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Law Schools Devise Trick To Game Taxpayers

As mentioned in Non-Sequiturs last week, this story is why we can’t have nice things. Specifically, why lawyers make it so we can’t have nice things.

On Friday, the Washington Post reported that Georgetown Law had worked out how to bilk the federal government into fully paying for some its students’ tuition and managed to create a profit for itself on the side. This is caused a bit of a stir Friday afternoon, but unfortunately the practice is neither new nor limited to Georgetown.

Though some tactics Georgetown employs may go beyond what any other school has the gall to attempt….

In Friday’s Post piece, Dylan Matthews lays out Georgetown’s strategy, citing a report from the New America Foundation:

Georgetown Law students who use LRAP [the school’s Loan Repayment Assistance Program] use loans from Grad PLUS — the federal government’s student loan program for grad students — to fund the entire cost of going to law school. That includes not only tuition and fees but living expenses like housing and food. Grad PLUS has no upper limit on the amount you can borrow, so there isn’t any constraint on how much you take out.

Once out of school, the students enroll in an income-based repayment program, in which, if they’re working for a nonprofit, the federal government forgives all loans after 10 years. For that 10-year period, however, the borrower has to pay a share of their income. But under LRAP, Georgetown commits to covering all of those payments.

Upon first glance, it looks like what’s happening is that Georgetown is paying for part of the cost of law school and the federal government is forgiving the rest. But as Jason Delisle and Alex Holt at the New America Foundation discovered, Georgetown’s cleverer than that. The tuition paid by new students — tuition they’re often paying with federal loans — includes the cost of covering the previous students’ loan payments.

So Georgetown is ultimately paying its share with money its students borrow from the federal government. The feds are paying back themselves. At no step in the process does Georgetown actually have to pay anything. The feds are picking up the entire bill.

Way to go lawyers, ruining another good idea. Forgiving some debt for people willing to take on jobs that society needs filled but that pay next to nothing is a clever plan, and now the whole policy is under attack because law schools couldn’t help themselves from gaming the system.

But the Georgetown revelation wasn’t a surprise. Professor Paul Campos outlined the problem in chapter 8 of his e-book, Don’t Go To Law School (Unless) (affiliate link). And Professor Brian Tamanaha, author of Failing Law Schools (affiliate link), previously noted:

I accept [Georgetown law professor Philip] Schrag’s argument that the new version of IBR/PAYE — implemented after the book was published — substantially reduces the financial burden on heavily indebted law graduates (with a major caveat about the tax bomb that awaits them when the debt is cancelled). For reasons I explain, however, IBR potentially has perverse consequences. It was intended as a debt relief program for graduates in financial distress (which I support), but as Schrag argues, it works as a subsidy for legal education. Now law schools have begun pitching IBR, telling prospective law students not to worry about taking on huge debt. This distorts the purpose of IBR and, by rendering the size of the debt irrelevant, exacerbates the warped economics of legal education.

And several schools have jumped at this chance to exacerbate the warped economics of legal education:

Without drawing down endowments or draining financial aid accounts, law schools could promise an (eventually) free education for public service students.

And plenty now do: Besides Georgetown, NYU and Berkeley, programs at Washington University in St. Louis, Duke, George Washington University, Columbia University and others tell students they can combine loan forgiveness with school loan assistance programs. “Public interest borrowers,” Georgetown promises, “might not pay a single penny on their loans — ever!”

Except in taxes, but let’s not tell them about that.

But at least it’s limited to public interest work. Oh, damn.

Particularly shocking, as Delisle and Holt point out, is that there’s nothing, in principle, limiting this to students who go into public interest. For students who don’t go into public interest careers, the federal income based repayment program only forgives debt after 20 years, and because private-sector lawyers make more, the income-based payments will be larger than for public interest lawyers.

But if Georgetown wanted to, it could jack up tuition enough to cover 20 years worth of big payments on loans taken out by alums who go into the private sector. Their students would have to take out much bigger loans, but since Grad PLUS doesn’t have an upper limit on loan size, that needn’t be a problem.

The Post also managed to get ahold of some shocking video of Charles Pruett, assistant dean for financial aid at Georgetown Law, encouraging students to shelter income from the federal government to lower the future income-based loan payments. This would, of course, help Georgetown maximize its cut from this program. Pruett does not suggest anything illegal, but this takes the “warped economics” to a radical extreme. Here’s the video:

If the law is being unfairly exploited, Congress can surely do something about it:

“It lends itself to giving a big windfall to people who don’t really need it, as opposed to people who would otherwise be in default,” said Rep. Tom Petri (R-Wis.), who has introduced a bill with Rep. Jared Polis (D-Colo.) to overhaul the nation’s student loan repayment process.

But many don’t expect Congress to address the issue until loan forgiveness begins in 2017, or until lawmakers rewrite the Higher Education Act — whichever comes first.

So… no, and don’t call me Shirley. Between now and 2017, Congress has another 875 “repeal Obamacare” votes scheduled and simply can’t be bothered to address law schools jacking up tuition on everyone else’s dime, which probably pushes the law school tuition trick clear until 2027 (as Pruett says in one of the videos in the Post piece, the federal government is unlikely to make any student who entered this program retroactively liable for their debt).

In other news, who wants to help me start a law school?

How Georgetown Law gets Uncle Sam to pay its students’ bills [Washington Post]
Georgetown Law Is Giving Away a Free Education, and You’re Paying for It [New America Foundation]
Tamanaha: The Problems With Income Based Repayment [TaxProf Blog]
Law schools devise debt-free path to degree [Politico]

Earlier: Non-Sequiturs: 08.09.13

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