It’s becoming increasingly clear that the roughly $870 billion student loan market is broken in the same way that the mortgage lending market was broken. According to a provocative Federal Reserve Bank of New York report on student loan debt covered on April 1 by The Washington Post's Ylan Q. Mui, problems with the student loan market are more comprehensive than most people previously thought. It’s not just recent graduates who are struggling with missed payments and defaults, senior citizens are still struggling to pay off an aggregate $36 billion in student loans incurred decades ago. If default rates continue to climb — as well they might, given that tuition rates are growing at twice the inflation rate — is there still time to save the student loan industry?
One of the most promising new solutions combines ideas behind peer-to-peer (P2P) lending and crowdfunding into a new social platform for alumni to make loans to students from their alma mater. The Silicon Valley-based company Social Finance — or SoFi — aims to address three of the problems that plague the student loan industry: the inability of graduates to find jobs; students being encouraged to take on too much debt while still in school, and stringent federal lending rules that make it almost impossible to shake off debt. SoFi, which is essentially a fund for alumni to invest in the fortunes of future graduates — started at Stanford with roughly $2 million in loans for 100 business graduate students from 40 alumni. The founders now have plans to grow it nationwide, to schools such as Georgetown. In addition to offering students below-market-rate student loans, SoFi hopes to create a connection between students, alumni and future employment, with the idea being that alumni will be so deeply invested in the success of the students they’re supporting (and, yes, their investments) that they will help them find future work. In the interest of full disclosure, SoFi did not approach me about the site and I have no vested interest in their success or failure.
The next step for innovating in the student loan market is to extend this approach that emphasizes jobs and employment into the 30-to-39 and 40-to-49 demographics, which account for nearly one-half of all outstanding student loan debt. The burgeoning loan balances — some as high as $200,000 — mean that nearly 1 in 7 of these loans are delinquent or in default. It’s a profound problem: college-educated people in peak earnings years who can’t make ends meet once student loans are added into the mix. As the Post’s Mui points out, in some cases, it means that senior citizens as old as 80 are having their social security payments garnished by the government when they can’t make loan payments. Senior citizens with college educations are living in mobile homes and being forced to choose between gas and food. What’s needed is a way for them to get out from under the massive debt burden without resorting to debt forgiveness.
What’s clear from the Federal Reserve Bank of New York report is that the student loan problem is not an educational problem — it is an economic problem. Students are graduating, suffering bouts of unemployment (or underemployment) and never catching up to ballooning loan balances. Before starting their careers, students are encouraged to take on too much debt. Meanwhile, the lenders actually make more money through defaults and collections.
This should sound familiar: people taking on debt to live beyond their means in pursuit of the American dream? If things continue to play out the same way as the mortgage market, the U.S. economy could face an unexpected double-whammy from the very people — college-educated knowledge workers — who were supposed to pull us out of the mess.
However, there are encouraging signs. Grassroots initiatives like #FixYoungAmerica increasingly emphasize the link between education and employment opportunities. On the educational front, innovators like Salman Khan and Sebastian Thrun are finding ways to reduce the cost of a college education. In government, President Obama announced in October an attempt to cap the amount of money that graduates must repay.
The stories of senior citizens in distressed economic conditions because of defaulted student loans are merely the canary in the coal mine. Just as the implosion of the mortgage lending market opened up debate about the great American dream of owning a home, the implosion of the student loan market is leading many to question the great American dream of graduating from college.
Dominic Basulto is a digital thinker at Bond Strategy and Influence (formerly called Electric Artists) in New York. Prior to Bond Strategy and Influence, he was the editor of Fortune’s Business Innovation Insider and a founding member of Corante.com, one of the Web's first blog media companies. He also shares his thoughts on innovation on the Big Think Endless Innovation blog and is working on a new book on innovation called "Endless Innovation, Most Beautifuland Most Wonderful."
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