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Posted at 10:00 PM ET, 10/28/2011

Curing the Gen Y student loan hangover


U.S. President Barack Obama greets a supporter after speaking at the University of Colorado Denver campus on October 26, 2011 in Denver, Colorado (John Moore - GETTY IMAGES)

President Obama’s new student loan relief plan, which offers a mix of loan consolidation, lower interest rates and income-based repayment options, is an important first step in fixing the nation’s student loan problem. The total student loan debt load in the U.S. recently passed the $1 trillion mark and now exceeds the total amount of credit card debt in the country. As student loan default rates continue to rise throughout the recession, it’s perhaps not surprising that the Obama administration felt compelled to act sooner rather than later to speed up the income-based repayment (IBR) plan, which was originally scheduled for 2014.

The way we finance higher education is obviously broken, making it an easy target for the Occupy Wall Street crowd as well as political candidates. Not only is total student loan debt the highest it’s ever been in history, the cost of a four-year college education continues to far outpace the rate of inflation, meaning that current graduates are saddled with an average of $27,000 in student loan debt before they even finish packing up their belongings in their college dorm. Many — such as Peter Thiel — are even questioning the need for attending these institutions in the first place: Why pay $100,000 or more for a four-year education when you can only land a job paying a fraction of that when you graduate?

The most radical solution, of course, has simply been to forgive all outstanding student debt. This is the Occupy Wall Street option, and is a non-starter for so many reasons, not the least of which is the fact that asking lending institutions to write off $1 trillion in student loans would be equivalent to a disastrous replay of the Housing Bubble for many players in our nation’s financial system. (And, by the way, banks get bailouts, they don't give them).

Private sector educational innovators have focused on two basic approaches: creating lower-cost educational alternatives and finding lower-cost financing alternatives. The first approach, represented by the DIY Education movement popularized by Anya Kamenetz (a Fast Company journalist and author of Generation Debt), suggests that higher education needs a more entrepreneurial approach. The second approach, represented by new peer-to-peer crowdsourcing alternatives, suggests that the financing mechanism for higher education needs to be updated for the Internet era: Why raise money from banks or the government when you can raise micro-loans from patrons?

But what if there were a third way — a way that combines the DIY entrepreneurial ethos with venture capital-like financing alternatives?

That’s exactly what the new $10 million Gen Y Fund, launched with the support of the White House and in the same spirit as the government’s new income-based repayment plan, has in mind. The fund encourages young students to think about launching start-ups and entrepreneurial ventures at a relatively young age, and in exchange, these students get a number of nice perks: housing expenses covered, three years of debt forgiveness when they graduate, and mentoring as they go about launching new companies, and a nice chunk of equity (ranging between $15,000 and $50,000) to get things started. To top it all off, they still get to attend four-year schools like Princeton and Georgetown at the same time as they are being supported by the Gen Y Fund.

We need to re-think higher education and what it means. The Gen Y Fund, launched at the same time as Obama’s new student loan relief plan, is an innovative way to think about higher education. Something needs to be done before we get to the worst-case scenario: students, sagging under massive debt loans and struggling with unemployment and weary of dealing with the system, begin defaulting on their loans en masse. As the Occupy Wall Street emphasis on student loan debt relief shows, the middle class American dream has always been one that included an affordable, high-quality education. To keep that dream alive, we will need to rely on the right partnership of private and public sector innovators to come up with new, entrepreneurial ideas for our nation’s youth.

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By  |  10:00 PM ET, 10/28/2011

Categories:  Dominic Basulto, Education, Morning Read

 
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