Brian Tamanaha's New York Times editorial Forum

[briviere]

Government participation in the market is necessary if the goal is to help the truly needed & underrepresented. Bankruptcy dischargeability should force the necessary changes. Government participation in the student loan market needs to severely curtailed, not eliminated, in my opinion.

@tiago splitter: Agree that government change comes slowly. Changing one provision in the bankruptcy law should be much more efficient.

This is not at odds with tfleming's proposal.

Get rid of gov't backing for student loans. Create a limited and extremely selective program to provide funding for select cases where students are unable to receive private loans for extenuating circumstances (identity theft, etc).

[Blessedassurance]

To me, it's unrealistic to assume that the US Government will not react in any meaningful manner with respect to student loan bankruptcy discharges.

You under-estimate the inefficiency of the government. This is the same government that paid private contractors ~$100 per mesh bag to do laundry for enlisted personnel in Iraq and paid contractors to drive empty trucks.

Why is the government not currently reacting in any meaningful way? It still guarantees loans for any US citizen enrolling at Cooley. In fact, you get to borrow for subsequent years as a below median student at Cooley.

[CanadianWolf]

Pre-2006 this was the case. Also, the US Government knows how to protect itself; for example, how bankruptcy treats federal taxes.

@tiagosplitter: I agree that we agree as written in your last post.

[CanadianWolf]

Well, the credit card companies got Congress to act fairly quickly in changing the bankruptcy law in 2005 & 2006 that fueled our current problem. And, maybe not "easy", but wrote "easiest".

[Tiago Splitter]

Pre-2006 this was the case.

But we've had far too many lawyers and law schools since well before 2006.

maybe not "easy", but wrote "easiest".

The easiest solution is to just get the government out of student loans. Let banks loan to credit worthy borrowers and if those borrowers default the bank is on the hook. This might not be the fairest solution but it is certainly the easiest.

[CanadianWolf]

At least they were employed & able to repay their student loans .

Too many constituencies to eliminate government from the student loan market.

Certainly Ron Paul & many Republicans would agree. But such a drastic move could force too many law schools to close & could impact too many unintended people & institutions & businesses.

[briviere]

We should all open up law schools in our basements. ABA will accredit anything with a decent sized parking lot (see Cooley) and they'll guarantee our income!

[Tiago Splitter]

At least they were employed & able to repay their student loans .

Well now wait a minute...

Goodbye Tier Three & Tier Four law schools.

Goodbye $40,000 & $50,000 a year law school tuition bills.

Goodbye massive numbers of unemployed lawyers.

Goodbye unneeded loan sources.

Hello employment opportunities.

Hello credit worthy borrowers.

[CanadianWolf]

This is 2012. Not pre-2006.

[Tiago Splitter]

This is 2012. Not pre-2006.

All of the problems created by the law school scam existed in 2005. They're just magnified now.

[CanadianWolf]

And that's the problem.

[minnbills]

Glad to see this discussion got cleaned up a bit. I agree with Tiago that the easiest, most straightforward solution would be to get rid of government loans altogether.

However, private student loans would still be non-dischargeable. I think it's entirely possible for lenders to take advantage of that.

I still think the best solution would be for the ABA to get its act together and close schools, along with a bunch of other reforms that I've mentioned before. Unfortunately, that's not really a possibility until a new generation of leadership steps up, IMO.

[Blessedassurance]

However, private student loans would still be non-dischargeable. I think it's entirely possible for lenders to take advantage of that

??

[rayiner]

Here is the problem with getting rid of government loans: it artificially insulates the upper middle class from competition. Right now, the upper middle class is feeling the heat of competition. Some of this is "bad competition", i.e. competition from tons of law school students who wouldn't be there if the market was rational. Some of this is "good competition", i.e. competition from students who are making a rational choice attending law school, but who would not be able to do so without student loans.

If the government got out of student loans, tuition would surely come down, but the T14 would become even more full with the kids of well-to-do people than they are now.

[flem]

Here is the problem with getting rid of government loans: it artificially insulates the upper middle class from competition. Right now, the upper middle class is feeling the heat of competition. Some of this is "bad competition", i.e. competition from tons of law school students who wouldn't be there if the market was rational. Some of this is "good competition", i.e. competition from students who are making a rational choice attending law school, but who would not be able to do so without student loans.

If the government got out of student loans, tuition would surely come down, but the T14 would become even more full with the kids of well-to-do people than they are now.

Couldn't this be alleviated through need-based aid like HY do?

[minnbills]

However, private student loans would still be non-dischargeable. I think it's entirely possible for lenders to take advantage of that

??

Am I wrong about that? I thought student loans in general couldn't be discharged in bankruptcy barring hardship

[rayiner]

Here is the problem with getting rid of government loans: it artificially insulates the upper middle class from competition. Right now, the upper middle class is feeling the heat of competition. Some of this is "bad competition", i.e. competition from tons of law school students who wouldn't be there if the market was rational. Some of this is "good competition", i.e. competition from students who are making a rational choice attending law school, but who would not be able to do so without student loans.

If the government got out of student loans, tuition would surely come down, but the T14 would become even more full with the kids of well-to-do people than they are now.

Couldn't this be alleviated through need-based aid like HY do?

Even schools that are economically rational to attend don't have the endowment that HY do. Beyond that, even solidly middle class people can't afford even a pretty reasonable law school tuition (say $20k/year) plus living expenses without loans. A household income of say $130k puts you at top 10% of households in the US, but such a household could not afford to pay $30-35k/year to support a law student, even one that worked part-time to defray the cost of living expenses. Yet, a system where a family with $130k/year of income qualifies for substantial need-based aid is probably not sustainable for any school other than Harvard.

The simple fact is that there is a class of people for whom it statistically makes sense to borrow against future earnings for law school. Student loans allows that whole class of people to make the economically rational decision to go to law school. Eliminating student loans limits the class only to those who already have the money.

[thelawyler]

Here is the problem with getting rid of government loans: it artificially insulates the upper middle class from competition. Right now, the upper middle class is feeling the heat of competition. Some of this is "bad competition", i.e. competition from tons of law school students who wouldn't be there if the market was rational. Some of this is "good competition", i.e. competition from students who are making a rational choice attending law school, but who would not be able to do so without student loans.

If the government got out of student loans, tuition would surely come down, but the T14 would become even more full with the kids of well-to-do people than they are now.

Couldn't this be alleviated through need-based aid like HY do?

I guess if top law schools would then move to a model of how the Ivy League undergrad schools do it - no merit scholarships and only need-based scholarships - then perhaps the "rich" would pay a significantly cheaper rate to attend, and the poor would still have the chance to attend as all that scholarship money would be distributed to them to alleviate some of the loan pain.

I think that'd a such a dramatic shift that we're unlikely to see that anytime soon.

[Tiago Splitter]

The simple fact is that there is a class of people for whom it statistically makes sense to borrow against future earnings for law school.

Right, and recognizing this plenty of banks would offer loans to people going to law schools with strong job prospects. I mean, wouldn't you lend 50-100K to someone to attend Harvard Law? What about Northwestern?

If the government does stay in the guarantee should be capped at a fairly low number. But I'm not sure that solves the issue of too many JDs. It may only mean lots of unemployed lawyers with 50K debt instead of 150K.

[RedBirds2011]

The simple fact is that there is a class of people for whom it statistically makes sense to borrow against future earnings for law school.

Right, and recognizing this plenty of banks would offer loans to people going to law schools with strong job prospects. I mean, wouldn't you lend 50-100K to someone to attend Harvard Law? What about Northwestern?

If the government does stay in the guarantee should be capped at a fairly low number. But I'm not sure that solves the issue of too many JDs. It may only mean lots of unemployed lawyers with 50K debt instead of 150K.

Which would be incredibly better. I don't care quite as much about employment prospect for these students as I do the debt level. 50K in debt is very manageable.

[Tiago Splitter]

The simple fact is that there is a class of people for whom it statistically makes sense to borrow against future earnings for law school.

Right, and recognizing this plenty of banks would offer loans to people going to law schools with strong job prospects. I mean, wouldn't you lend 50-100K to someone to attend Harvard Law? What about Northwestern?

If the government does stay in the guarantee should be capped at a fairly low number. But I'm not sure that solves the issue of too many JDs. It may only mean lots of unemployed lawyers with 50K debt instead of 150K.

Which would be incredibly better. I don't care quite as much about employment prospect for these students as I do the debt level. 50K in debt is very manageable.

And maybe that is the correct solution since an artificial cap on law schools and enrollment, AMA style, seems to be impossible.

EDIT: Renzo made a similar point on page 3. Essentially turn the JD into an MBA, where lots of people have it and most don't take on much debt to get it.

[Renzo]

The simpliest, easiest & most effective solution: Allow student loan debt to be dischargeable in bankruptcy.

I think that is a viable alternative, but the best one would be to allow student loans to be a tax write off, both for the person and the company.

For example, if a company is paying you $100K/year, they could transfer $30K/year to paying off your student loans. While that money would still be considered compensation, both you and the company would benefit, since the company would not have to pay payroll taxes on it and you wouldn't have to pay income taxes on it. This carrot would encourage people to pay off their loans quicker and would encourage companies to hire poorer people who had to take out student loans.

I gotta admit, this is a pretty elegant idea. It has some potential dangers, but on whole it seems more positive than negative.

[Blessedassurance]

However, private student loans would still be non-dischargeable. I think it's entirely possible for lenders to take advantage of that

??

Am I wrong about that? I thought student loans in general couldn't be discharged in bankruptcy barring hardship

You're right.

I didn't understand the sentence. I was asking for clarification because I thought you were suggesting that the government should get out but the private loans should still be non-dischargeable.

[MatMat]

Here is the problem with getting rid of government loans: it artificially insulates the upper middle class from competition. Right now, the upper middle class is feeling the heat of competition. Some of this is "bad competition", i.e. competition from tons of law school students who wouldn't be there if the market was rational. Some of this is "good competition", i.e. competition from students who are making a rational choice attending law school, but who would not be able to do so without student loans.

If the government got out of student loans, tuition would surely come down, but the T14 would become even more full with the kids of well-to-do people than they are now.

Couldn't this be alleviated through need-based aid like HY do?

Even schools that are economically rational to attend don't have the endowment that HY do. Beyond that, even solidly middle class people can't afford even a pretty reasonable law school tuition (say $20k/year) plus living expenses without loans. A household income of say $130k puts you at top 10% of households in the US, but such a household could not afford to pay $30-35k/year to support a law student, even one that worked part-time to defray the cost of living expenses. Yet, a system where a family with $130k/year of income qualifies for substantial need-based aid is probably not sustainable for any school other than Harvard.

The simple fact is that there is a class of people for whom it statistically makes sense to borrow against future earnings for law school. Student loans allows that whole class of people to make the economically rational decision to go to law school. Eliminating student loans limits the class only to those who already have the money.

I'm confused by this point -- no one is saying that student loans should be somehow outlawed. Rather, the government shouldn't fund, distribute, and insure them with the policy goal of equalizing opportunity for all applicants. The only market participants with the necessary knowledge to delineate between those potential students who are members of "a class of people for whom it statistically makes sense to borrow against future earnings for law school" and those who are not, are private lenders. As we saw with the housing market collapse, when the federal government artificially stimulates demand by lowering the cost of capital and insuring the risk, incentives become grossly misaligned. People speak about the current state of legal education as a "market failure." That's ridiculous. The market can't fail when it's not allowed to operate freely.

Look - you're half right to say that scaling back government loans will hurt those who don't have the cash on hand (ie, anybody from a middle class family). The necessary caveat is that it only hurts those students who both don't have the cash and whose plan of study (probably judged by rank of school/scholarship/evidence of work ethic/etc.) isn't demonstrably sound such that a private investor (namely, a bank) would choose to back it.

The reality is that, at least ITE, money would be available at much cheaper rates for students going to top schools if the government hadn't distorted the market. GradPlus is at 7.9% -- where else can you get a 7.9% return today??? 30-year T-Notes are trading at under 3%! If we let investors take on law school debt, priced adjusted for risk and compiled into liquid securities, the market would absolutely deliver a better value than is currently available.

And yes, if you were planning on attending a TTT and have never held a job before, you wouldn't get loans. But ask yourself -- is that so bad for the world?

[rayiner]

Here is the problem with getting rid of government loans: it artificially insulates the upper middle class from competition. Right now, the upper middle class is feeling the heat of competition. Some of this is "bad competition", i.e. competition from tons of law school students who wouldn't be there if the market was rational. Some of this is "good competition", i.e. competition from students who are making a rational choice attending law school, but who would not be able to do so without student loans.

If the government got out of student loans, tuition would surely come down, but the T14 would become even more full with the kids of well-to-do people than they are now.

Couldn't this be alleviated through need-based aid like HY do?

Even schools that are economically rational to attend don't have the endowment that HY do. Beyond that, even solidly middle class people can't afford even a pretty reasonable law school tuition (say $20k/year) plus living expenses without loans. A household income of say $130k puts you at top 10% of households in the US, but such a household could not afford to pay $30-35k/year to support a law student, even one that worked part-time to defray the cost of living expenses. Yet, a system where a family with $130k/year of income qualifies for substantial need-based aid is probably not sustainable for any school other than Harvard.

The simple fact is that there is a class of people for whom it statistically makes sense to borrow against future earnings for law school. Student loans allows that whole class of people to make the economically rational decision to go to law school. Eliminating student loans limits the class only to those who already have the money.

Look - you're half right to say that scaling back government loans will hurt those who don't have the cash on hand (ie, anybody from a middle class family). The necessary caveat is that it only hurts those students who both don't have the cash and whose plan of study (probably judged by rank of school/scholarship/evidence of work ethic/etc.) isn't demonstrably sound such that a private investor (namely, a bank) would choose to back it.

You're assuming that investors will look at only the risk/return in evaluating who to extend loans to. The credit market doesn't work like that. If you have a lower middle class kid whose parents have missed a few payments on their credit card, he's not getting a good enough credit rating to get loans for the same exact law school that someone from an upper middle class family whose parents have sterling credit will get.