Monday, September 29, 2014

A Lesson in Moral Hazard from New America

Hello everyone.  Between bar prep over the summer, taking the bar, and hustling trying to get a full-time, long-term, bar passage required job, I haven't had much time or motivation to post.  However, with bar results from my state coming in soon, and a probable full time legal job awaiting me if I pass, posting on OTLSS can help calm my nerves.

Back in April of this year, I highlighted a report from the New America nonprofit policy institute on cumulative student loan debt for those who completed graduate programs.  New America found that debt among law school graduates increased by $50,000 between 2008 and 2012, a shocking amount.

New America (NA) is back with a report focusing on income based repayment programs, posted earlier in September.  The full report is here.  The summary is here. In the report, they focus on what they call "New" IBR, which is the more generous version that the Obama Administration recently implemented.

NA isn't the first to criticize the government loan forgiveness programs as an experiment in moral hazard, but should be credited with this in-depth study which focuses on what NA calls the "zero marginal cost threshold."  What is the "zero marginal cost threshold" (ZMCT)?  NA defines it here:

Because what borrowers repay on their loans in total (for "New" IBR/PSLF) is largely a function of their incomes, not necessarily the amount they borrow, we can . . . find the level of debt at which borrowers with certain graduate and professional degrees cease to incur any increases in future loan payments if they borrow an additional dollar.  Taking on more debt at that point increases only how much debt is forgiven after 10 years; it does not increase monthly or total payments.  We call this . . . ZMCT.  p. 10.  Italics are my own.

In other words, by taking known variables: student loan debt and income, NA has been able to calculate the point where a graduate of a certain program at a certain income level post-graduation will not have to pay an additional dollar on loans they incur past said point.

Anyone with a working knowledge of trends in JDs' debt levels and the bimodal distribution of entry-level JD salaries should be able to figure out that anyone at most debt-levels will be able to qualify for forgiveness under the newer, more generous, IBR, as well as PSLF.

While this isn't a shocking realization for many of us, it might be for well-intentioned but misinformed legislators.   NA reports that, for instance, that

a teacher with a master's degree who borrows typically leaves school with $42,000 in federal debt . . . If he earns at the 75th percentile for his age over his first 10 years of repayment, he will have $32,711 forgiven.  In other words, a teacher with a master's degree who has a typical debt load, who earns an above average income, has over $30,000 forgiven under New IBR and PSLF. p. 21.  Italics are my own.

NA goes on to theorize that "having at least $30,000 forgiven if you are a teacher with a master's degree stands to become the norm," if you are savvy enough to make use of the generous federal programs.  As it stands, according to the US Department of Education, the number of borrowers using income-based repayment programs account for 11 percent of borrowers and 22 percent of the Direct Loan portfolio in repayment. p. 23.

It is not a stretch to assume that the numbers using these plans are going to increase.  NA names names for two organizations which are hawking income-based plans: The Advantage Group (a consulting firm) and Georgetown Law. 

The Advantage Group boldly states on its website that income-based plans including IBR and PSLF can "forgive tens, even hundreds of thousands of dollars and allow graduates to live the life they imagined when they first enrolled in school."

As to Georgetown Law, Professor Campos noted that Georgetown was tying its LRAP program to IBR in 2012.  NA also calls out Georgetown for "aggressively market[ing] the benefits of its program to current and prospective students with seminars and other materials."  p. 23.

At this website in 2013, NA posted several videos from a seminar Georgetown Law conducted on the generous benefits its graduates can receive from income-based repayment programs.  In the videos, Georgetown Law employees tout the benefits of the programs, going so far as to state that one can "ignore the fact that you have six digits of loans."  Georgetown employees also said that BigLaw slaves will be eligible for such programs, while acknowledging that they are not the programs' intended beneficiaries.

As I imagine even the most liberal among you find Georgetown Law's and The Advantage Group's cheap tactics and bluntness to be disgusting and offensive, imagine how budget-conscious Republicans such as Paul Ryan are going to respond.  It's no surprise that Georgetown removed the videos from its website after NA published a post on the Higher Ed watch blog regarding the program.

Without further ado, here are the ZMCT figures for PSLF for lawyers.  NA finds that the "Lawyer with Typical Income" makes $59K their first year in the workforce, and $121K by their tenth year in the work force.  p. 14.  Feast your eyes on NA's calculations, on page 14 of the full report:

Yes, your eyes are working correctly. right.  The ZMCT point for new lawyers at the upper end of the lower bump of the bimodal distribution is merely $55,000.  And yes, your eyes are still working correctly.  As NA points out:

A lawyer earning at the 50th percentile with that debt level stands to have $147,282 forgiven, which is more than he borrowed, due to interest accrual . . . p. 21
As to those at the 75th percentile of earnings:

"A lawyer who has median debt for law graduates and earnings at the 75th percentile of all lawyers, not just those working in PSLF-qualified jobs, and the amount forgiven jumps to $98,751.  A lawyer earning at the 75th percentile has some of the highest earnings among all professions, yet New IBR and PSLF provide benefits large enough that high earnings will still result in nearly $100,000 in loan forgiveness for typical levels of debt . . .
 The ZMCT for law graduates at the 75th percentile of earnings is $117,000.  p. 9.

Finally, thanks to NA, we can put numbers to the obvious moral hazard that the federal government has created, and what graduate schools and students have gleefully begun participating in.  Whether or not you fully agree with some of NA's assumptions and methodologies, such as setting the household size to one for the first five years of repayment, and two for the last five years, and using 2011 dollars, the data is useful in crafting arguments on why the current situation is untenable.  p. 7.

If tuition returned to levels that didn't require graduates to incur a "typical" debt of $140,000 of high interest, non dischargeable, student loans, a program with such perverse incentives would never exist.  Programs like this do not create incentives for law professors and deans to think of ways to minimize the amount of debt that their graduates incur.

Let's go back to Georgetown Law for a minute, and speak in broad strokes.  Their LRAP program is based on income-based repayment programs, where the law school will pay a qualifying graduate's reduced monthly payments.  Thus, a student could optimistically borrow $140,000 in student loans to attend Georgetown Law for three years and a T14 JD.  The student could go into a qualifying job, with, say, a $59,000 starting salary,  and Georgetown Law would simply use $49,000 over ten years to repay that graduate's debt!

$49,000 isn't even the cost of one year for tuition and fees alone to attend Georgetown!  Why wouldn't prestigious institutions such as law schools climb the nearest mountains and shout how good of a deal it is to attend law school right now under those conditions, other than to not incur the wrath of politicians and taxpayers who may not agree that the current price structure of graduate school education was inevietable.

The intentions behind such income-contingent programs were good: students motivated by public service could still attend school and handle their loan payments with help from the understanding taxpayers.

Now, the spirit of such principled intentions is gone, as BigLaw drones can also benefit from the program, and the debt amount that the taxpayer foots may be higher than the amount the graduate student borrowed in the first place!  A "prestigious" law school like Georgetown can create a malignant scheme where taxpayers pay for 3 years of living expenses and two years of tuition for its graduates.

What does this mean to prospective law students and law school professors and deans, hoping to cash in for a few more years before the reckoning sets in?  The morally hazardous income-contingent repayment programs are exposed for what they are, and are in the cross-hairs of politicians and public research institutes alike.

Hell, the Obama administration, not known for its restraint in protecting the Federal Treasury, proposed to cap PSLF at $57,500.  Go ahead and read the HuffPo piece I just linked and see the perverse incentives that NA outlined in action.

The clock is ticking for IBR, Old IBR, New IBR, Georgetown IBR, and whatever other income-based repayment programs there are out there, sucking at the taxpayer teat.  As more voices join New America's in creating a chorus for reforming the way America funds higher education, change is inevitable.

Georgetown, The Advantage Group, and every "non-profit" institution that benefits from charging students ridiculous prices for diminishing returns, the good times are just about up.  Until then, the scam continues.

Wish me luck.


  1. "Georgetown, The Advantage Group, and every "non-profit" institution that benefits from charging students ridiculous prices for diminishing returns, the good times are just about up."

    I wish I shared your optimism. This scary, scary stuff. Think about it. You're saying to people that if they agree to forfeit a fixed percentage of their paycheck every week they can have unlimited funds for "education." Everyone loses 7.65% of their check (up to the Social Security limit) to FICA and just forgets about it. There are tens of millions of idiots in America who think they paid no income tax last year because they got a refund.

    Under this system schools will have zero incentive to not quadruple tuition and suck up student loan money at taxpayer expense. You think the game is up? When have you ever heard any politician say that higher education is grossly overpriced? I never have, but I've heard plenty of them talk about helping people pay for college.

    I despair of living long enough to see a solution.

  2. The Cartel continues to lay tuition on their Procrustean Bed and force it to fit their notions of what it should be, because money. The Feds blindly follow suit and taxpayers are left holding the bag. The good news here is that the collapse of the funding will unravel this whole IBR scheme. The bad news is that thousands will suffer for it, when they were supposed to be the recipients of it in the first instance.

    But, that's what these so-called "educators" are banking on: the false lure of IBR means money for me today; debt for you, tomorrow and forever. It is a sad day when crashing the bus is the only way to affect change, even though the shrapnel will injure many innocent parties.

    Yeah, I know, some (Boomer) haters will say that 22-year-olds are all scheming connivers and are functionally no different than Bernie Madoff, merely for wanting to go to law school. Just goes to show you how messed up the 'Murican Dream has become.

  3. Dear Unemployed Northeastern:

    Your post is all ad hominem attacks. It does not deal with the underlying facts of Antiro's post. 2 + 2 still equals 4 regardless of the motives and character of the person who claims it. I welcome your input and hope it can deal more in facts than ad hominem.

    Dear Antiro:

    Best wishes for the bar exam and hope that job comes through. Let us know how it goes.

  4. I would like to hear more about what you think about their methodologies.

    There's no question that they are funded in large part by Lumina, what I would like to know is whether or not we can rely on said studies to attack the loan scam.

    I appreciate your long and detailed response.

  5. You can't get blood from a stone... without IBR or PAYE a lot of graduates would be completely impoverished if they were forced to pay whatever usurious terms private lenders demand. Are these lenders really looking forward to making graduates destitute for short term profits?

  6. Not sure that UNE's post was ad hominem. I think he/she was pointing out there may be some very real conflicts of interest going on behind the scenes, not unlike unpublished meetings between Goldman Sachs and the Fed on banking regulatory policy.

    NAF's pointing out that IBR is moral hazard is good, and one way to directly impact the hazard is by lowering tuition, not coming up with a new loan schema. It's very possible that NAF's parent institutions are indeed laying down a "whoa, let's not get crazy, here!" smokescreen, as lowering tuition would be (1) a direct fix, and (2) affects interested parties, ah, "negatively."

    Antiro: Best of luck.

  7. I enjoyed that, too. Floyd B. Olson was a great governor. He was the Minnesota version of FDR.

  8. Unemployed NortheasternSeptember 30, 2014 at 12:53 PM

    Part I:

    Critiques of their methodologies - both my own and that of others - can be found in most coverage of their articles on the Chronicle of Higher Education and on Inside Higher Ed. See,, and, among other coverage. I would point out that I communicate with several of the other pseudonymous posters who poke holes in NAF's studies in those threads; they are, by and large, career financial aid professionals. David Sheridan, who shows up in some of the threads, is director of financial aid at Columbia Law School, for instance. Mark Kantrowitz founded Etc.

    But to briefly list, some of their flaws include the assumption that lawyers will earn low salaries for 10/20 years to hit PSLF/PAYE forgiveness and then jump to a BigLaw partnership or something; they tend to use the risibly inappropriate fair value cost accounting estimates for federal student lending projections rather than the DOE's own projections, and so forth.* The difference between those projections is about $200 billion, by the way: a $100 billion profit (negative subsidy) over the next ten years by the DOE's accounting, a $95 billion loss over the next ten years under a fair value cost accounting method put together by congressional Republicans. But let's take the Republicans accounting at face value, for argument's sake. Fed student loans will lose $95 billion over the next ten years. I recall that in one of NAF's *studies* about IBR plans, they estimated that those plans, in conjunction with the Republican's accounting, will cost the government $150 billion over the next ten years. For real? About 1 in 35 student loans is in an IBR plan, under which they will still have to make payments unless they are under 150% of the poverty line. And that changes a $95 billion loss into a $150 billion loss? C'mon.

    It has been some months since I last read one of NAF's studies, as they tend to be quite predictable and repetitive in their analysis and recommendations, so my critiques are not as fresh as they could be; hence the links above (which is not meant to be an exhaustive list).

    @anonymous #2,

    The private lenders don't care if grads can't make payments. That's because they roll them into those SLABS I mentioned above and sell them to pension funds, sovereign wealth funds, college endowments, investment banks, etc. By the time repayment comes around, the lender hasn't actually owned the loan in years. It's no different than the banks who wrote NINJA loans and sold them to other banks and investors. In fact, I have heard that some of the bigger players used to sell them to various offshore shell company subsidiaries to run up the price before selling them to third parties. In any event, the risk is off their books. They probably still provide loan administration services for the new owners of the student loans, but that's just another revenue stream.

    @dupednontraditional - I have not seen one breath out of NAF about actually lowering tuition in any of their studies. Just a purportedly axiomatic notion that if you cut federal largesse and repayment plans, things will work out. Of course, law school tuition grew 1) far beyond the bounds of federal lending limits and 2) faster than any other branch of academia for like 15-20 years before GradPLUS or IBR** existed, and that's because private lenders filled the gap. And again, NAF's funder's funder is Sallie Mae.

  9. Unemployed NortheasternSeptember 30, 2014 at 12:53 PM

    Part II:

    *Fair value cost accounting is OK for credit card debt, where defaults result in 15 to 20% collection rates. It is not OK for federal student loans, where defaults result in 90 to 130% collection rates. Whoops! Some more moral hazard, particularly since your federal student loan administrator has a 50-50 chance of being an erstwhile student lender who also owns an authorized collection firm for defaulted federal student loans (read: SLM/Navient and Nelnet).

    **Tangential, but just to open everyone's eyes a little more, back in the pre-Direct Lending, pre-GradPLUS days, the largest provider of federal (FFEL) and private student loans to graduate students was the non-profit AccessGroup. In any given year, about half of its loan volume was to law students. Guess what? AccessGroup*** was actually jointly owned by the 197 accredited law schools as a membership corporation. And despite being a nonprofit, it too rolled all of its loans into SLABS and sold them; from the documents I have seen, it managed to originate about $11 billion of SLABS between 2000 and 2008. AccessGroup is still around, too, despite lending virtually nothing and having long since outsourced its loan administration. It sits on about $300 million and pays a host of executives anywhere between $250k and $600k for... showing up and turning on the lights, I guess. Like SLM and Nelnet and Citi and the other major lenders, they are simply waiting for an opportunity to take market share back from the government.

    **Long-time readers of the law school crisis may recall that this is the organization that Richard Matasar took a lot of flack for being its chair of the board of directors while also being the dean of New York Law School and a pseudo-defender of the value of law school.

    As you can see, moral hazard is everywhere when it comes to student loans.

  10. Most current and prospective students I know don't seem to believe they will ever actually pay off their loans. They expect to either get IBR, PSLF, or simply never pay them off. With that in mind, why would they take anything less than the maximum possible cost of living amount? Why would schools charge anything less than sky-high tuition? Everyone just expects the taxpayers to end up holding the bag.

    This is moral hazard at its worst. The federal student loan system is funneling enormous sums of money straight into the pockets of a bunch of "academics" who pretend to be humble public servants.

    1. And is also enabling tens of thousands of lazy-ass brain-dead "students" to live lavishly for three years at public expense.

      Old Guy

    2. The vast bulk of the student loans goes to tuition and other study related expenses not living expenses. So its more correct to say that these student loans are enabling tens of thousands of lazy-ass "lawprofs" to live lavishly for decades at the public expense.

    3. Most of the student loan money goes to the law school. The only people who lived "lavish" lifestyles at my school were the students who had family money and the faculty.

    4. i read somewhere that federal loan money goes directly to the institution. the borrower cant even intercept that payment for his/her own purposes. don't know about private loans though. maybe private loan borrowers are living it up.

    5. The institution will give you a check from loan proceeds up to their estimated cost of living. It depends on how much you want to borrow.

    6. Actually, @1:35, in the late 1970's interest rates were sky-high but student loan interest was subsidized and thus dirt cheap. Many folks took out loans and parked the money in high interest CDs, which I believe led to the lenders making the checks out to the school or the student and the school.

    7. Certainly the profe$$ors and other beneficiaries of the scam live a damn sight more lavishly than the students that borrow most or all of the cost of attendance. Nonetheless, it is true that the thousands of people borrow the cost of living—as determined by the law school—for three years and won't ever pay the loan back. Why should some mouth-breathing Cooleyite get to live for three years at the public expense?

      Old Guy

    8. That's right, 4:08. Even in the late 1980s, people would get more interest from an ordinary savings account than they paid on their student loans.

      Old Guy

    9. I went to law school in the late 90s/early 00s and all the interest was subsidized. Graduated with about 28k in loan debt. I simply cannot imagine taking on the debts that current students are incurring, esp considering the current job market.

  11. IBR is here to stay. It is simply a structured bankruptcy over the life of the student, or up to twenty years, depending on which comes first. I know law students with close to $300K in debt and jobs making in the lower five figures. They will never be paying off those loans absent a windfall and knowing that the Windfall may go to pay off the loan . . I suspect many young lawyers with large loans won't even bother trying to make that windfall or pay the loans off. The loans are, imho, a huge disincentive to make large amounts of money. Why bother when the income goes to the debt. Better to work not so hard and make smaller amounts so the amount that needs be paid back is much less?

  12. This is very interesting, with many parallels to the law school scam. But with law schools it took 20+ years to reach the situation of a full-blown graduate glut and oversupply crisis. With pharmacy schools it only took about 8 years. That's progress for you. It just shows how much money is being pumped into the education sector in general that all these pharmacy schools could be opened so quickly.

  13. Agreed, @ 12:32, but let me add this. In addition to the torrent of money we're more and more seeing a credentialing mentality. If I go to school for X many years and get Y piece of paper someone is going to give me a high paying job. Lemmings rush in and swamp the boat, then the oversupply starts driving down the wages. Medicine, nursing and dentistry have done a bit better because of the "if we screw up people die" factor, but seeing credentialing creep into pharmacy is not a good sign (unless, of course, pharmacists are now just pill bottle fillers).

    1. Retail pharmacy is the equivalent of document review (except for the pay). Pharmacists stuck there are "pill bottle fillers".

      The requirement of the PharmD was brought about by the higher education industrial complex.