Puke Rates And Default Rates Of Student Loans

Now I know the numbers represented in these charts, below, apply to more than law schools, and I know the crux of the story related to these charts concerns the default rate on federally insured student loans related to for-profit schools.  But, there are a couple of underlying stories here that should be frieghtening to those in or wanting to go to law school.

First, as to the first chart bemoaning the increase to 8.8% of the default rate for federal insured student loans. With what is essentially government insurance of student loans against default, financial institutions are free to make risk free loans to students seeking such things as law degrees. Because the money is risk free the financial institutions are more free with the money. Because the financial institutions are more free with the money, law schools feel unrestricted in raising tuition to what would be called a "puke level".

In regard to some big law firms firms, the "puke level" is the the guess of how high an hourly rate can be raised until it causes a gag response from the big business that would need to pay it. Taking after their big law counterparts, for which they act like minor league training camps, law schools have been aggressively employing the puke rate analysis in raising tuition and fees to the highest level possible. It is of course denied, but the goal seems to be to get from each student the full and highest amount that can possbily be borrowed for a law school education regardless of the ultimate consequence to the student for this action. And, just like during the houseing bubble, the goal of most law schools is to keep testing those barriers or the puke rate.

This is important to understand because the first chart does not actually show the pain suffered by student loans incurred due to the puke rate of law school tution, so much as it show the penalty for law students getting locked in to federal insured student loans at levels now demanded of law schools. If you were to believe the first chart, the strain of student loans has actually eased since 1990, when the default rate was over 20%. In fact, this is probably not the case at all. This is because before 1990 student loans were dischargeable in bankruptcy. After 1990 the laws were changed to allow student loans to be discharged based only upon a number of years and/or the creating of a long term hardship. Then the bankruptcy rules were changes to not allow discharge regardless of the nunber of years that had passed. Now, it is virtually impossible to discharge students loans in bankruptcy, to outlive the student loans other than by death, and the laws have been strengthen further to involuntarily collect the debt through garnishment, tax refund seizures and even the removal of professional licenses, ending a lawyer's ability to build a law practice, which was the entire reason to obtain the loans in the first place. Also, in the interim, law school tution and fees have far outpaced actual inflation.

Second, as to the second chart, the focus of most articles is on the default rate related to for-profit schools. There are a few for-profit law schools, but not many. More interesting to me is the the default rate for public institutions as opposed to private, non-profit institutions. From a law school perspective this make some sense. When someone starts law school they get locked into the school. It is not easy to change law schools for cheaper tution. This is the reason, for example, for teaser scholarships by some law schools. They intice a prospect with the thought of a free legal education, then cut the support, leaving the law student to scramble to unexpectedly pay for their legal education.

Public law schools have been increasing their tution and fees on existing law students more quickly and in higher percentages than private law schools. Often this is happening to students that have less in the way of family resources than those in private institutions.

Something has to be done with law schools and their perception of the puke rate for tution and fees. If not, then our entire legal community will be irreparably harmed in the future.

 

Now I know the numbers represented in these charts apply to more than law schools, and I know the crux of the story concerning these charts is the default rate related to for-profit schools. But, there are a couple of underlying stories here that are just frieghtening.

 

Comments

[Jeff Crossman]

I saw one client with several hundred thousand dollars in student loans with absolutely no way out--even bankruptcy was not an option. Where do you think these defaults are headed? Will this problem worsen into a crises forcing Congress' hand to change the bankruptcy laws? Will banks stop/slow lending to students due to an increasing default rate? It's an interesting issue to watch--like knowing a car crash is about to happen.

[Toni Kangas]

Student loan in different parts of the world is not yet been an issue specially in Finland country the level of student loan is still in normal,puke level seem really bad but for sure there are still some alternative way of solution about it.