One Crushing Tale and My Letter to a 0L

File this one under “there but for the grace of God go I.”  Here’s a profile of Andrew Carmichael, a “whiz kid” who racked up law school debt totaling $215,000.  Yep, that’s not a typo.  Two hundred fifteen large.  Just to put that in perspective – most people in this country could own a house outright for two hundred fifteen thousand dollars.  Meaning, Andrew took on law school debt that could have financed a home.  Meaning, he’s now looking at a student loan payment the size of a mortgage (to the tune of $2,756 per month).  Thank goodness mortgages are totally easy to pay off and have never gotten anyone into trouble.  

Spoiler alert: Andrew did get a great job after taking on all that law school debt, so it wasn’t a total waste.  He is now employed…as a computer programmer.  Yep, that’s also not a typo.  He is now a computer programmer.  I'm no expert, but last time I checked, a lot of computer programmers were scraping by without JD's.

A Creative Route to Student Loan Forgiveness?

Photo courtesy of stockfreeimages.com

I came across this comment on All Education Matters today in response to Cryn Johannsen’s post about AEM’s two-year anniversary:

“Has this blog done anything?  I'm thinking that this entire AEM is a pretend nonprofit that you "work" for so that you can get your student loans forgiven after a decade!  Right?”

It got me thinking…why not?  Have any borrowers actually thought of going this route?  Wouldn’t it be wonderfully ironic if student debtors had their loans forgiven by starting non-profits that fight against the student lending industry? Here’s a link to the eligibility requirements for public service loan forgiveness. 

I know one of the requirements is that the borrower must work “full-time” for a non-profit, but it doesn’t give a definition of “full-time.”  I’m sure some un(der)employed JD out there will find a loophole somewhere! 

A Hollow Victory

As you can see from the pic posted here, I have fully repaid one of my student loans.  This particular loan came directly from my school, which is why I cut out references to my alma mater's name.  That leaves me with one other loan that I am currently repaying, and then I am done.  I have about one more year, give or take, of Spartan living before I am debt-free, and I can close the dark chapter of my life known as Law School.  When I received this payoff notice, at first I felt a sense of pride and hope.  Soon I would actually be able to save some of the money I earn and build wealth for my future.

But after I read and re-read the second sentence, pride and hope were replaced with frustration and sadness.  Because I repaid my loan, some other poor schmuck now has the ability to take out crippling student loan debt.  And my school's low default rate remains intact, resulting in further federal student loan funding.


I suppose some might believe that since I repaid my loan, as so many fellow alumni of my school have, then I must have benefited from higher education.  After all, how could I earn enough to repay my loan in under five years if my employment prospects had not brightened as a result of my degrees?

Having the benefit of hindsight, I can honestly say now that I did benefit somewhat from my earning my bachelor's degree.  The positions I've held since graduating have all required a four-year degree (save for some moonlighting jobs I have taken in order to repay my loans at a faster rate), and almost everyone has one nowadays, so it's hard to compete in the marketplace without one.  BUT.  I should not have taken out student loan debt to earn it.  Although I worked almost full-time during my undergraduate years, I realize now that I could have cash-flowed my BA had I worked and saved for a couple more years before enrolling.  It might have taken me longer to get through my program, but probably not as many more months or years as it has taken me to pay off half of my loans.  And, I would not have had to pay interest.

As far as my law degree is concerned, I can honestly say now that I did not benefit from earning my JD.  The positions I've held since graduating (aside from any associate/law school intern positions) have been obtained by omitting or downplaying my law degree on resumes and applications.  I do not list my JD on my resume (a resume is, after all, just a marketing tool), and when I fill out applications, I only list my JD if I am asked to list all of my higher education degrees.  The fact of the matter is simply that employers do not want to employ lawyers or JD's in non-lawyer positions.  Unless that lawyer or JD is going to run a fortune 500 company or teach law.  Last time I checked, I think all of those positions have been filled.

I am not sure what else to say about law school to those considering it, except: Don't go.  Please.  You will absolutely regret it.  I do not know any happy lawyers, or any recent graduates who are happy that they decided to attend.  I cannot put it any simpler.  It will leave you in a financial hole that will take years, if not decades, to crawl out of.  And the legal market is saturated.  What else can be said?

I hope this post will give some of my fellow JD's and recovering lawyers some hope for their financial futures.  I am not debt-free yet, but I know I will be soon.  At that point, I will be able to say that law school took [X number of] years from me, rather than my entire life.

The Flawed Law School Model

I have referenced the law school "scam" and the failed/flawed law school model many times, but now I think I should discuss in further detail what exactly I mean when I reference these.  Here are my thoughts (in no pariclar order of importance). 

Law school does not prepare students to be small business owners.

At orientation, there were many speakers who described the rigors of a legal education, the stress that comes with applying to the Bar, the "many doors" that JD's open, all peppered with jokes about the fancy cars that most lawyers drive. What none of these speakers mentioned is that most attorneys, especially in the current job market, are basically on their own. They did not tell me that career services would not help those students who were ranked below the top 33% of their classes, and would instead tell them they would need to hang out their own shingles. (True story: an unfortunate classmate of mine had a 3.0 GPA, and was ranked just in the middle of the class. She was paying out-of-state tuition, and had racked up $160,000 in loans, when she went to career services for help in finding a job. She was told to hang out her own shingle, even though she had no business training and the law school did not offer a course in operating one's own practice.) I was lucky enough to find a decent-paying job upon graduation, but if I had not, I would have been in the same boat as many of my classmates, forced to run a small business with no training and no idea how to even practice law.

If you are considering law school, I implore you to first ask yourself whether you know how to run a business, and if so, do you think you can run that business successfully when you do not even know if you are competent to offer your services?

Which brings me to my next point.

Law school does not prepare students for the actual practice of law.

I completed an internship during the summer after my 2L year at the DA's office. This provided me with courtroom experience, but most of my fellow students were not as fortunate. Most law students take classes that involve listening to lectures, reading case law and statutes, and maybe conducting an exercise or two in oral argument. None of which matter when you are faced with an actual client sitting across your desk.

Even with my valuable experience of representing the State in the courtroom for a few weeks, I still had no idea how to conduct a client meeting, or how to structure a fee agreement. Or even how to go about suing someone in the state in which I practiced. All of that knowledge came later, after I had the opportunity to work with more experienced attorneys who showed me the ropes and who made me calendar deadlines properly.

This is a critical failure of the current law school model. No one knows what they're doing upon graduation. New graduates are in need of mentors, but oftentimes they end up on their own, and they end up failing or quitting or moving back in with their parents because they cannot develop enough business to support themselves.

Here is a valuable law school exercise that I will provide you at no charge: go to the Supreme Court's website and read through some of the opinions. Then go to your state legislature's website, or your city/municipality's website and read a chapter of statutes or ordinances. Pick out a topic that interests you like criminal law, or insurance regulation. Once you have finished reading your cases and statutes/ordinances, ask yourself what you would tell a client who was arrested, or who felt he had been defrauded by his insurance company. How would you tell him to proceed? What would you tell him you could do for him? How much would you charge him? What timeline would you provide for resolving his case? Do you think he will prevail?

If you feel that after reading the materials I assigned you, you could confidently answer these questions, then law school is for you. There are two reasons I say this: you are either a) a genius who will be picked up by one of the big firms and you will not have to worry about figuring things out yourself, or b) so delusional that you probably do not have the mental faculties required to complete a JD, so you will never have to worry about practicing on your own.

The study of law is nothing like actual law practice.

This flows from my previous point that law school does not prepare one for the practice of law. In law school, students partake in the Socratic method. You read a bunch of materials and the professor drills you on them, questions everything you say. You must defend your position on a topic that is almost always interesting and has vast political implications. At the end of the semester, the professor will read your essay exam and provide you with a grade that reflects how well he or she believes you have retained the lessons imparted during the past few months.

In reality, when you practice law, most of the time you will be sitting alone in a room, keeping track of billable hours, and drafting mind-numbing research memos. One after the other. Westlaw and/or Lexis will become your best friends and worst enemies. Your research topics will most likely involve issues that no one cares about, save for the client. Can Janie sue her classmate for spilling soda at prom, which caused her to slip and fall and sprain her ankle? What is Fred's recourse when his insurance company offers him less than he had anticipated for the car that he totaled? Can Pam get a restraining order on her ex-boyfriend even though he has never hit her, but her parents think he is controlling? If Pam gets that restraining order, how will that affect her ex's child support obligations or custody arrangement?

Oh, and did I mention the best part? No one will read these memos. You see, your supervising attorney does not have time to read them because he or she tees off at 3:00 sharp. He or she would simply like to know the answer to the question, in 10 seconds or less, and will then direct you to file the memo away, just in case the client ever questions the bill. That memo will serve as proof that actual work was performed for the client. But no one will grade you on it. No one will tell you how awesome your case law synthesis turned out or want to speak with you further about the greater implications of the answers to these legal questions. No one cares, you see, because no one wants to actually practice law. They just want to make enough money to afford country club dues and to pawn off research assignments on young associates, who will then turn around and do the same in a few years when it's their turn.  And you will not be one of these lucky young associates because the legal job market is steadily shrinking and most small firms will not even consider anyone not in the top half of their class (which leaves a lot of graduates with their cheese out in the wind) and the big firms will only consider the top 10-20%, depending on school ranking. 

If you are considering law school, ask yourself if you could handle working in a field in which no one will ever give you positive feedback, whether it is a supervising attorney or a client. The supervising attorneys will only gripe if there are holes in your research, but will otherwise remain silent, and clients will only complain about your bill. If you manage a favorable outcome for them, it was because their cause was just. If you do not, it is because you were incompetent. Do you want this for yourself? Or, more appropriately, would you ever wish this on anyone?

Unless you have a scholarship or a rich relative paying your tuition, your income will almost never justify the amount spent earning your JD.

Consider that the average law school debt for public school graduates is a little over $68K and over $109K for private schools (for the 2009-2010 school year). Suppose you are able to spread out $68K over 30 years. Your payments, assuming a 6% interest rate, will be $408 per month. $109K spread out over 30 years will be $654 per month. Remember, this assumes 6% interest, and that you can spread the loans out over 30 years. So that's between $4,896 and $7,848 per year spent on student loan payments, not counting undergraduate degree payments. You can only deduct $2,500 per year on your federal income taxes, and only for the first five years after you begin repaying. Considering the average attorney salary has been steadily dropping (to about $63K currently), this means you will be spending somewhere around 10% of your income on student loan payments. Considering that the average salary for a college graduate is $46K, what exactly have you gained from earning a law degree? A few thousand dollars a year? Which will be eaten away by all of the extra hours spent working in a field that will eat away at your soul and make you want to auction off your JD.

Let’s do a little math here and figure out just how well you’ll be living with a JD and an annual salary of $63K.  Would you like to buy a house? Have a car? Health insurance? Contribute to your retirement? Ok, then, let’s go!

Assuming you are single, you will be in the 25% federal tax bracket. And we’ll assume state and local taxes are 5%, give or take. And your health insurance premiums are $300 per month. And that you contribute 2.5% of your salary to your 401(k). Here are your pre-tax deductions:

$5,250 is your gross monthly pay.

After deducting $300 for health insurance premiums and $131.25 for 401(k), you are left with $4,818.75. Now comes Big Bertha, also known as the IRS. Deduct 30% for federal, state, and local taxes, which brings your monthly take-home to $3,373.13.

Now let’s say you purchase a $165,000 home with no money down and a 30-year fixed-rate mortgage at 5% interest. Your mortgage payment will be $885.76. Assume property taxes to be about 3%, which is $4,950 annually. That’s $412.50 per month. (My husband’s and my property taxes were a lot higher than this, but we are from a ridiculously expensive state). Ok, here’s your monthly budget:

$3,373.13

-$885.76 (mortgage)
-$412.50 (property taxes)
-$150.00 (heating, cooling, and electricity, which will vary by state and climate)
-$100 (phone/cell)
-$100 (cable, internet)
-$300 (car payment)
-$100 (car insurance)
-$400 (groceries)
-$200 (gas)
$724.87 (surplus)

Now, how are you going to spend that extra $725 per month that you have lying around? Movies, clothing, furniture, meals out? Oh, wait, I forgot one of the most important deductions. Your student loan! Let’s take away $654, assuming you have $100K in student loan debt at 6% interest amortized over 30 years. That leaves you with $71. You can spend it however you want – credit card bill, clothing, dates (which you probably won’t have many of, since people with six-figure debt do not have much value on the marriage market), anything! Just be sure not to have any emergencies, like a broken down car or a molar in need of a root canal.  And absolutely no vacations or kids!  (If you really want to find some extra cushion in your budget, you can always drive a beater until you are sixty, or take on a second job.)  But remember, it is all worth it because you are a prestigious attorney.

If you are considering law school, think about whether you actually want to practice law, and are willing to mortgage your future in the hopes of successfully building a career in a field in which salaries continue to decrease, as well as demand. Do you think you will be able to later out-earn your current financial stupidity?

Law schools lie about employment statistics.

Another topic not discussed at orientation? Graduate employment statistics. The speakers did not clarify whether the 97% boasted at my school reflected the number of graduates who were actually employed in the legal field, or if that figure included graduates who were forced to find work in other lucrative fields. Nor did anyone discuss the way in which employment statistics are calculated, and whether the statistics are actually plausible.

If you are considering law school, the first thing you should do is write down a list of the schools you would like to attend.  Then pick out your top choice, and get your hands on a list containing the names of its most recent graduates.  (Try attending a graduation and obtaining a program there, or call up the school and say you had a relative who recently graduated and were wondering if you could get a copy of the program.)  Now the real fun will begin.  Wait a few months, then go to the Bar website for the state in which the school is located and start looking up the names of the graduates.  See how many you find that list an actual employer under their contact information, rather than their home address.  For the names that do not appear anywhere, begin looking those up on other Bar websites until you have exhausted all of your resources.  Now count the names of those who you did not find, or who did not list an employer in their contact information.  Take that number and subtract it from the number of total graduates you looked up.  Then divide that number by the total number of graduates you looked up and you will arrive at an accurate employment figure.  But that will all take too long or require too much effort, you say?  I say you’re right, it’s better to just go six figures into debt by relying on a brochure than to conduct any actual research yourself.  I'm sure the guy who wrote the brochure dotted his i's and crossed his t's.  I mean, what's in it for him to fudge the numbers? (I should probably warn you that your hesitation at embarking on such an involved research assignment does not bode well for your future as a practicing attorney.  Just sayin’.) 

The Bottom Line

My point in discussing the flawed law school model is not to piss on anyone's dreams of becoming the next Perry Mason. What I would like to see is transparency in advertising employment statistics, frankness when discussing job prospects with students, course offerings in how to run one's own practice, tuition rates that reflect current market demand and compensation, and more opportunities for students to observe and experience the reality of law practice.

Are you considering law school? And if so, is there anything that could convince you not to go, or do you think you have made up your mind no matter what?

Netflix Corner: Maxed Out

For those of you living with minuscule entertainment budgets due to crushing student loan debt (or any other kind of debt for that matter), leaving you chained to Netflix streaming or youtube on  the weekends, check out Maxed Out, a 2006 documentary that eerily predicts the collapse of the housing market, and the economy as a whole, after far too many years of access to easy credit.  A major portion of the documentary focuses on credit card debt, but it also touches on the real estate bubble, predatory lending tactics employed on college campuses, and interviews with some pond scum, aka "collection agents."  

This is not the sort of movie to watch alone at night, since it is quite dark at times (stories of two students with outrageous credit card bills who eventually committed suicide are included), and because we all know what happened just a couple years after the movie was filmed. 

On the other hand, there are some lighter moments that highlight just how valuable an education is when it comes to succeeding in the marketplace.  Listen closely at about an hour and five minutes in as a real estate broker who doubled her money during the housing bubble describes a "track" home and informs us that the "medium" price of a house is $268,000. 

I wish someone would make a similar documentary based entirely on student loan debt in the U.S.  It is truly frightening that many people carry student loan balances equal to or greater than a typical mortgage.

Any other movie suggestions that will keep people like me motivated to pay off their student loans early and stay out of debt permanently? 

How Many Doors Did Your JD Open?

For anyone who's bitter about high student loan debt and/or the dearth of (paying) legal jobs out there, check out this piece from Nando of Third Tier Reality, which sheds some unflattering light on the higher education scam.  It includes some sobering statistics regarding the glut of student loan debt in the U.S., the lack of available jobs that require advanced degrees, as well as the frighteningly inflated tuition prices some law schools are charging their "customers" these days.  

Also, if you feel like getting involved in protesting or sharing your views on the higher education scam, check out the upcoming protest scheduled to take place October 8th in San Diego, California. 

The Trap of Student Loan Debt, Part II: Do You Want to Get Out?

Many unhappy attorneys feel they cannot quit practicing law because of the enormous burden of student loan debt.  If you have been considering leaving the law for another field or to start your own business, paying off your student loans affords more opportunity to take risks (perhaps in the form of a lower-paying but more satisfying position), as well as the feeling of hope that comes from building a future, rather than paying for past mistakes.  

A little over a year ago, I found myself in the position of having left my attorney job for a lower-paying one, but still carrying a large student loan balance of over $100K (between my husband's loans and mine).  Since then, I have gained more control over my finances, and my husband and I have decided to take radical steps in order to pay off both of our student loans once and for all.  Before you begin your own journey out of student loan debt, you first need to ask yourself whether you really want out because getting out involves a great deal of sacrifice.  Let's talk a little bit about some obstacles that might be standing your way.

The Lawyer Lifestyle

When you graduate from law school and land your first attorney gig, one of the first things you will probably do is buy some new clothes.  I know I did.  I believe I spent about $800 in my first month as a new attorney on new suits, shoes, and blouses.  How sharp I must have looked while dying a thousand little deaths every time I logged onto westlaw and looked with dread at the number of cases I would have to read that day. 

Another expense many new attorneys take on is that of a car loan.  If only law schools offered a course like Personal Finance 101.  Perhaps I, along with many other would-be attorneys, would have learned the sheer stupidity of financing a depreciating asset.  Ah well.  I made this mistake, but not until I had practiced for almost three years.  Toward the end of my illustrious career, I financed a big, shiny new car in order to assuage some of my depression.  It worked for a little while, but once the new car smell wore off the leather, I was back to pouring myself glass after glass of alcohol when I arrived home in the evening. 

Some other attorneys from white shoe firms might even go out and join a country club or buy a boat, or some other such nonsense.  All I can say about the many trappings of the lawyer lifestyle is that if you want to leave the law for good, you first need to decide that you are not going to be a miserable workhorse the rest of your life. 

You Don't Understand the Difference Between "Want" and "Need"

Many Americans, lawyers and non-lawyers alike, equate their need for certain  luxury items with their need to breathe oxygen.  To name just a few examples:

• cable TV (guilty)
• smart phones (guilty)
• restaurant lunches
• gym memberships (guilty)
• new cars every three years
• a car for every member of the household over the age of 16
• Starbucks (guilty)
• "stuff" from Target (guilty)
• the latest gadgets for the kids
• vacations at Disneyland
• stainless steel appliances

This list is certainly not exhaustive, but you get the idea. 

If you want to get out of student loan debt so you can leave the law, or just to have some peace of mind, you need to evaluate your lifestyle and start labeling things as "wants" and "needs."  In no time, you will see that most of the things in our lives are really just wants.  One way to start evaluating is to focus on what Dave Ramsey calls "the four walls."  This would be food, shelter, utilities, and transportation.  Anything beyond that is not a need.  (Clothing fits in there, too, but most Americans have an abundance of it.) 

One of the first things my husband and I cut out when we decided to get out of debt is cable.  For the time being, we get by on Internet (which he needs for his job), netflix streaming, and hulu.  We used to pay over a hundred dollars per month on cable and now we pay about $40 (which is mainly Internet). 

Another expense we cut was transportation.  We used to have two cars, but when we moved, we cut back to just one.  This may not work for everyone, especially if you do not have reliable public transportation where you live.  But you certainly do not need two car payments, or even one car payment, in order to get to work and back.  What we did was sell my husband's car, which was almost paid off, and we used the proceeds toward our emergency fund (about five months of living expenses in the bank).  When we sold our house, we used those proceeds toward the emergency fund as well.

As for my car, we have been making extra payments on it for the last five months and I am proud to say we just sent in the last payment a few days ago.  It is actually "our" car now, and it is enough for us. 

You Justify Student Loan Debt Because of the Tax Break

While some borrowers are eligible for a tax break on their student loan payments, please do not justify hanging onto these loans simply for the tax break.  A few considerations:

• There are income limits on who can claim it.  (In 2010, the income limits were $60K for  individuals or $120K for couples before the credit was phased out.)
• You can only deduct a maximum of $2,500 no matter how much interest you paid on your loans.  (My husband and I paid over $5,000 in interest in 2010, so the tax break didn't help all that much.)
• Beginning 2013, you will only be able to deduct student loan interest for the first 60 months (5 years) of repayment.  Many people with advanced degrees are on 20-30 year plans (myself included).
• Student loans are generally not dischargeable in bankruptcy. 

The Bottom Line

If you want to put student loan debt behind you, you need to decide you are not going to keep up with the Joneses, you are going to cut back on luxuries, and you are not going to chase a soon-to-be-obsolete tax deduction.  Ready?  Stay tuned for my next entry on how to start budgeting and make extra cash to put toward those loans. 

   

Another Grad Who Would Like a Refund

The New York Times reported today on a woman named Cortney Munna, who incurred over $100,000 in student loan debt for a 4-year degree from NYU. She is now attending night school in order to defer her loans, but the interest is still accruing. Once her loans come out of deferment, the payments should be about $700 per month. She currently earns $22 per hour working for a photographer.

The article does not specify what type of degree Munna earned, but I am going to take a wild guess that it was of the Liberal Arts variety. As I've said before, most liberal arts degrees are basically useless. The only use mine ever had was that I could put it at the top of my resume when applying for jobs after college. None of the positions for which I applied actually required knowledge of political science or philosophy, but the companies still required a B.A. or B.S.

This is the sad reality of higher education. Students spend thousands of dollars and go into debt in order to earn degrees that will help them achieve middle-class jobs, but the loan payments will end up putting these suckers back to the position they were in prior to taking out the loans. For example, Munna works for $22 per hour. Without her college degree, she might have been able to find office work for $10-$15 per hour. She takes home $2300 per month with her current position, but $700 of that will eventually go toward her loans. So, that leaves her with $1600 per month, which is about $12-$13 per hour prior to withholding, and $10 per hour after withholding. So what did she gain by attending NYU?

How much are your student loan payments and what percentage of your current income does that comprise? Was taking on student loans worth it in the end?

The Votes Are In!

Last week, I posted two poll questions regarding readers' thoughts on higher education as well as the debt load carried with certain degrees. 43% of respondents stated that if they could do it all over again, they would go to tech school or learn a trade after graduating high school (myself included!). 20% would earn a bachelor's degree.

As I suspected, most of the J.D.'s (31 out of 41 J.D. respondents) admitted to having $50K - $100K+ in student loan. The other 10 J.D.'s had $50K or under in student loan debt.

I have mixed feelings about the results. On the one hand, it is nice to know I am not alone in regretting the astonishing amount of time and money spent on a (now useless) advanced degree. On the other hand, the fact that so many respondents would learn a trade or get a technical degree rather than earn any other advanced degree is a bit discouraging. It seems to me that some products of the higher education system are questioning the value of their advanced degrees. Are institutions of higher learning encouraging too many folks to earn these degrees? Any other theories?

Sorry, I Must Have Skipped That Year

The New York Times ran an Op-Ed piece from Stephen Joel Trachtenberg, President Emeritus of George Washington University. Trachtenberg believes undergraduate and professional degree programs could be shortened in order to reduce costs to students and get them out into the workforce sooner. He cites Northwestern Law School, which has a two-year J.D. program, as well as Texas Tech, which offers a three-year M.D. program. He also proposes the idea of a three-year Bachelor's degree, which might include two full summer semesters to make up for the eliminated fourth year.

I agree with these proposals, particularly the idea of a two-year J.D. By my third year in law school, I had pretty much learned that being an attorney would take years of training and dedication, and that law school mostly just teaches you how to start finding the answers to legal questions. In fact, I think law students should complete an apprenticeship for their second year, in order to teach them what an attorney's job really is. Judging from the current law school model, a student might get the idea that attorneys regularly partake in esoteric discussions about "substantive due process" versus "procedural due process." In reality, most attorneys regularly engage in expletive-laced discussions about looming deadlines ("where's my fucking brief already?!) and gridlocked negotiations ("when are you gonna make me a fucking offer?).

Do you think students should be given the opportunity to earn their degrees in less time?

Image courtesy of healingdream.

Kill Them All (with Debt) and Let the Market Sort 'Em Out

Daniel Bennett wrote an article for Forbes on the rising default rate for student loans. Apparently, the 90-day default rate for private loans is up to 6% and the 30-day default rate is up to 7.5%, an increase from 5.4% and 6.8%, respectively. The default rate on federal student loans went from 6.7% in 2007 to 7.2% in 2008.

Bennett notes that if private student loans are rendered dischargeable in bankruptcy, as they were prior to 2005, this would increase the risk to lenders, leading to higher interest rates for those seeking professional degrees, which are almost certainly financed in part through private loans. It would also discourage low- to moderate-income borrowers from pursuing these degrees due to high loan costs. He does not provide any data supporting these assumptions. One would think it would not be difficult to provide such data, considering private loans have only been protected for a little less than 5 years.

Bennett's solution is for the government to get out of the student loan business and let the market sort it out. Private lenders could assess a borrower's risk of defaulting on the loan and set the interest rate accordingly. There are a few problems with this solution. First, most first-year college students would not qualify for an unsecured private loan without a co-signer with good credit. Which leaves a huge chunk of college-bound hopefuls with their cheese out in the wind. (I, myself, could never have qualified for a private loan during my undergraduate career, nor did I have parents or relatives who could co-sign for me.)

Second, even if private lenders are prohibited from turning down a borrower due to poor credit or no credit (which is the policy of federally-backed loans), then increasing the interest rate seems like it would adversely affect only those students who do not come from well-off or even middle-class families who can co-sign for these loans to get lower interest rates.

Finally, setting the interest rate at the time a student applies for the loan does not make much sense since the student's credit-worthiness will most likely go up after he or she earns the degree (J.D.'s excluded, of course). So, you could have a student with no credit, no co-signer and no income, sign up for a loan at 10% and then graduate with a nursing degree with $50K in student loans. If the student secures gainful employment upon graduating, it seems like the interest rate should reflect the student's likelihood of repaying the loan at that point (when he or she is entering a field with high demand and good income potential), not four years prior, when the student had no money, no credit, and no prospects.

Bennett also proposes that colleges share in the risk of student loan defaults. This would create an incentive for colleges to actually provide valuable educations, as they promise. I agree with Bennett on this one. Too many institutions of higher education are focused on enrolling as many students as possible and forgetting that about 90% of all undergraduate programs are basically worthless (take it from a PoliSci major).

Do you think student loans should be dischargeable in bankruptcy? Should colleges be held accountable when students default on loans?

The Myth of "Good Debt"

I have often read that student loans can be categorized as "good debt," since they are an investment and generally come with low interest. Given that many degrees are no longer an investment, but rather a gamble (I'm looking at you, Mr. Juris Doctor), I have a hard time swallowing the notion that carrying $80,000 in student loans is actually a good thing.

Fortunately, the student loan crisis is being covered more in the media lately, undoubtedly due to the high unemployment rate and a push by congressional democrats to make private student loans dischargeable in bankruptcy. Tess Stovall wrote a great piece for the Huffington Post about student loan reform. She points out that borrowers may only deduct $2500 in interest, which is not that much considering the enormous debt many graduates carry, particularly law school graduates. (Stovall claims the average law school graduate carries $93k in student loan debt.) She suggests that the student loan deduction should be raised to $3500 and unemployment deferments should stay all interest from accruing, regardless of loan type.

I agree, but I don't think these reforms go far enough in addressing the student loan crisis. My husband and I pay $600 per month toward student loan debt, which is $7200 per year. Only a fraction of that goes toward the principal, since I am on a graduated repayment plan. In fact, for the first year and a half of repayment, none of my payments went toward the principal. Yet, I was only allowed to deduct $2500 in interest. So, according to the government, my wealth increased the first year of repayment by $4700 (since the assumption is that $4700 went toward a reduction in the principal balance, while the remaining $2500 went toward interest). This is simply not true, nor is it good policy. Given the state of the economy and the "jobless recovery," the government should give more consideration to the thousands (if not millions) of graduates who are struggling to repay loans for degrees that are failing to pay off as promised.

Do you agree that student loans are good debt? How do you think the government should address the student loan crisis?

Wow, $50K Wasted on a Worthless Degree!

Above the Law published their quote of the day. Apparently, some teacher who couldn't find work at an elementary school (and is now in nursing school) is complaining about spending $50K on a degree she can't use. I don't know whether I should be angry at how out of touch she is with the student loan crisis or whether I should sympathize with her plight. After all, $50K is a lot of money, although it's nowhere near the amount that most of my law school colleagues are carrying in student loan debt. Plus, the quote does not state whether Jade Stier is actually in debt for that amount or if that's just what she spent.

Thoughts?

Democrats Push for Student Loan Reform

Congress may soon pass a law that would permit private student loans to be discharged in bankruptcy. Prior to the 2005 Bankruptcy Reform Act, private student loans were considered to be equivalent to other private, dischargeable loans. If the proposed bill is passes, this would be terrific news to the countless law students who are struggling to repay their six-figure loans.

Personally, my private loans are not really a problem (I owe about $14K in private law school loans, which is about $100 a month). The bulk of my student loans are government-backed, so I really have no hope of ever making them go away apart from doing it the old-fashioned way - by paying up. Even if I could discharge all of my loans through bankruptcy, I'm not sure I'd want to. I used to clerk at a bankruptcy firm and I know how much it can wreak havoc on one's credit. For me, bankruptcy would be an absolute last resort. Which is what it's supposed to be anyway.

If this law passes, would you declare bankruptcy to wipe out your private loans? Why or why not?

The Next Bubble: Law School Tuition

The Next Bubble: Law School Tuition

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Elie Mystal wrote an interesting article about the similarities between the housing market bubble and the law school tuition bubble. Consumers, desperate to pursue the American Dream of home ownership at any cost, took out sub-prime mortgage debt that infinitely outweighed the values of the homes themselves.

Similarly, a law student will take on a six-figure debt in order to pay for a degree that holds questionable value in today's job market. Like American consumers who have been inundated with the message that home ownership is the ticket to financial prosperity, law students have grown to believe that a law degree is worth more than it is. And those of us who now recognize the emperor is not wearing any clothes are swimming in law school debt that will likely not be paid off in our lifetimes.

I am on the 30-year plan with my law school debt. I pay a little over $600 per month with private and government loans combined. My private loans will probably be paid off in about 20 years, but as for the bulk of the debt, my husband and I will have paid off our mortgage well before those loans are ever wiped clean.

The fact that my husband and I are purchasing a home would probably lead many to believe that we are financially secure. Sure, we pay our mortgage and other bills on time every month. But will we ever be able to afford children? Probably not. Vacations? No. Most likely, we will both need to work in order to keep up with our debt for the next 20+ years. It makes me sad. It makes me want to use the $392 that will be deposited into my checking account on Friday to buy a whole mess of lottery tickets...