The Income-Based Rate Swap: A Critique of Legal Education Financing Models and a Possible Alternative
Benjamin M. Leff
American University Washington College of Law
American University - Washington College of Law
July 9, 2013
The high cost of legal education and corresponding student debt levels are subjects of robust debate. Critics are questioning everything from the three-year J.D. curriculum to the need for physical campuses and tenured faculty. Yet too few critics show creativity in thinking about how to match costs and capital to educate lawyers. Law schools rely on a limited model for financing a legal education; students borrow with (mostly) fixed-rate loans repayable soon after graduation. The federal government’s income-based repayment programs help over-indebted students. But these programs spend taxpayer money inefficiently by creating perverse incentives for both students and schools. Students may borrow more than they otherwise would, given the government subsidy. Schools can raise costs knowing that students may be insensitive to price beyond program thresholds.
This Article proposes — and explores the implications of — a new model called an Income-Based Rate Swap. Law schools could enter into this type of swap transaction with students. Students would still borrow money to pay for legal education, either from a bank or directly from the federal government. But students could then enter into contracts with the school under which the school agrees to make the students’ loan payments in exchange for a commitment from each student to pay the school a percentage of his or her income over time. The Income-Based Rate Swap is a student’s exchange of a fixed obligation to lenders for an income-based obligation to the school.
The Income-Based Rate Swap has numerous advantages. For example, it corrects perverse incentives and price insensitivities that the current system creates; also, the pricing of Income-Based Rate Swaps could provide reliable information about the predicted financial value of law degrees. However, the Income-Based Rate Swap raises important concerns as well, including legal, distributional, and ethical ones. This Article presents the Income-Based Rate Swap concept in order to advance the debate about the quality and accessibility of legal education.
working papers series
Date posted: July 11, 2013 ; Last revised: July 25, 2013
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