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Poor economy, other factors leading to new economic crisis

February 29, 2012

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.

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“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.

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