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A bill wending its way through Congress would cap graduate federal student loans and drive many law students into the private loan market, potentially forcing between 20 and 30 law schools to close within five years.

That's the dire prediction offered to a group of legal educators by Chris Chapman, president of AccessLex Institute, a former private student loan provider and nonprofit organization that now advocates for greater access to law school. Chapman's warning cast a pall over the Summit on the Future of Legal Education and Entry to the Profession, where law deans, professors and other interested parties assembled last week at Florida International University College of Law for two days to contemplate how to address legal education's myriad woes.

Washington's pending overhaul of the student loan system would not only make law school more expensive for many students, but critics argue it would also exacerbate the academy's existing racial and socioeconomic diversity challenges by making a law degree accessible only to those with deep pockets or whom private lenders deem low risk.

“Our concern is that this cap would disproportionately impact students from low-income families and students of color,” said Nancy Conneely, director of policy at AccessLex Institute.

Republicans in the U.S. House of Representatives in December advanced out of the committee a Higher Education Act reauthorization bill that would make several major changes to graduate federal loans. The bill would:

• Eliminate public service loan forgiveness, which allows law graduates in public interest jobs to keep their monthly payment manageable and see their federal loans forgiven after 10 years.
• Do away with income-based repayment, which lets federal loan borrows cap their monthly payments at around 10 percent of their income, and see their loans forgiven after 20 or 25 years.
• Cap federal graduate loans at $28,000 annually, instead of allowing students to borrow the full amount of tuition, living expenses, books and fees as determined by their individual programs.

Each of those changes would make a law degree more difficult for students to pay for, and undoubtedly some prospective students would opt not to enroll due to costs while others would be shut out altogether because they can't secure enough loans.

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Chapman acknowledged that the pending bill is simply a starting point. He predicted that the Senate would negotiate less draconian limits on graduate federal loans, perhaps ending up with a $40,000 annual cap. Still, many law students borrow more than that amount.

Under that cap, law students would have to supplement their federal loans with private ones. But the private student loan market has changed dramatically since 2006, when the government expanded the availability of graduate federal loans, according to Grant Carwile, managing director of S L Capital Strategies. Loan underwriting standards have tightened.

“Fewer applicant loans are approved now, versus then,” Carwile said. “For all lenders, the approval rates nationally for private loans tend to be somewhere around 20 to 30 percent. That means 70 percent of the people who apply for a private loan are not eligible.”

Private lenders are looking for low-risk borrowers, and data such as credit scores and even grades play a role in those calculations, Carwile added. Even for the lucky applicants who get approved, private loans tend to come with higher interest rates than government-backed loans, which in turn raises the overall repayment cost for borrowers.

Faced with a restricted flow of federal loan dollars, law schools could share the risk with private lenders—a financing model used by vocational schools, he said. In some cases, the schools don't get 100 percent of the private loan money upfront, and in others the schools pay back a percentage of any loans that go into default.

Public Service in Peril?

The uncertain fate of public service loan forgiveness and income-based repayment is yet another concern for legal educators. Schools pitch both programs as tools for law graduates to manage their high debt loads.

“From a student perspective, it's as good as it has ever been,” Chapman said of the current loan system that does not cap federal borrowing and allows for debt to be forgiven after 10, 20 or 25 years.

But lawmakers have taken issue with the ability of some students to borrow far more from the government than they can realistically pay back. They see eliminating public service loan forgiveness and income-based repayment as ways to rein in costs.

“There's a group of people who go to the policy makers and say, 'You are allowing a law school to set a tuition price, set a cost of living for their area, and the government will loan it for every student,'” Chapman said. “Then at the back end, if they can't get a job to service that debt, that's OK. And that's not a sustainable model.”

Without income-based repayment, a graduate from a top-tier law school who lands in the bottom 25 percent of earnings from their school would put 28 percent of the income toward loan repayment, as opposed to the current 10 percent, Chapman estimated.

“This is real for everybody,” he said. “It's real for top schools, middle schools, and the bottom schools.”

It's too soon to say a eulogy for public service loan forgiveness, according to American Bar Association president Hilarie Bass. She told summit attendees that the U.S. senators she met with on a recent lobbying trip were supportive of the program, which was established in 2007 during the presidency of George W. Bush.

Moreover, the Senate last month included $350 million in its omnibus spending bill to forgive the federal student loans of borrowers who met all the criteria for public service loan forgiveness, but who had enrolled in the wrong repayment plan by mistake.

But Conneely warned that last month's retroactive “fix” does not mean public service loan forgiveness is safe in the future.

“We have concerns about what [the program's elimination] would do to the communities that are served by the people who expect to get public service loan forgiveness,” she said. “Those tend to be communities that are very rural, or very urban. These are folks who are low- or middle-income and can't afford an attorney. It will exacerbate the justice gap that already exists.”