- December 19, 2016
- Posted by: Travis
- Category: Lawyer, PSLF
With political regime change coming to Washington, I wanted to highlight how one of America’s elite law schools uses federal student loan programs for its own benefit. Public Service Loan Forgiveness (PSLF) was intended by Congress to help low income borrowers work for non profits after college. The way the law ended up being written, PSLF became the largest back door grant program to American graduate schools in history. Specifically, Georgetown Law School PSLF abuse is so bad that I believe the case highlights why the PSLF program as a whole has a 90% chance of repeal for future borrowers starting in fall 2018.
How Georgetown Law’s Loan Repayment Program Works
Georgetown Law offers a series of loan repayment benefits, but the one I will focus on in this article is the innocuously named Loan Repayment Assistance Program (LRAP) III. This program is supposed to be paired with the federal PSLF program. One might say that LRAP III is the higher education equivalent of a Ponzi scheme. It is entirely suited to benefit Georgetown Law in every way at the expense of the federal taxpayer. Additionally, LRAP III only works if Georgetown can recruit a full class of law students willing to sign up for ever increasing tuition. The law school then uses the tuition increases to finance LRAP III.
Confusing right? Here’s how the program works. A Georgetown graduate declares his or her intention to work in a qualifying 501(c)(3) employer such as a state attorney’s office, the federal government, or even Georgetown Law School itself. Georgetown agrees to cover that graduate’s monthly income based payments as long as his or her income stays below $75,000 a year for up to 10 years. At the end of the 10 year period, the federal government forgives the entire student loan balance tax free.
How Much is Georgetown Actually on the Hook For?
The school makes clear that its obligation is limited to paying the monthly income based payments of graduates, and only those that elect the PAYE or IBR programs. Notably, the school will not cover payments made under the Revised Pay As You Earn program (REPAYE), which would actually be more beneficial to married couples who both have student debt. REPAYE would offer a massive interest subsidy while borrowers made payments, protecting their ability to stay in the public sector or move to the private sector.
Why won’t Georgetown cover payments made under REPAYE? The reason is cost. REPAYE treats both spouses’ incomes as joint for the purposes of the monthly payment calculation. PAYE and IBR allow the borrower to file taxes separately and exclude the high income spouse’s income from the calculation.
In other word, Georgetown wants to subsidize its students as little as possible. Filing taxes separately can come at a very high cost as it frequently pushes folks into a higher marginal tax bracket and leads to the loss of many tax credits and deductions.
To see how little the per student cost is to Georgetown Law School for the LRAP III benefit program, let’s look at a hypothetical example. I will use my proprietary spreadsheet that I built for use in my private student loan consulting business.
Jake decides to work for his home state as a public defender making $55,000 a year. His income will grow to $65,000 over his 10 years in public service. He finances his entire Georgetown education including living expenses with student debt. He thus graduates with $250,000 in student loans at a 7.9% interest rate. Jake’s wife Lauren decides to go into corporate law and starts off at $140,000 a year. They are hoping to have one child in 2017 and another in 2019. Here’s how much the LRAP III program would have to pay since it requires that Jake and Lauren file taxes separately.
Georgetown Law Uses New Student Tuition to Make Minimum Payments on the Loans of Past Graduates
If you look at the profile of the Georgetown Law class of 2015, 133 of the 549 students went into government or public interest law. Assume 100 of them take full advantage of the LRAP III program and have similar characteristics to Jake in our above example.
The average cost per beneficiary to cover this benefit is about $30,000 over the life of the PSLF 10 year period. If you spread this cost among 500 students, the law school only needs to generate $6,000 in additional tuition revenue per student over three years to pay for the cost of their tuition assistance program. This $6,000 cost is also fixed, because no matter how much money students borrow, the income based repayment plans cap how much is paid.
Georgetown recently increased tuition by 4.2% this past year to $57,576. Assume it keeps this rate of increase every year from 2017 to 2020 for the incoming law school class of 2017-2018. The school would net additional revenue of $7,553 per student. That’s more than enough to finance the entire LRAP III benefit for the graduating class and still have a little left over to spare.
Georgetown Law School PSLF Abuse Facilitates Gaming the Law School Rankings
It’s fascinating to me that the Law School tells its students making under $75,000 a year to file taxes separately and use the PAYE program to keep their payments to a minimum. Georgetown also tells students to shelter their income through maximizing their retirement accounts to minimize Georgetown’s payments.
Furthermore, the school will only make payments under the loan assistance program if graduates take a JD required or preferred job. This is me speculating, but I’m guessing the reason for this stipulation is because law schools rise in prestige and rankings when the vast majority of their graduates get jobs that prefer or require JD degrees.
Notice that Georgetown actually pays nothing towards this loan assistance program of theirs. It’s entirely financed by the federal government through the PSLF program.
Does Georgetown Know What They’re Doing? Absolutely
Check out this discussion with Georgetown Law administration and students. In this video, you can hear them laughing when one of the students asks about repeal of PSLF. The assistant Dean basically says that “there will be thousands of lawyers who will make sure PSLF doesn’t change.”
I have to hand it to the Law School, they are very sophisticated. Getting the federal government to finance their loan assistance program while using it to force students into behavior that will cause Georgetown to rise in the rankings is a stroke of genius.
Other law schools like Stanford are doing this too, they are just not as blatant about it. Perhaps I should give Georgetown more credit. After all, most law schools offer no repayment assistance and raise their tuition every year anyway. Many law schools are banking on PSLF and income based repayment programs more broadly to bail out a large percentage of their graduates.
“Once Congress Figures Out What They’ve Done, They’re Gonna Change It”
Georgetown’s assistant Dean can also be heard in the above Youtube video saying that Congress will probably make a change once they “realize what they’ve done.”
I’ve written that I think there’s a 85% chance that current borrowers receive the PSLF benefit. I also think there’s a 90% chance that PSLF will be gone starting in fall of 2017 for future borrowers thanks to the Georgetown Law school PSLF abuse going on.
Assume 100 graduating Georgetown students take advantage of the school’s loan benefit program every year. If Georgetown didn’t increase tuition, the school would have to pay for the monthly income based payments for these 100 grads over 10 years. In the earlier hypothetical example of Jake, the cost per person might be around $30,000. Across 100 individuals, that total cost would be $3 million.
However, the Georgetown Law School PSLF abuse is made worse because it DOES raise tuition every year. By generating additional tuition revenue, the school can use those dollars to pay the full cost of their loan repayment assistance programs with new student dollars. Of course, students pay for this higher tuition with even more borrowing, which in turn will lead to even MORE being forgiven by the US taxpayer. Not only does Georgetown expect the federal government to pick up the tab for its extremely expensive education for public servants, it expects it to finance their loan benefit programs too.
The taxpayer will also owe over $40 million in 10 years for the 100 law students in this class when the loan balance goes away tax free. In other words, it’s not impossible to suppose that since Georgetown created the loan repayment program LRAP III in 2009, the total cost of PSLF for its students graduating through 2017 will be over $300 million.
Now multiply a shocking tab like this one by the top 100 law schools that are doing a less egregious version of the exact same thing. I agree that Congress had no idea what it was doing when it passed PSLF, and I think law schools that take advantage of the system like Georgetown does will hasten the realization in Congress that something must change. Perhaps then the perpetual tuition increases will stop.
I Can Help
My business model here at Student Loan Planner, LLC is helping lawyers conquer huge student loans with flat fee consultations. I perform a holistic loan analysis to see what your best available repayment options are and simulate what the future looks like, including how to plan for a potential massive tax penalty.