In practicing law for 38 years, I have thought a lot about money, as I frequently counsel small businesses and consumers who want to make and hold onto their money. I watch incomes and debt loads rise and fall. In the economics of our country and that of many individuals, a growing concern is the dramatic increase in student loan debt over recent years.
Many students borrow to finance their education, and it can be a great benefit for them. Nevertheless, national statistics show that students who borrow to finance an education are now graduating with an average of $35,000 in student loan debt. Here in the US, this is the largest consumer debt category, other than first mortgages. It is larger than credit card debt, second mortgages, and other consumer debt. At this point in time, $1,300,000,000 is owed on student loans.
A recent article in the Indianapolis Business Journal gives us some insight into what innovative thinkers in Indiana are doing to address this growing problem. My thanks to Hayleigh Colombo for highlighting this issue in her article on the front page of the IBJ for May 9th, 2016. Many of her thoughts are echoed herein.
Credit can be given to Mitch Daniels and other serious thinkers on education policy. Purdue ((under Mitch Daniels) has frozen its tuition for a number of years. The student who enrolls for the 2017–18 academic year will pay $10,002 per year, just as he would have paid in the year 2012. This is good news for Indiana students.
Indiana University also understands the problem. IU now sends letters to all student loan borrowers regarding their future monthly loan payment, cautioning them about excess borrowing. This is also good news.
The reason for the concern here in Indiana is obvious. Student loan debt has been rising steadily in past years, as US Department of Education statistics show.
Indiana has not fared well in paying off its student loan debt. At this point in time, Indiana ranks 4th highest among states in student loan defaults. 14.7% of Indiana students who have graduated and are scheduled to pay their loans currently are defaulting, within three years or less.
Debt is used to finance a college education on a very broad basis, with 46% of the freshman at Indiana public universities financing college with student loan debt. On the bright side, both Purdue and IU main campuses have reduced to 36% the number of first year students taking out student loan debt, from a high in 2008 of 41-42% of first year students taking out student loan debt. Thus it seems that more Indiana college students at these institutions are becoming aware of the dangers of financing college.
Another practical step being taken here in Indiana is the use of “banded tuition”. This allows a “package price” for up to 18 credit hours, where the student is enrolled full-time (12 credit hours or more). Despite the obvious advantages, a troublesome report by the Indiana Commission for Higher Education mentions that approximately half of college students take enough credit to graduate on time, but 75% of them expect to graduate on time.
If we assume 120 hours of credit to graduate, the eager and penurious student can take six semesters (including summer school) of 18 hours, plus one more semester of 12 hours, and she can earn a degree in two years and four months. In other words, seven semesters of tuition could be paid, instead of eight semesters.
Further, the student can be out in less than three years, if she chooses to devote extensive time to her education, with few sideline interests to distract her in that period of time. For the student living with the relatives, this can be a way to keep expenses down while on the “educational fast track”. Of course, this can also mean less borrowing for living expenses.
The main problem with student loans is shown in the high default rates: often the payment, which the student has not calculated in his younger and tender years is not affordable in the first 10 years when he enters the workforce. Sometimes, due to unforeseen circumstances, it is not affordable during his entire work history.
In future blog posts, we will examine what to do with the “unaffordable” student loan.