Poor economy, other factors leading to new economic crisis

Statutes of limitations exist for nearly all federal criminal actions – except for espionage, treason, and since 1991, student loan default.

Delinquent borrowers may be relieved to learn that student loan default – unlike espionage and treason – is not punishable by death. But defaulting on a student loan can have disastrous effects on a borrower’s personal credit and lead to a lifetime of financial difficulties.

In February, the National Association of Consumer Bankruptcy Attorneys called on Congress to restore bankruptcy discharge for student loans in its report, “The Student Loan ‘Debt Bomb’: America’s Next Mortgage-Style Economic Crisis?” In the meantime, colleges, federal assistance programs and state governments are taking steps toward reducing loan debt before it becomes unmanageable.

Tom Bodin, chief economist for the Indiana attorney general’s office, said it is no surprise that the United States is on the verge of a student loan-related economic crisis. Rising tuition, combined with a long recession where many people have had difficulty finding work, means more students are relying on student loans. In 2011, overall student borrowing surpassed $1 trillion for the first time.

On average, college tuition increases by about 8 percent each year, meaning that the cost of college doubles every nine years, according to the website FinAid.org. Bodin offered a possible reason for this phenomenon.

Bodin

“The theory I’ve been looking at is just that it’s an uber-competitive industry, so being able to attract the right talent and create the infrastructure that brings students to you is kind of expensive,” he said.

But Bodin said schools are beginning to recognize that students – as consumers – are looking for the best return on their investment when planning for college. “The cost of how you get there is now going to matter more than ever before,” he said.

Read a related story on the push for bankruptcy discharge for school debt.

By the numbers

The national non-profit Project on Student Debt shows that students graduate from Indiana private and public colleges with an average debt of about $27,000. That figure does not include post-graduate loans, which – if federally funded – have an interest rate of 6.8 percent, twice that of undergraduate federal loans.

The Law School Admission Council estimates the average debt owed by law school graduates is $100,000. With uncertain job prospects, that kind of debt can lead to serious financial problems down the road.

“For any kind of debt to be sustainable, there has to be income to pay it back,” said Alan White, professor of law at Valparaiso University Law School and visiting professor of law at City University of New York. “Now, we don’t know at what point student loan debt becomes too much student loan debt, but it’s clear that the current trajectory can’t continue indefinitely.”

Offering incentives

Beginning in the fall of 2012, New Jersey’s private Seton Hall University will begin offering high-achieving incoming freshman the same in-state tuition rate offered at Rutgers, a state college. Students who meet criteria for this offer will pay the lower rate for four years, at a savings of nearly $20,000 per school year.

In January 2012, a group of concerned students in California announced its “Fix UC” campaign, which would change the way students pay for college. Under its UC Student Investment Proposal, students could attend a University of California campus at no cost, and after graduation, repay the school a fixed percentage of their income, interest-free, for 20 years. Fix UC hopes to pilot this program with students in its Blue + Gold Opportunity Plan. UC graduates 31,000 of these students every year, who because of academic achievement and financial need, attend college at little to no cost.

But whether such a school repayment plan would work in Indiana is unknown.

Leonard Fromm, associate dean for students and alumni at Indiana University Maurer School of Law, oversees the law school’s Kathleen A. Buck Loan Reduction Assistance Program. He thinks a school would need a significant reserve to test drive the type of program Fix UC proposes.

“The problem is how to transition into such a system,” he said. Without incoming tuition, a school would have to find a way to be sustainable.

“If you’re Harvard, and you have a tremendous endowment, you could decide for a couple of years you’re going to use that endowment during the transition period,” Fromm said. But he did not dismiss the merits of the plan.

“What I like about that idea is that it exhibits creative, outside-the-box type thinking, and I think education at large, and law schools included, need to think about different ways of funding as we go forward,” he said.

Relief for law graduates

Fromm

Fromm said that at graduation, law students sometimes have no choice but to get private loans to help with living expenses as they study for the bar exam.

IU Maurer’s LRAP program aims to help students during that time between graduation and employment, awarding between $2,000 and $6,000 for qualified applicants entering public service positions.

“For the past three years or so, the number of people who have requested LRAP assistance has definitely increased, even though the student body hasn’t increased that much,” Fromm said.

Each year, the school has been able to offer more in LRAP funds, but it still can’t meet the demand.

“Do you try to give it to more people? Or do you try to give funds to less people in higher amounts?” he said.

Bodin administers the John R. Justice Loan Repayment Assistance Program for the state of Indiana. Disbursements may vary from year to year, depending on the number of applicants and the amount of need. Last year, the program helped 79 people, awarding an average of $2,300.

Changes on the horizon

On Feb. 21, Indiana House Bill 1220 passed the Senate and went back to the House with amendments. The bill, sponsored by Sen. Jean Leising, R-Oldenburg, would allow the Indiana Commission for Higher Education to approve or disapprove of both new and existing degree programs that require more than 60 credit hours for an associate’s degree, or more than 120 credit hours for a bachelor’s degree.

Leising contends that some degree programs require students to take up to 141 credit hours, even though student financial aid is available for only eight semesters. Leising said that’s a problem because it leaves some students with no other option than to take out loans to meet the gap in funding.

Around the country, government is beginning to take a more active role in controlling college costs. On Feb. 21, the University of Missouri Board of Curators agreed to increase tuition by only three percent after the governor offered to offset losses by providing the school with proceeds from a nationwide mortgage settlement. The school had been considering a higher rate hike, due to a loss of state funding.

In his State of the Union address Jan. 27, President Barack Obama announced plans to help keep college tuition under control. He proposed shifting federal tuition aid programs away from colleges that fail to keep tuition inflation under control and rewarding those that do control tuition increases.

The president also is asking Congress to freeze current undergraduate federal loan rates at 3.4 percent. Barring action by Congress, that rate will revert to 6.8 percent on July 1.

Take-home advice

Bodin said private student loans have become more common in recent years. Private loans often come with higher, variable interest rates, and some students may mistakenly think that private loans are easier to obtain or result in faster funding. Bodin urges consumers to do their own research before buying into marketing campaigns that push private loans. And, in general, prioritizing expenses has become increasingly important.

“One of the things that student loans are traditionally used for are living expenses,” he said. “It’s just being very conscientious of what the value is you’re going to get out of the degree, and how it is that you can mitigate what you’re borrowing as you go through college.”•