College Debt Trap

Dear Reader, 

Across the country, college tuition is getting more expensive, and salaries aren’t keeping up with the rising costs. 

At elite universities like Columbia in New York City, the median debt of a graduate film student is  $181,000, yet two years out of school, the median salary is less than $30,000. 

But before you roll your eyes and open your mouth to advise students to pursue more “lucrative” fields, let us point you at another shocking example of this disparity…

Recent graduates of the University of Miami School of Law who used federal loans borrowed a median of $163,000, yet two years later, half were earning $59,000 or less. 

This gap represents the largest imbalance between debt and earnings among the top 100 law schools.  

Anthony Alfieri, a law professor at the University of Miami, stated that law schools “foster this kind of cruel optimism” in students, allowing them to believe six-figure salaries are realistic when those high-paying jobs are mostly reserved for students at only the top-ranked law schools.

Federal data backs up Alfieri’s statement that the value of a law degree from non-elite schools has dropped. 

According to the Education Department data, which covers roughly 200 programs, only a dozen of the U.S.’s law schools have students who earn annual salaries two years after graduation that exceed their debts. Unsurprisingly, such schools include the likes of Harvard, Stanford and the University of Pennsylvania. 

Tuition Rises While Salaries Are Stagnant 

This issue has arisen because salaries have stayed mostly constant while inflation has been rising. 

Let’s look at the math…

A three-year Juris Doctor Program, plus living expenses, now can cost more than $250,000 at private law schools. But, according to the National Association for Law Placement, the median salary for graduate students who finished law school in 2019 was $72,500 — essentially the same starting salary that graduates had a decade ago. 

Miami has increased tuition by 43% over the past decade, according to American Bar Association data, more than double the rate of inflation. 

But Miami isn’t the only school hiking up tuition costs; data from the nonprofit advocacy group Law School Transparency shows that between 1985 and 2019, the average annual tuition at private law schools nearly tripled to $49,000, adjusted for inflation. 

Law schools can continually make these cost increases because they know students will rely on the U.S. government’s Grad Plus loan program, now the fastest-growing federal loan program. 

And unlike undergraduate loan programs, the federal Grad Plus loan program has no fixed limit on how much grad students can borrow and has charged interest rates as high as 7.9% in recent years. 

Universities are completely off the hook for student’s inability to pay their loans. After 20-25 years on an income-dependent payment plan, the balance on Grad Plus loans can be forgiven. 

And here’s the biggest kicker: some taxpayers could pay the price of any losses…

Will Taxpayers Be on the Hook For Loans? 

In 2018, Betsy DeVos, then U.S. education secretary, called Jamie Dimon, JPMorgan Chase & Co.’s Chief Executive, and explained that repayments on federal loans were coming in consistently below projections. 

Jeff Courtney, a former JPMorgan executive, was sent to report on the issue, which found that Congress, several administrations and federal watchdogs had continually made the student loan program appear profitable when defaults were actually becoming more common.

As a result, there was a huge gap between what the books were reporting and what the loans were actually worth. Therefore, the Treasury was forced to funnel cash to the Education Department in addition to already approved budgets, which cost billions in losses. 

The federal budget assumes the government will recover 96 cents of every dollar borrowers default on, a number that seemed suspiciously high to Mr. Courtney. 

Education Department budget officials explained that when borrowers default, the government often puts them into new loans. They consider this a way to pay off the old loans even though, in many cases, the borrowers haven’t repaid anything, and the new loan also defaults. 

Mr. Courtney’s final report revealed that the government is likely to recover only 51% to 63% of defaulted amounts. 

His calculations also found that since 2006, students with loans had repaid an average of just 73% of their original balance after a decade. Additionally, many who received loans had credit scores in the “distressed” category.  

The Wall Street Journal used his calculations to claim that taxpayers could ultimately be on the hook for roughly a third of the $1.6 trillion federal student loan portfolio, or more than $500 billion.

Now, we should note that Mr. Courtney’s model has not been widely accepted. But if it was, organizations such as the Congressional Budget Office could force the government to recognize losses, increase deficits, and add billions to the debt, which could lead to tax increases for some.

The assumptions in Mr. Courtney’s model faced challenges from career officials at the White House Office of Management and Budget (OMB) during the Trump administration. And now, the Biden administration has scrapped the project. 

The OMB released a statement with their decision which explained that the “analysis used incomplete, inaccurate data and suffered from significant methodological shortcomings, including a dubious method for predicting borrowers’ future income.”

A spokeswoman for OMB has stated that the agency has refined its model to provide more accuracy. 

Regardless of whether his calculations were perfect, it’s still clear that the government is failing to make changes that could help borrowers.

For example, many borrowers pay 7-8% interest on loans. Since the government can borrow at less than 2%, it could use its position to refinance loans at a lower rate, making loans more affordable, meaning they might be paid off more easily. 

However, Federal law bars the Education Department from refinancing federal student loans at lower rates. This leaves individuals only one option: replace federal loans with cheaper private loans — if they have great credit and income, of course. 

Otherwise, you’re stuck with high interest on federal loans, and the cycle just continues. 

At the end of the day, the real victims of this system aren’t taxpayers, but graduates, who the government knows cannot likely pay their debts, yet loans them the money and holds them in their grasp regardless… 

To a Richer Life,

The Rich Life Roadmap Team

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