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Law Students Could Win Big With New Obama Loan Program

 
“Happy days are here again!”
You can almost picture American University law grads breaking into song after President Obama announced plans for easing student debt burdens. Carrying an average debt load of $158,636, American’s 2013 graduates will be among the biggest beneficiaries of Obama’s “Pay As You Earn” (PAYE) program, which was expanded by executive order on Monday. It will take effect in December 2015.
Originally signed into law in 2012, PAYE will now cover loans taken out before October 2007. The program also enables debtors to hold their monthly student loan payments at 10% of their discretionary income.
The PAYE program will offer an alternative to debtors already eligible for the Income-Based Repayment (IBR) program, which is set to 15% of discretionary income
The Federal government estimates that the order will extend a 10% rate to an additional five million borrowers. As part of the program, students working in the private sector will have their loans forgiven after 20 years (those working in the public sector will have them forgiven after 10 years). With IBR, forgiveness occurs after 25 years.
For law grads, the order offers serious benefits. Aside from providing relief to cash-strapped grads, it frees recent graduates to accept lower-paying jobs in the public sector. Additionally, it will benefit the graduates of a wide range of law schools. In business schools, for example, the highest average graduate debts are concentrated among the highest-ranked institutions; however, high debt occurs in nearly all law schools, from the Thomas Jefferson School of Law ($180,665) to the University of Chicago ($153,753) to the University of Maryland ($114,909).
Still, the PAYE program might be unfair to law graduates who incurred lower debts by attending less expensive schools, earning scholarships and financial aid, and working during school. Here is another example of this dichotomy from Bloomberg Businessweek (using MBA grads as an example):
“Take, for example, an MBA graduate who has a high debt load of $180,000 and a mid-level job paying $80,000 a year at a private company. Under PAYE, she will pay $427 per month. That’s the same monthly burden as someone who owes $80,000 but earns the same amount, calculates Jason Delisle, director of the Federal Education Budget Project at the New America Foundation, a nonpartisan public policy institute. And since both alums will stop paying after 20 years, the first borrower will end up paying a much smaller portion of her total loan amount.”
But Obama’s plan will undoubtedly make it easier for most young attorneys to finance homes or start families. In his announcement, President Obama reflected on the challenges of paying off his own law school debt: “When I got out of school, it took me about a year to pay off my entire undergraduate education. That was it. And I went to a private school…Now, when I went to law school it was a different story. But that made sense because the idea was if you got a professional degree like a law degree, you would probably be able to pay it off…But compare that experience just half a generation, a generation ago to what kids are going through now. These rising costs have left middle-class families feeling trapped.”
While Obama accrued less debt than recent grads, he admits that he and his wife “only finished paying off our own student loans just 10 years ago.”
Currently, law graduates bear the highest debt burden among graduate students, accruing, on average, $140,616 in debt, according to a report from the New America Foundation. That is over three times higher than MBA graduates ($42,000) and well over two times higher than the median graduate school debt ($57,600).
In short, law students will benefit, to an extent, from this program. In the end, though, the program won’t change the fact that right now, going to law school all but guarantees carrying a lot of debt for a lot of years.
Source: Bloomberg Businessweek, Bloomberg Businessweek, ABA Journal
 

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