Let's look at some scary numbers: total U.S. credit-card debt, $679 billion. Auto-loan debt, $737 billion. Student-loan debt? Trumping both at more than $900 billion. Since it's in nobody's interest to have Americans intimidated by the cost of college and burdened by debt after graduation, entrepreneurs and politicians alike are working to make degrees more affordable. We asked Cristian deRitis, director of consumer credit economics for Moody's Analytics, to weigh in on three emerging approaches.
Short for "social finance," this San Francisco-based for-profit, hatched in 2011, connects students with alumni and investors who provide loans at a lower fixed rate than many federal loans. The creditors earn a solid return, while students get introductions and mentorship along with a cheaper loan. (SoFi takes a 1% cut.) The model isn't new--RIP, private-lending site MyRichUncle.com --but SoFi's focus on programs with high graduation rates and infrequent defaults tamps down risk. After launching at Stanford's business school, SoFi now works with MBA programs at Harvard, MIT, UPenn, and Northwestern, and is expanding to roughly 40 other colleges.
deRitis: It's a good program. One of the biggest issues with college-loan debt is that only 60% of students who start a four-year degree graduate within six years. That leaves them with debt and limited earning ability. Having alumni embedded in the program should ensure that more students succeed.
Independent student organization FixUC.org has proposed to the University of California board of regents a model that provides free schooling to UC undergrads, in exchange for 5% of their salary for 20 years following graduation (with exemptions for anyone earning less than $30,000, and an annual cap of $10,000 for high earners). The economics of the plan are attractive--by FixUC's estimates, tethering alumni to their alma maters could bump UC's annual revenue from $1.5 billion to $3.3 billion--but conversations are in early stages at best. "Our goal is to expand access and quality and build revenue," says David Alcocer, UC's deputy director of student financial support, "but several features of the plan limit its viability."
deRitis: Basically, the FixUC Plan would give UC an equity stake in its students. It's creative, but I worry that it could create negative loopholes: There's no way to account for undocumented income, and what do you charge tech workers who get paid largely in stock options? If they can figure out enforcement, this sounds like a reasonable trade-off, though it's functionally not that different from the federal government's income-based repayment plan.
Programs based on forgiving (read: erasing) student debt already exist but are typically available only to graduates who go into public service or the like. In April, Detroit congressman Hansen Clarke supercharged the idea when he introduced the Student Loan Forgiveness Act of 2012. It outlines a plan to, among other things, wipe the slate for debtors who put 10% of discretionary income toward loan repayment for 10 years. "Americans are demanding that their representatives in Congress take action," says Clarke, whose team has collected more than a million signatures on a petition asking for a vote on the bill. Over to you, representatives in Congress.
deRitis: Fairness is my main concern with any broad-based federal loan-forgiveness plans. You're going to have people who either never went to college or who have no debt subsidizing graduates who may be earning more than they do. If the forgiveness is more targeted--for distressed borrowers, or ones who go into public service--that helps with the fairness. Of course, if you consider student-loan debt a crisis, forgiving a lot of it will solve that.