Bursting the Student Loan Bubble: A Conversation with Daniel Pianko

Student loan debt now amounts to approximately $1.4 trillion among 44 million borrowers, who face an average debt of $35,000, according to various federal government sources. Due in part to this ballooning debt, there is increasing skepticism about the value of a college degree. Yet for many, a degree still seems like the best pathway to prosperity. I sat down with Daniel Pianko, co-founder and managing director of University Ventures and a leading expert on the student debt crisis, to understand the current state of student debt and how we can solve these issues long term.

In the simplest of terms, can you explain what the “student debt crisis” is and how we got here?

More than 60 percent of Americans are unable to pay enough money each month to reduce the principal balance they owe; in finance, we call this negative amortization. Once a person has a negative-amortizing loan, the likelihood of repayment goes down dramatically. The result is that each year, more than a million people are entering default status on their loans, and the total debt now tops $1.4 trillion. When someone enters into default on a student loan, it’s a crisis for that person. Personal bankruptcy is generally not that far behind. When thousands of individuals nationwide have loans in negative amortization, it becomes a public crisis.

So, how did we get here? It’s simple: College got too expensive. The average cost of college has grown at more than twice the rate of inflation. Wages haven’t grown nearly that fast. The rising cost of college means debt is growing faster than the average salary of college graduates, which is, in part, what is driving up the number of loans in negative amortization.

What’s worse, nearly half of would-be graduates never finish their degrees, so they are paying for school without the benefit of the salary bump that a degree often brings. It’s these individuals we should worry the most about. They’ve been, in effect, duped by the promise of higher education.

Can you explain what the policies of income-based repayment and public service loan forgiveness programs are? Why there is a massive impending write-down of these programs? How concerned should we be that the taxpayer is unaware of this write-down? Should we be working to inform them?

Over the past 10 years — in both Democratic and Republican administrations — the federal government has created a series of programs to ease the debt burden on borrowers. In effect, students can pay a low percentage of their income rather than a fixed amortization schedule (e.g., 10 percent of income vs. $351/month). But lower payments are exactly what creates the problem of negative amortization. When the percent of income paid is lower than the scheduled amount, the underpayment gets added to the principal amount due. Eventually (in about 20 years) federal income-based repayment programs end and suddenly the borrower has to pay off the entire amount of the loan — and that loan has grown each year. So, instead of, for example, $30,000 worth of debt, it might now be $50,000. There is no way that at the end of these loans the borrowers will suddenly have the money to pay down the loans. The result is non-payment, and the federal government has to write down (or write off) the debt. The borrowers then live out their “golden years” with Social Security garnished and no access to credit.

What is your take on the proposed changes to the Higher Education Act? Do you think, if passed, it will help bring down student debt?

It’s hard to know exactly what the changes to the Higher Ed Act might eventually be, as we’re still in the early innings. Congress is signaling a real seriousness of intent in redesigning its lending programs. But in many ways, I view today’s proposals as more of a treatment than a cure for out-of-control college costs.

My belief is that the only sustainable way to reduce debt is to reduce the cost of higher education. That’s why so many students are flocking to faster and cheaper pathways to employment, rather than traditional school. Just look at programs like MissionU, Galvanize or The Software Guild. This new crop of last-mile training for jobs is changing the dynamic for higher education.

With the proposed tax changes going through the federal government, are there any impacts worth noting around student debt or just higher education in general?

I think it’s a myth to believe endowment taxes or some of the other proposals will change higher education finance. What would have a significant impact is if the federal government required schools to take on some of the risk from the costs of their education. We call this the 10/90 rule: Every school will only get 10 percent of the financial aid monies when and if the student has paid back the rest of their student loans. The cost of college won’t really change until schools have “skin in the game” and a real incentive to lower prices.

If you were in charge of the Department of Education, what would you do to make our higher education system better? By that, I mean improved outcomes in terms of retention/graduation rates and job preparedness, reasonable debt levels, etc.

First of all, higher education is a broad community with more than 4,000 institutions, 20 million students and more than $500 billion of annual spend. There are no quick fixes.

In college, I read Form Follows Finance, which argues that the reason skyscrapers look the way they do is because real estate developers are driven by their economic incentives. Higher education is, unfortunately, no different. Professors, college presidents, boards and even individual faculty members are often reacting to the economic structures created by accreditation and the federal student loan program. Until that incentive structure is changed to force colleges to keep skin in the game, there will be limited change to retention, graduation rates or cost.

What advice would you give to leaders of colleges as it relates to the student debt crisis? Are there steps they can take to alleviate the burden, or should we just expect them to play by the rules laid out for them by the DOE and regional accreditors?

The first thing every college president should do is reduce tuition. Institutions have to start from the premise that all students should graduate debt free. Models like work colleges (such as Berea College or, most recently, Paul Quinn College) or Northeastern’s co-op programs are well known but emulated too infrequently.

But, we also have to get serious about complementing the higher education establishment with faster and cheaper pathways to employment.

Finally, be sure to change your financing mix to put your money where your mouth is. Adopt your own income-share agreement program (like Purdue University) that gives students clear information about their future.

Where do employers sit in all of this? In the end, the salaries they pay college graduates is what allows students to either pay back loans or not. Can they, or should they, have a bigger voice in the cost of education and the ensuing debt levels that come from this?

The problem for employers is that it’s a one-to-many problem. There are thousands of colleges, and that creates massive complexity for employers who need to understand what graduates know and can do. Even large companies can only recruit at, say, 20 or 30 college campuses in a given year. That creates artificial constraints on talent and also diversity. Sadly, employers have no actual incentive or reason to dive onto college campuses. We need to create more efficient intermediaries (like Revature or Avenica) to bridge the gap between colleges and employers.

You mentioned Purdue’s income-share agreement (ISA) earlier, and you have even funded a company in this space. Can you quickly define what an ISA is, the current state of ISAs in higher education and what variables need to exist to make it a substantial source of funding for students in the future?

An income-share agreement (ISA) is a contract between the college and a student that changes the way students pay for college. The focus moves away from debt and toward them paying a percentage of their income after graduation. ISAs are currently best used as a replacement for the high-priced private student loans and function effectively to align the incentives of students to earn a valuable degree and colleges to offer an education that leads to employment. What we’re seeing in the coding bootcamp space is incredible. Virtually every coding bootcamp will soon be using ISAs. Pioneering institutions like Purdue have embraced the model.

As the model takes hold and scales, we expect that it will create downward pressure to encourage institutions of all kinds to lower their prices.