Zvi Mowshowitz makes a pretty strong case that the new student loan forgiveness and program changes are net bad for everyone except universities, especially including future students. Nice for people who just had loans forgiven, of course, and I can’t blame them for liking it! But all the incentives here are for universities to raise tuition higher until students aren’t benefiting, and future taxpayers are taking a big loss. And of course transferring money to college graduates helps poor people much less than those who are (or will likely become) middle-to-upper-class.
Under the Public Service Loan Forgiveness (PSLF) program, law graduates that go on to work in the public sector, which is a lot of them as the public sector employs many lawyers, only have to pay 10 percent of their discretionary income for 10 years in order to have their debt forgiven.
Law schools figured out many years ago that, for a student who is planning to enroll in PSLF upon graduation, prices and debt loads don’t matter. Ten percent of your discretionary income is ten percent of your discretionary income regardless of what the law school charges you and how much debt you nominally have to take on.
Law schools also realized that they could make the deal even sweeter by setting up LRAPs [repayment programs, AT] that give graduates money to cover the modest repayments required by the PSLF.
The LRAP schemes work as follows:
The school increases their tuition.
The student takes out federal loans to cover the tuition increase.
The school squirrels away the debt-financed tuition increase into an LRAP fund.
The school disburses money from the LRAP fund to cover PSLF repayments.
Summarized:
Did you get that? Here’s a stylized example. Suppose a student will make 150k per year for 10 years working in the public sector. If they have 200k in debt they pay 15k every year to the government for 10 years and then 50k is “forgiven.” But now the law school comes to the student and says ‘heh, I have a deal which will make both of us better off. We are going to raise the price of law school to 400k but don’t worry not only won’t that cost you a penny more than the 15k a year you are already obligated to pay it will actually cost you much less because we will pay your payments of 15k per year!’ This indeed is a great deal for the student who pays nothing and it’s a great deal for the law school which gets 200k more revenue immediately in return for 150k of payments paid out over the following 10 years. Win-win! Except for the taxpayer of course.
