Credit: Flickr User acaben
Lawyers are trained to exploit the letter of the law on behalf of their clients. How we feel about that usually depends on whose side of the case the lawyers are on. Now, one of the nation’s leading law schools is exploiting a huge loophole in federal financial aid law, and taxpayers are clearly on the losing side. If other schools catch on, the result could be an undeserved bonanza for wealthy lawyers and expensive law schools even as other federal aid programs, like Pell Grants, face looming budget cliffs.
The story begins seven years ago when the federal government created two separate programs that, when combined, created the loophole: Grad PLUS loans and Income-Based Repayment for student loans. Under the Grad PLUS program, graduate and professional students can borrow to pay for the entire cost of their education, including living expenses, at just about any school and at whatever price the school sets. Income-Based Repayment, in its most recent iteration, caps recent and future students’ payments on those loans between zero and 10 percent of annual income and forgives any remaining debt after 10 years for those working in virtually any government or non-profit job, or after 20 years for all others.
While both programs have their flaws, on their own they work largely as lawmakers intended. But when schools and students strategically combine them, like ammonium nitrate fertilizer and gasoline, the result is financially explosive. So powerful, in fact, Georgetown Law can promise that students enrolled in its Loan Repayment Assistance Program (LRAP) “might not pay a single penny on their loans -- ever!”
Here’s how it works:
Under Georgetown’s LRAP, students take out Grad PLUS loans to cover the full cost of attending law school (around $75,000 per year, which includes living expenses). After they graduate, they enroll in Income-Based Repayment. If they work in government or non-profit jobs, Georgetown pays 100 percent of their loan payments for 10 years, after which IBR’s loan forgiveness wipes away the remaining balance. The students pay nothing for their education.
On the surface, it seems like Georgetown Law is taking a loss on students who go into public service. But the truth is far more sinister. Georgetown loses little if any money from this scheme because the school simply includes the cost of the loan repayment program in its tuition. And since the federal government issues loans for whatever amount Georgetown charges, students just take out more loans to cover that cost.
See the problem? Neither Georgetown nor its students are financing the program. You are, as a taxpayer by providing them with access to unlimited loans and unlimited loan forgiveness.
But don’t take our word for it. Assistant Dean for Financial Aid Charles Pruett recently told students in a taped seminar that, “It's not really Georgetown [who finances the program], it's you guys, because LRAP is primarily funded through tuition." And remember: those students take out federal loans to pay that tuition, and will ultimately have those loans forgiven.
Pruett explains in a journal article that combining Grad PLUS and IBR “makes it possible for law schools to create or restructure LRAP programs in a way that provides significant debt relief to graduates in public service at the lowest possible cost to the law school… The central idea behind coordinating LRAP and federal benefits [is to have] federal programs do most of the heavy lifting.” (emphasis added)
That’s nice lawyer-ese. After Georgetown bears the “lowest possible cost” the “heavy lifting” left for taxpayers is a whopping $158,888 per student. That is, by our estimate, the average amount of debt a Georgetown LRAP participant stands to walk away from under IBR. Compare that to what the federal government provides as a maximum Pell Grant benefit of $34,000 over six years for low-income undergraduate students.
Pruett and his colleague Phil Schrag have encouraged other law schools to launch programs like Georgetown’s, and several have (e.g. Berkeley and Duke). In fact, there is nothing to stop all graduate schools from adopting these schemes and expanding them to graduates beyond those in so-called public service jobs once they understand that the apparent cost of covering a student’s loan payments is really no cost at all; nothing prevents a school from simply hiking tuition by the same amount. But those tuition hikes never translate into higher loan payments for student or school—only bigger loan forgiveness after 10 or 20 years under IBR.
This cannot be what most lawmakers had in mind when they created IBR, loan forgiveness for public service, or Grad PLUS loans. Fortunately, they need only make a few tweaks to head off the abuse.
First, impose a $30,000 cap on the amount of debt non-profit or government workers can have forgiven under IBR. That is slightly below the maximum the government would provide an undergraduate from a low-income family under the Pell Grant program. Graduate students shouldn’t qualify for more de facto grant aid than low-income undergraduate students. The cap allows for significant loan forgiveness but does not give schools a blank check to raise tuition. It also ensures that students have skin in the game when they decide how much to pay and borrow for school. Borrowers who still struggle to repay after having $30,000 forgiven can continue to repay under IBR and have debt forgiven after 20 years.
Lawmakers should not limit the amount forgiven at the 20-year mark. That provision is a safety net for borrowers who legitimately struggle to repay their loans for an extended period. Therefore, the only way to fully check the financing schemes is to limit the amount graduate and professional students can borrow. An annual $25,000 limit and an aggregate $75,000 limit for all federal loans would solve the problem. Those limits could be higher, but lawmakers should then require graduate students to repay for 25 years before they could receive loan forgiveness.
Pruett, the assistant dean at Georgetown Law all but admits lawmakers would be justified in reining in the programs. In response to a student who wonders when Congress might shut the schemes down, he says the year 2017. Why? “My concern is… that’s when the first large wave of forgiveness may happen, and that’s when, if someone wakes up to what they’ve done, that’s probably when it’s going to be.” In the meantime, Georgetown Law graduates can look forward to U.S. taxpayers footing the bill for most of their education.
Here’s your wakeup call, Congress.
Click here for a group of clips where Georgetown Law explains how the program works.
Click here for a full explanation of how we arrived at $158,888 as the average loan forgiveness figure.