IBR: The Tax Time Bomb At The End Of The Rainbow

What if there was a way for you to go to law school, take a job in the public sector, and lead a life in line with the American Dream? Philip Schrag and many law schools have just the solution for you: Income Based Repayment (IBR). But, like most things associated with law school, IBR has a dark side that interested parties don’t want students to know about.

Philip Schrag’s paper “refuting” Brian Tamanaha’s Failing Law Schools presents IBR as a great way to make law school more “accessible”, which is a red herring that can be quickly dispatched. The reason we have a lawyer shortage isn’t because we don’t have enough lawyers. It’s because tuitions that are skyrocketing every year can’t be serviced by a public sector salary. Schrag’s paper makes the worst type of self-serving argument. He argues that IBR nullifies the tuition crisis. He wants taxpayers to subsidize law schools, with no checks on the rising tuition. He wants taxpayers to pay his salary, which I am sure he doesn’t want decreasing anytime soon.

IBR is being pitched by law schools as a way to make law school more affordable to all. Several law schools proudly display information about IBR on their websites. On its face, IBR is a very attractive program. Students who have a partial financial hardship qualify. The government qualifies borrowers for partial financial hardship "if the monthly amount you would be required to pay on your IBR-eligible federal student loans under a 10-year Standard Repayment Plan is higher than the monthly amount you would be required to repay under IBR". Given that the majority of law graduates don't make enough money to service their debts, we can assume that almost all law graduates not in BigLaw moving forward will be eligible for this program.

What IBR’s proponents don’t want to publicize is the tax liability that waits at the end of the IBR period. The amount of the loan amount forgiven is treated as taxable income by the IRS. So, let’s say that you have $230,000 forgiven as a result of IBR. Let’s also assume that even after 25 years, you are still only making $45,000 per year because of the law schools still pumping out 44,000 graduates per year every year. If we are to use the tax laws in place today, and add in the standard deduction and 2 kids, that leaves you with a tax bill of $60,463. That’s right: you would owe almost $15,000 more than your annual income in taxes. It’s one last way for law school to ruin your financial well-being.