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Student Loan Ranger: As Student Loan Default Rates Rise, Is the Law School Bubble Bursting?

Here at the Student Loan Ranger, we recently read about Educational Credit Management, a Minnesota nonprofit that is earning commissions of up to 31 percent for collecting on defaulted student loans. Seven of their employees earned more than $400,000 in 2010, according to the San Francisco Chronicle

Ironically, we just got an E-mail from a woman who defaulted on her federal student loans and is struggling to rehabilitate them. Like so many borrowers we talk to, she genuinely wants to pay back her student loans but is struggling to do so.

As the exorbitant pay at Educational Credit Management indicates, she's not alone. As we've pointed out before, default rates have continued to rise in this bad economy; the fiscal year 2009 national student loan cohort default rate is 8.8 percent, almost two percentage points higher than the previous year. Delinquency rates are even higher.
She's also not alone in finding that defaulting subjects people to what law school professors might call a parade of horribles that are all too real. Defaulting on federal loans can result in seizure of tax refunds, garnishment of wages, and the taking of a portion of Social Security payments without a court order.
And, as the National Consumer Law Center (NCLC) recently reported in Borrowers on Hold: Student Loan Collection Agency Complaint Systems Need Massive Improvement, borrowers lack an accessible way to lodge complaints when problems do arise. Private lenders can't go as far, but defaulting on private loans will still be very unpleasant.
We aren't consumer protection attorneys and don't give out personal legal or financial advice, but there are resources that can help, such as Student Loan Borrower Assistance, a site run by the NCLC. 

Hopefully even periodic readers of this blog also know how important it is to take out federal student loans whenever possible and to utilize their borrower protections, such as income-driven repayment plans and hardship deferments, to avoid default. These are proactive steps that can make sure the Educational Credit Managements of the world will not be profiting off your pain.
In other news, the Law School Admission Council (LSAC), which administers the Law School Admissions Test (LSAT), has raised its testing fee from $139 to $160. Why? Because of the significant decline in the number of LSAT test takers over the last couple of years.
As you can see in this chart from the Law School Admission Council, the number of test takers fell by 9.6 percent in the 2010-2011 cycle, and then a whopping 16.2 percent in 2011-2012. Only 129,958 people took the LSAT in 2011-2012, the lowest number since 2000-2001. And this is coming off a recession-driven all time high of 171,514 in 2009-2010. Not surprisingly, law school applications are down by almost 11 percent.
The author of the LSAT Blog: Ace the LSAT points out that some of the decline is driven by policy changes implemented by LSAC. But the Student Loan Ranger tends to agree with them and others that a big driver in this decline is the word is getting out about the stagnant legal job market and the difficulty law school graduates have dealing with their staggering burden of student debt. (The burden can exceed $200,000 for those who have to rely on loans to pay the full cost of tuition and living expenses.)
In the short run, this will make law school less competitive for new applicants. Unfortunately, it won't do much to help the prospects of the law students graduating into an oversaturated legal market over the next few years. 
Ultimately, we don't know if this decline is the sound of a law school bubble bursting—much less if it is a harbinger that the trillion dollars in student debt is a bubble that is about to burst—but we'll be watching closely.
We do know that you should consider cost when choosing a college or graduate school and control your spending. You can also download our Educational Debt Manual, keep up with the latest news by following us on Facebook and Twitter (use the #studentdebthelp hashtag), and attend one of our free student debt webinars.

Isaac Bowers is a senior program manager in the Communications and Outreach unit, responsible for Equal Justice Works' educational debt relief initiatives. An expert on educational debt relief, Bowers conducts monthly webinars for a wide range of audiences; advises employers, law schools, and professional organizations; and works with Congress and the Department of Education on federal legislation and regulations. Prior to joining Equal Justice Works, he was a fellow at Shute, Mihaly & Weinberger LLP in San Francisco. He received his J.D. from New York University School of Law.

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