Sunday, July 17, 2011

Let's Talk About Debt

I've been meaning to write a post about this for a while, but thinking about my impending debt gives me a major case of the sads. Like death or what my scrambled eggs actually are, I find life is more enjoyable if I don't think about it too much.

But graduation approaches and the gig is up. And I face an important choice.

As some commenters have noted, my class (the class of 2012) will be the last Boalt class to enjoy a "pure" LRAP program. By pure, I mean not dependent on new federal programs like IBR and PSLF. So on the pure LRAP program, Boalt would help me make my loan payments for my law school debt, up to $100,000, so long as I do approved legal work and am within a certain income level. In ten years, my $100,000 of debt would be paid. If I left the program at any time (for a private sector job, presumably), I would then be on my own to make payments, but my debt would be smaller, because of all those LRAP payments already made.

The problem, of course, is that I won't have $100,000 of debt. I consider myself lucky because I don't have significant undergraduate debt. And I guess I'll be "lucky" to escape Boalt with a bill around $160,000... errrr make that $170,000. But for LRAP, that's not a pretty scenario.

While LRAP would make payments for $100,000 of my debt, I would need to make payments on the remaining $70,000 or so. The nice lady in financial aid handed me kleenex as she explained this to me. It works out to be about $800 a month.

I've done some math, and this is definitely possible. But it would probably only be possible if I left the bay area for a better cost of living, and if I were lucky enough to land a public sector job paying in the $40-$50,000 range.

The alternative option for me (and the only option for the classes of 2013 and beyond) is to use IBR or PSLF in combination with LRAP (if I'm doing approved legal work). This means I enroll in either IBR or PSLF, which both allow you to make very small monthly payments on your loans. If I'm doing public sector legal work, LRAP will make those tiny payments for me. Which means no monthly payments! Woo! But it also means my debt is rapidly getting bigger over time. And if I leave PSLF at any point, I will have to pay off a lot more debt than when I started. No bueno my friends.

I'm pretty committed to a career in the public sector, but no level of commitment can make me feel totally comfortable with eliminating any private sector work as an option for me in the next ten years. Not to mention the concern that IBR and PLSF could be eliminated in this spending-cuts-only political climate. Dean Edley told some concerned students that he thinks the elimination of the programs is unlikely. I'm sure he'll forgive me for being skeptical. Would we be grandfathered in? I have no idea. Do you?

None of this is to whine. I know so many of my classmates who have it worse. And I'm really grateful that there is something in place that makes it possible for me to pursue a public sector career. I chose this path. Financial cushion is something I knew I was giving up in exchange for doing the kind of work I find fulfilling. But the two options certainly don't leave me feeling at ease. In case you're interested, I'm leaning towards traditional LRAP (and if any graduates have wisdom to share, I will gladly take it).

Future Boalt students pursuing public sector work won't even have my daunting choice to make. They have to use the IBR/PLSF + LRAP option. That's something I hope incoming public sector students are aware of.

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Anonymous Anonymous said...

I think this is a thoughtful post, and it's a really real and troubling issue for a bunch of us, so I totally don't mean to downplay your concerns.

But, I'm always a little bit surprised when people are so down on IBR. I, presumably like you, came to law school fully intending to pursue a career in public interest, and realizing that that meant a long future of paying back loans. I absolutely didn't expect fee increases, and feel pretty cheated that my cheap(ish) in-state tuition -- a huge incentive for me to come back to California for law school -- ballooned over my three years in law school. But fee increases aside, I think IBR is a pretty great program, and if you really are committed to a future in public interest, can only help you.

To correct something in your post, S*grid from the LRAP office made it pretty clear to me that your 10 years in public service don't have to be consecutive, but rather that they accumulate. This means that if you do public interest work for 3 years, decide to try firm life, work there for five, and then hate it and come back to public interest, you still qualify for loan forgiveness.

I too worry about what happens if IBR just gets flat out cancelled 9 years down the road. But shit is uncertain for everyone. And I for one was pretty pleased with the idea that I could spend 10 years doing what I came to law school to do, pay a small amount of money on my loans during those 10 years, and then be done with it. I find it hard to complain about that.

7/17/2011 11:03 PM  
Anonymous Anonymous said...

i want to raise a delicate issue and not accuse the school or anyone else just yet.

but don't you think it's bad enough that schools eyeball your finances before they decide how much they will charge you for law school and then, in recent years, will continue to tinker with your costs (indebtedness) by monitoring what career choices you make? at what point is it fair to say, "charge me a price at the beginning and then get out of my life"?

7/17/2011 11:05 PM  
Anonymous Anonymous said...

Don't limit it to incoming public sector students either. If you do not get BigLaw, your salary in the private sector is also in 30-50k with an even longer forgiveness period.

I get so angry and depressed when I think about how many opportunities I left on the table to come to school, and it looks like I could very well be graduating into glorified secretarial work. I dont understand how Boalt is able to even fill a class of 2014 when students finally saw what tuition would be and how dim prospects were. Hopefully law schools become so transparent, I wish students knew what they were getting themselves into.

7/17/2011 11:08 PM  
Blogger Jackie O said...

@11:03 - I agree with you and I'm glad IBR (but in my case I would actually use PSLF) exists. They are also wonderful options for people with a lot of undergrad debt, or people who might want to work in non-law jobs. I also remember you're right about taking breaks from the program, but the problem there is that (as far as I remember, and correct me if I'm wrong) you have to make payments during that break time, and payments on MUCH more debt than before. If you go to big law, fine, no problem. But I was thinking more along the lines of, if I were to work at a small firm for a couple of years. On that salary, I doubt I could make payments on 200K+ of debt. Is that incentive to stay committed to the public sector? Sure. It just leaves me uneasy.

And I really can't shake the whole repeal problem.

7/17/2011 11:51 PM  
Anonymous Anonymous said...

11:03: Under the IBR system you simply wouldn't have the choice to do firm life after three years of public interest work, unless the firm you were going to transferred you in as a midlevel associate with biglaw salary. By that point, your loans would have negatively amortized and you would be asking yourself, "Do I want to take a pay cut to work in the private sector?" Most people answer that question "no," but sometimes their spouses and kids answer that question for them.

7/18/2011 7:08 AM  
Blogger McTwo said...

There is always fleeing to a non-extradition country.

7/18/2011 9:32 AM  
Anonymous Thomas F. said...

Thanks for posting this, and getting this conversation going (again).

To the person at 11:03 - "I too worry about what happens if IBR just gets flat out cancelled 9 years down the road. But shit is uncertain for everyone."

A couple things on this: (1) The Administration hadn't considered this as even possible until students brought it up this year, which is really disconcerting; (2) I think Jackie O's point about Dean Edley's assurances raise a good point related to this issue: that's great that the University is confident on this issue, but this means very little unless they're willing to carry the risk (instead of passing 100% of that risk on to the students); (3) Other schools are helping insulate against the negative amortization issue that 7:08 brought up by promising to cover some of the debt if students opt out after 'x' years... it doesn't solve the uncertainty problem, but it helps limit the risk students are exposed to in worst-case-scenario situations.

The bigger issue though is that I think the relationship between tuition hikes and increased financial aid has been presented very dishonestly. Even if the financial aid budget increase much faster than the tuition hikes (in % terms, which is how it always appears in Dean Edley's presentations), in absolute terms students are graduating with much more debt. When the financial aid budget increases 20%, but tuition goes up 10%, the net change to students (even the most needy, who enjoy the most fruits of that budget bump) is still thousands more in debt. I don't know if this is sustainable in 10 years.

7/18/2011 10:18 AM  
Anonymous Anonymous said...

My understanding is that negative amortization is only a problem for a few students who have very high debt (over 200,000) and very low incomes (under 40,000 for the next 10 years). It is something they should take into account when making this decision and assessing the risk of PSLF program being repealed versus Boalt's LRAP changing, but I don't think it will effect most students.

I have 160,000 in debt (including 10k undergraduate loans) and IBR/PSLF seems like an excellent option. After ten years I will have paid 0 dollars to go to law school.

7/18/2011 11:24 AM  
Blogger Jackie O said...

@11:24 - I'm pretty sure you're mistaken about that. We'll have around the same amount of debt and S*grid talked to me about negative amortization. If you haven't had an appointment with her, I definitely recommend it.

7/18/2011 11:42 AM  
Anonymous Sara C. said...

Just a quick comment in response re: repeal of IBR and Thomas F's remark that "The Administration hadn't considered this as even possible until students brought it up this year, which is really disconcerting."

I'm not sure where this information is coming from, but it's certainly something the administration was talking about as soon as IBR/PSLF came out a few years ago. Students asked about it at the very beginning, and the administration was responsive then. Mind you, the response has always been similarly evasive, but I think it's incorrect to assert that the administration was somehow in the dark about this.

7/18/2011 1:49 PM  
Anonymous Thomas F. said...

@ 1:49 -

I've been one of the BHSA student reps on the Financial Aid Committee the past two years. You're right that I should be careful when using "the Administration," as I'm sure that some folks perhaps have thought this through. But when the students have brought the issue up in the Committee this year, for example, the response from both the faculty members and administrators present has been, "We hadn't thought of that," or, "We don't have any plan for that," or, "We had no idea that this was such a concern for students."

I don't mean to disparage the work that people at Boalt have done on this issue, and it's certainly on the radar now. While I've gotten very frustrated working on the Financial Aid Committee the past two years, I think it's clear that most of the faculty / administrators involved have nothing but the best interests of the students in mind.

But my sense is that there are major downsides to switching to IBR that many people simply didn't pay sufficient attention to. The potential for defunding is one, but by no means the only, downside. For example (and this one's dear to my heart), for Class of 2012, there's been a pilot program for students interested in working for unions or doing lo-bono work. Boalt Hall has a great history of producing labor law scholarship and labor lawyers, but for Class of 2013 and beyond, tough luck: that won't be covered under PSLF (even if Boalt picks up the payments for 10 years of IBR).

Which administrators do you think were "responsive," and how did they "respond"?

7/18/2011 2:34 PM  
Anonymous 11:24 said...

I graduated in 2010 and had several meetings with Sigrid. I'm pretty sure that there were scenarios in which negative amortization would occur -- like if I worked for 10 years making 35k or less a year, never getting a raise, then my loans would negatively amortize. Or I think if I took time off and had to put my loans in deferment with no LRAP assistance. But, assuming my pay gradually increases, the IBR amount (that LRAP contributes) will increase also and so at the end of ten years, while I won't have made a huge dent on my loans, I won't be owing more than I started with either.
At least that's how I understand it.

7/19/2011 2:54 PM  
Anonymous Anonymous said...

Um, no.

Sorry to sound like Sigrid here, but try this:

For students graduating with Jackie O's debt, making normal public interest salaries, even getting steady normal raises, you're in (at least) as much debt 8 years in as you were when you started.

That's daunting if, for whatever reason, you can't end up making that 120th payment.

7/19/2011 6:36 PM  
Anonymous Anonymous said...

Sorry, not totally understanding this "negative amortization" talk. Is that basically a term that means even though you're making payments, the amount of interest that is accruing is outpacing the payments, and the amount you owe is growing?

Regardless, assuming IBR/PSLF is not repealed, does it even matter, considering the balance will be forgiven after 10 years (and assuming you've done 120 months of public interest work)?

7/19/2011 9:08 PM  
Anonymous Thomas F. said...

@ 9:08 -

That's exactly what it is... you got it. So even though you're making your payments, you're actually going into more debt. And you're also right that it doesn't really matter if you make it through the 10 years: that's when the real benefit of PSLF kicks in.

But if you switch to a plaintiff-side employment law firm, or other lo-bono, or start your own practice, or work for a union...

7/20/2011 6:26 AM  
Anonymous Anonymous said...

Negative amortization means just what you said: your loans are growing faster than you can pay them.

And yes, if your loans have negatively amortized and they get forgiven, then it doesn't matter whether they've grown because you're not paying them back.

7/20/2011 6:26 AM  
Anonymous Incoming 1L said...

Has anyone looked into making a small payment on top of what IBR requires (e.g. the LRAP covered payment) in an amount that would cover the interest accruing to prevent NA? If so, what kind of figure are we talking on a monthly basis for, say, 150k in loans on typical PI salaries (let's say 40, 50, and 60?) This may seem a bit odd, but it could work if one is not determined to "pay nothing" to attend school (by utilizing the IBR/LRAP hybrid) and fears what NA might do five-ten years down the road. (Note: I've worked in a government position for the past few years and had to make student loan payments. Money is tight on these salaries, but it isn't theoretically impossible to live on such a salary and pay a little in loans).

Also, I believe I read somewhere that IBR has a provision that takes care of NA for the first few years. Is this correct? Can anyone say more?

Financial Aid folks at all the T14 admit days I attended said the same thing regarding IBR and PSLF: "These are budget neutral programs and even if they were to be cut, the feds will honor the terms that existed for a particular class when they took out the loans." Past behavior would seem to confirm this - changes were not retroactive. Having said that, I wonder if the all-but-certain lawsuits that would arise for a retroactive IBR/PSLF cut is enough to scare of the current Congresscritters from such a move. If not, perhaps all you wise current Boalties & alums can provide insight on what the suits might be and their respective chances of success (reliance-based estoppel, perhaps?).

7/20/2011 9:02 AM  
Blogger Patrick said...

Incoming 1L,

Welcome to Boalt! Exact numbers depend on variables including AGI, interest rate, and amount of debt principal. But by way of ballpark figures, 150,000 in principal at 8% requires 12,000 per year (1,000 per month) just to service the interest. IBR-based LRAP payments based on those numbers are likely in the 600-700 per month range. So, the difference between LRAP's IBR contribution and what is required to service the debt's interest is substantial.

7/20/2011 10:06 AM  
Blogger Matt said...

It'd be cool if Sigrid calculated that number and gave it to us IBR-LRAP folks along with our disbursement every six months. It seems like the increased workload for her would be minimal.

7/20/2011 10:07 AM  
Anonymous Anonymous said...

incoming 1l, I am curious about how you are still interested in attending despite having an awesome government gig. As a 3l with top grades here I've been told working gov is a long shot and yet you have a position right now that id gladly take as a boalt grad. Also I hope you realize how tough the pi market is... Those 40 to 60k salaries are going to litigators burnt out or laid off with many years experience... Most of my graduating friends in pi graduated unemployed. You are in an awesome position it sounds like, why forgo a 350k opportunity cost (200k loans 150k salary) for a iffy chance at employment you already have?

7/20/2011 10:27 AM  
Anonymous Incoming 1L said...

@ Patrick: Even with that ballpark figure, I'd argue that it's doable if one is so concerned about NA. $300 is not chump change. But my monthly payments on ten year standard repayment for undergrad loans (about 18k of debt) were ~$220 and I managed on a low/mid-range public sector salary. If you've got LRAP to cover a good chunk, it seems feasible for some to come out no worse with regard go NA if they pursued a route such as this.

Having said that, I'm not defending non-coverage of NA by Boalt - it would be nice for LRAP to adopt a hold harmless provision for NA, similar to NYU, for those who would be affected by it.

@ 10:27 : It wasn't a federal gig, but rather an appointed position in a state level politician's office. A job is a job ITE, but trust me when I say that you'd hardly clamor for it if you had more details. Even if the job had been lucrative, see: 2010, November Election of.

Perhaps more importantly, I don't have an interest in direct political work moving forward, but rather a specific range of issues - work largely accomplished with a JD. As far as loan debt, mine will be substantially below 200k (about half), so an opportunity cost calculation is closer to 240k. Nonetheless, your point is well taken. In other circumstances, I might pursue a different path, but this move was one well-thought out and makes sense for me on a number of levels. Ironically, given the type of PI work I want to do, I may need to work in the private sector for a few years after graduating. It isn't quite clear yet.

7/20/2011 10:53 AM  
Anonymous Anonymous said...

Incoming 1L's who use phrases like "reliance-based estoppel" scare the hell out of me...

7/20/2011 11:20 AM  
Blogger Armen said...

I think we can all agree that 11:20 speaks for all wise Boalties and alumns.

7/20/2011 11:34 AM  
Anonymous Anonymous said...

I don't understand how the school is telling people that IBR would stay even when repealed, that's not true. Doesn't the government have sovereign immunity? Also, why are people relying on IBR when republicans already have it on the chopping block? IBR's repeal is going to happen, I can't believe people are relying on it.

7/20/2011 12:02 PM  
Blogger Patrick said...

12:02, the sovereign immunity angle is a tad more complex than that, but your basic point is spot on: it smacks of insanity for a student to invest 10 years of their life, and expose themselves to hundreds of thousands in personal and un-dischargable liability, all on what is essentially a politician's promise.

7/20/2011 12:06 PM  
Blogger Matt said...

Is this the part where someone argues that Boalt made us all enter IBR+LRAP under duress?

7/20/2011 12:08 PM  
Anonymous Incoming 1L said...

@ Patrick & 12:02: regarding sovereign immunity, what about the Tucker Act? hasn't the federal government waived immunity for suits involving contracts to which the government is a party?

if so: doesn't a federal student loan constitute a contract between the student and the government? if it does, and the government has waived immunity, wouldn't promissory estoppel be a recourse? there's no contract for IBR/PSLF, but it would seem that the current provision of these programs is the exact kind of promise (upon which law students rely when taking out those loans) that would make them enforceable as a contract under PE doctrine.

I, of course, have a 0L understanding of both contracts and torts, but based upon my understanding, this seems like a reasonable argument to make (should IBR/PSLF be cut without a grandfather clause).

7/20/2011 1:01 PM  
Anonymous Anonymous said...

@Incoming 1L, I'm not seeing how IBR/PSLF is budget neutral; but

@ 12:02, what evidence do you have that it is on the chopping block?

If a debt deal gets passed and doesn't include cuts to this, it would probably be safe for a while; I don't think congress would want to revisit the debt issue for a while.

Plus, I agree with what someone said, usually cuts like this seem to be forward-looking, not backward-looking, so while class of, say, 2015 couldn't rely on IBR, people in prior classes hopefully could.

But generally speaking, I don't think the proper recourse for this is legal, I think it's political: mobilizing to call congressmen, but even more so, it will probably be in the hands of the Department of Education to suggest cuts, and I feel like people who want IBR/PSLF saved are going to have to speak up.

7/20/2011 1:14 PM  
Anonymous Anonymous said...

The Tucker Act does not waive sovereign immunity for suits based on promissory estoppel. This is black-letter, BarBri law, everyone.

7/20/2011 6:42 PM  
Blogger Patrick said...

Black letter barbri law? Well, then it must be that simple!

7/20/2011 6:45 PM  
Anonymous Anonymous said...

OK so I was exaggerating in the heat of my feverishly reviewing for this god-forsaken exam. But seriously, a quick Google search reveals that the court of claims regularly dismisses PE claims under the Tucker Act.

7/20/2011 6:53 PM  
Blogger Patrick said...

This comment should go in the bar exam thread, but I would like to apologize for potentially leading 6:42/6:53 toward what could become a post-bar exam summer of alcoholic despair.

One should never let the law get in the way of a bar exam answer. Striving for things like "precision" or "nuance" or the "actual law" in an answer is a sure path to failure or madness or both. And my use of sarcasm during dead week before the bar exam? That was just plain insensitive.

The bar answer is “[sovereign immunity] + [maybe something about the stupid contracts clause] + case closed.”

Hang in there, and good luck next week!

7/20/2011 8:19 PM  
Anonymous Anonymous said...

To make sure I am understanding: class of 2015 and on have to do 10 years (albeit non consecutive years) of work in the public sector in order to benefit from LRAP programs? From skimming the Berkeley website, I got the impression that the program was improving for future classes. Apparently I have a lot of work to do on my reading comprehension before I matriculate...
Any more info or LRAP for dummies explanation would be very helpful! Thanks so much and good luck:)

3/16/2012 3:41 AM  
Anonymous Allan Morais said...

There's nothing wrong with the path you've chosen. Pursuing a public sector career isn't that bad. And, if you do become successful, you can think of it as a "rags to riches" thing. LRAP is a good option to pick because they have unparalleled support for public interest. You can consider this as your financial safety net. It can also cover your educational loans. However, you must work really hard in studying and working in order for you to stay debt-free.

1/30/2013 5:33 AM  
Anonymous Jaden Allred said...

“I find life is more enjoyable if I don't think about it too much.” -- Indeed. However, there are people who really don’t think about their debts at all. They keep on having extravagant ways of living even if they really don’t have the funds for it. Well, I really hope that you’re doing fine right now and you were able to manage all your debts in the past. ;)

2/25/2013 12:09 PM  

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