Andres Pinter is a managing director of Ernst & Young Capital Advisors. The views expressed here are his own.
Recently student loans have emerged as the most ubiquitous of consumer debts, and the unemployment rate among recent college graduates remains persistently high. All finger-pointing aside as to the underlying causes, these two economic birds could be killed by borrowing one stone from the world of syndicated lending, where interests are often properly aligned.
When a bank agrees to make a loan of a certain size, it often seeks to sell down some of that risk across a lending syndicate. Although the bank — known at this point as the underwriter or syndicator — could sell down the entire loan, at the end of the process it frequently retains a token piece as a sign of faith in the borrower’s credit. The blessing of the underwriters makes the world of big lending spin fairly smoothly.
Consider, then, if colleges were to share with lending institutions and the government some of the credit risk of student borrowing. Much like the way syndicators hold a piece of a loan, colleges should hold pieces of their students’ loans. By doing so, the college would provide its explicit faith in the borrower’s credit and in the likelihood that the loan will eventually be repaid.
Here’s how it would work: A student at X University applies for a loan. Lending institutions perform the perfunctory underwriting with one exception. X University reviews copies of the credit application and must consent before the loan is approved. (This system would differ from syndicated lending in that the university would never take full balance-sheet risk and would not itself originate or sell down loans.) When the loan is funded, the university would pitch in 2 to 5 percent of the cash lent to the student, not only as a symbolic gesture but also giving it skin in the game.
Yes, there would be complications. Some educational institutions couldn’t afford to get into the lending business. Institutions short on funds could apply for exemptions, and their credit risk could be reduced to 1 percent or less of each loan. If a cash investment in the loan is not possible, colleges could at least be required to act as backstops to the lenders, should the underlying lender not be repaid in full.
This leads to the second economic problem: high unemployment among recent college graduates. Frankly, many graduates leaving our higher learning institutions these days seem woefully unqualified for the post-Great Recession era. An arrangement in which colleges have a monetary interest in whether graduates repay loans in full would light a fire of sorts under the feet of complacent deans.
Training students to be employable with tangible, marketable skills would become a much higher priority. Colleges would have the incentive to prevent ill-prepared graduates from defaulting on loans. University officials would be forced to rethink the importance of real-world technical job skills in their curriculums and in on-campus student employment services. Shunning a liberal arts education for a more technical one is nothing new. But a greater abundance of and concentration on technical skills would dovetail well with the acute need for more specialized job skills in the modern global economy. This lending mechanism would not necessarily decrease the amount of student debt in the future, but it would improve the odds that such debt is ultimately repaid.
U.S. higher education must evolve beyond Physics for Poets and Rocks for Jocks. I am the direct result of a generation that extolled the value of a liberal arts degree, and it took an MBA in finance for me to ultimately find a reliably fruitful, productive place in the modern economy. While broad liberal arts educations may create incredibly interesting, well-rounded cocktail-party guests, those individuals may not be the most employable in 2012 and beyond.
Banks and big business have been understandably vilified of late, but commonplace business principles such as aligning of interests, skin in the game and emphasis on tangible job skills have clear societal importance. In this and other respects, academia and government should get up to speed with the for-profit world.