Student Loan Derivatives: Improving on Income-Based Approaches to Financing Law School

Abstract

Despite extensive public discussion of the high cost of legal education and student debt levels, too few critics show creativity in thinking about the optimal mechanism for funding a legal education. This Article proposes — and explores the legal and practical implications of — a new model of law-school financing called an income-based repayment swap (“IBR Swap”). The IBR Swap is a student loan derivative: a novel idea that improves upon existing income-share contracts. Under an IBR Swap, students still borrow money from a bank or the government to pay for their legal educations. But students then enter into contracts with a financial institution under which the institution agrees to make the students’ loan payments and the students agree to pay the institution a percentage of income. An IBR Swap is a student’s exchange of a fixed obligation to lenders for an income-based obligation to a financial institution. The parties exchange no money upfront, which distinguishes this form of transaction from existing income-share and “human capital” contracts that face barriers to enforcement. This Article advances the debate over costs and financing of legal education by presenting a method of education finance that departs from the current debt model and income-based alternatives. It presents the IBR Swap in order to incite critical consideration of both the potential and the limitations of private-market mechanisms for law school finance. As such, it advances assessment of what is the most impactful role for the government in ensuring access to law school.

Keywords: Income-Share Agreements, Human Capital Contracts, Higer Education Financing, Law School, Taxation, Derivatives