Income inequality bedevils the United States, as does debt, of the public and private varieties. Under the circumstances, you’d think that the federal government’s priorities would not include channeling billions of dollars in cheap credit for the benefit of highly paid lawyers who train more lawyers.
Yet that is essentially what happens each year through the student loan program known as Grad PLUS.
Despite all the talk about the government’s $1.1 trillion student loan portfolio, and the burden it represents for college students, some 40 percent of the money is owed by graduate and professional school students – who make up only 16 percent of all student-loan borrowers – according to Jason DeLisle, who ran the numbers for the New America Foundation.
The recent surge in grad-student debt traces to the enactment of Grad PLUS in 2006, during George W. Bush’s presidency.
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For the first time, it gave professional and graduate-school students unlimited access to below-market-rate loans from the government, which, of course, borrows the money to begin with. Before that, there was a $138,500 cap on grad-school loans, including leftover college debt. (Undergraduate borrowing remains capped at $57,500.)
Subsequent laws enacted under Bush and President Obama sweetened the Grad PLUS deal further by permitting certain students long-term debt forgiveness as well as income-based repayment options.
Nowhere has Grad PLUS had a greater impact than in the nation’s law schools. Law-student indebtedness grew from an average of $66,000 for public institutions in the 2005 academic year to $88,000 in 2012, according to a recent American Bar Association task force report. The figures for private law schools were $102,000 in 2005 and $127,000 in 2012. More than half of law students use Grad PLUS.
These resources are flowing to institutions whose business model is geared to a bygone era. For the past quarter-century or so, law schools added expensive buildings and faculty to enhance their rankings – believing, correctly, that students would pay ever-increasing tuition for top-rated schools because a J.D. was the ticket to a high-paying career.
Then demand for lawyers collapsed because of the Great Recession and structural changes in big-firm practice. Only about 60 percent of the Class of 2013’s law degrees landed immediate employment. The value of a law degree has plunged, and with it, law school enrollment.
The logical response would be a full-scale restructuring of legal academia, including pay trims or layoffs for the lawyers who teach and administer law schools, and whose salaries, generally well above the median national income, account for about a third of law-school overhead, according to the ABA.
Instead, the flow of easy taxpayer-backed loan money through Grad PLUS operated as a de facto bailout, enabling many law schools to maintain capacity and delay reforms, or settle for modest ones, while continuing to charge more or less the same high tuition.
In other words, much of the subsidy represented by Grad PLUS loans is getting captured by those who operate the schools, not those who attend them.
Yes, law schools have increased grants and scholarships. Now only 4 students out of 10 pay full “sticker price” tuition, rather than 6 out of 10 students 15 years ago. But, as the ABA report acknowledged, the bulk of these discounts is awarded based not on student financial need but on “merit” – that is, on data such as college grades and test scores that help the schools enhance their rankings and attract a larger share of the declining applicant pool.
As it happens, Grad PLUS was intended as a deficit-reduction measure, as Grad PLUS loans carried higher interest rates than undergraduate loans and would help offset the latter’s cost, thus raising the overall profitability of the government’s direct lending for education.
Yet using grad-loan profits to cross-subsidize undergrad loans looks less clever – and a lot less equitable – when more and more borrowers take advantage of loan forgiveness and income-based repayment plans.
Some of that debt relief does go to people – newly minted lawyers among them – who agree to take low-paying public-service jobs. The vast majority of it, however, does not.
And though the precise hit to taxpayers from graduate student debt reduction options can’t be calculated, it’s notable that half of all Grad PLUS debt is now covered by them, according to the Wall Street Journal.
With bipartisan support, Sen. Lamar Alexander, R-Tenn., has proposed limiting this wasteful deployment of the federal government’s balance sheet. Indeed, few bills before Congress would do more to make educational programs more rational and transparent. If it doesn’t pass, maybe someone should sue.
Charles Lane is a member of The Washington Post’s editorial board.