb through the higher ed sites you can even find isolated attempts by Democratic Congressfolk to get rid of the so-called tax bomb for IBR/PAYE/REPAYE enrollees, but nothing has happened yet and certainly will not during this administration.

      Note how in my excerpted comment I wrote PAYE (and crunched the numbers with a PAYE repayment calculator).

  2. Building pyramids. Using scarce resources and hard labor to build things that don't do anything.

    Lend unlimited amounts, which will never be repaid, to attend law schools that produce 4 grads per real job. What's the end gain here?

    1. The end game is privileged law school professors collecting without having to do a fucking thing. They don’t have to make the curriculum more practice oriented, they don’t have to take salary cuts, they don’t have to compete after tenure, etc.

      This is liberalism.

  3. I remember when the word billion was tossed around lightly, without consideration of its magnitude. Probably most Yanks couldn't write the number one billion in figures, and few have an intuitive feel for its significance. A billion dollars, for instance, is more than $2 for each person in Canada, the US, and Mexico combined. Someone once quipped: "A billion here, a billion there—sooner or later it turns into real money."

    Now trillion is similarly trivialized. A trillion dollars is about $1000 for each person in the entire Western Hemisphere. And $1.5T due on US student loans is $5000 per person in the US, $1500 per person in the Western Hemisphere, or $500 per person in the world. It's also almost 2% of the whole world's annual GDP. And those loans, with few exceptions, are underwritten by the US government. Do you want US taxpayers to have to repay 2% of the world's GDP just for student loans?

  4. I have substantial student loan debt from law school and am enrolled in IBR, so I've been thinking ahead about the impact of the "forgiveness" discharge. Obviously it would be a nightmare to have this huge tax bill which could deplete any savings I've managed to sock away by then. And who knows if they might put a lien on my house, or other collection methods. But I wonder, is the discharge automatic, upon being in the program the required number of years? Or is it up to the borrower to request the discharge when the time comes? If it's the latter, it seems to me I'd be better off just making the monthly IBR payments forever, rather than having the loans "forgiven" and facing a huge tax bill I can't afford to pay. I mean, the payment amount changes annually based on income, so upon retirement the payment would probably drop to zero.

    1. "If it's the latter, it seems to me I'd be better off just making the monthly IBR payments forever, rather than having the loans "forgiven" and facing a huge tax bill I can't afford to pay."

      This may be the smart play, assuming it works out this way. It's still bogus that the system has devolved to a point where people are looking at paying an education tax, for life, to do the exact same thing that was "affordable" even 30 years ago. How people on the other side of the fence can argue for this as a good idea seems astounding.

    2. "....assuming it works out this way." Right, another thing that sucks about all of this is the uncertainty, leaving borrowers unable to plan for the future in any informed way. I've been reading about the first crop of PSLF borrowers hitting the 10 year mark, and it sounds like the burden is on the borrower to apply for the loan forgiveness and show that all the criteria have been met. It sounds like only a small minority actually had their loans forgiven. That led me to think that many regular IBR folks may actually benefit if the loan forgiveness never comes. But again, who knows how this will actually be handled when the time comes. None of the customer service reps I've spoken with have any idea, either.

  5. The brutal reality is that there are powerful forces-including but not limited to the Law School Cartel and its cohorts in the financial industry-which long ago decided to seek the good life on the backs of law students. The debt that most law school graduates incur is, frankly, insuperable, but those holding the levers of power just don't care.

  6. The federal government has the legal authority to cap tuition directly, either through its commerce clause power [don't we still have price controls on milk, etc. etc. etc.? WE DO!], or through its conditional spending power on pigs who take federal funds.


    They subsidize which drives the price up but they don't institute a price control? HMMM...

    It's all about cash flow, baby.

    And that's right, paying back tuition is a tax. Why? They debt finance the DOE loans through sovereign debt borrowing, then Congress keeps the tuition payments as foldin' cash to spend on whatever, leaving the federal debt untouched. Significant foldin' cash, tens of billions each year. That's a BIG TAX.


    They know full well these federal student loans ultimately cannot repay, they're just kicking the can because they PROFIT from it.

    One might argue the federal government has an interest expense on its sovereign bonds. Not necessarily - it depends on who owns the bonds. For instance, if the Federal Reserve Bank bought the bonds, the annual interest is ZERO for the life of the bond.

    So anyone who borrowed during the quantitative easing decade, is truly getting screwed. Their repayments and the interest are straight profit to these sessions of Congress.

    $20 trillion and counting is your real bill, folks.

    She's going to blow. Enjoy your housing inflation, tariff inflation, medical cost inflation. Enjoy until you're Venezuela.

  7. I probably should have just IBRed instead of working my ass off and paying my loans off, and putting life on hold.

    I won't have children and don't have a house, and I don't have anywhere near a $225k income. Honestly I mostly worked my ass off doing doc review for crazy hours. I couldn't do that anymore even if I wanted to, as since I've gotten older my health has suffered.

    I think if you have a stable $225k+ job, you will be fine. In all honesty that number will probably just get higher. Also if it's really that big of a deal to have that tax hit, I'm sure they'll let you just keep paying an IBR amount until you die. At some point interest rates will drop and you can re-finance for below inflation.

    I don't see the big collapse coming that people are worried about. The average debt load is still some $35k, about the price of a new car. If people can't afford to pay for a new car, there won't be an economy at all. The number of six figure debt loads, let alone seven figures, is an extreme minority. The vast majority of the debt will not be discharged. Nobody is going to stretch out a $35k debt load over 25 years just to get it forgiven. In the case that they genuinely can't afford to pay it off sometime in that timespan, they can probably just drop off the grid and laugh it off.

    1. 5,000 loans default more often than 500,000 federal loans. 35 grand is a lot of money especially since the choice now is between paying student loans or getting cars, homes, kids. Changing voting demographics - this thing does not stay the same for 20-25 years. Impossible.