How can technology assist in Student Loan debt crisis?

I’m interested in people’s opinions around how technology can help an emerging debt crisis. Below is a combination of opinion and facts. The numbers I’ve included are from an assortment of government statistics and research institutions. They should be accurate. The context around the numbers are suppositions from myself—so those should not be taken as fact—but rather as opinion. I am not an expert opinion on this matter—but I did try to be cautious in giving too outlandish of an analysis on my take of the numbers. The purpose of this article is to provide some statistics and opinions and from those—to open up dialog around technology’s role in helping solve this problem. Policies have definitely contributed to this problem—but the scope of this conversation isn’t intended to be a political lens, instead a technological one (that said, I don’t think you can completely decouple those in this situation, but try to think less of who is responsible for paying and more around how we work to solve the ballooning debt).

Student loan debt in the US has now breached $1.5 trillion. This will continue to increase with interest rates going up and the cost of tuition. To give a comparison the total debt of the US is at $21 Trillion. Mortgage debts are at a bit over $8 Trillion. Auto loan balances are at about $1.2 Trillion. The $1.5 trillion in student debt is double the US deficit—and it is $300B more than the United State’s discretionary spend budget (what it spends money on for everything besides entitlement programs) which is $1.2 Trillion. The fact that Student loans are now larger than the entirety of the United State’s discretionary budget is of significant concern to me.

Let’s compare some of these debts. When somebody takes on a mortgage debt—they have to go through an approval process. They have to disclose all finances, have them reviewed by a bank. The bank validates (or should be validating) that the person(s) can afford the loan. In addition to that—a person will have to put down equity, generally around 20%, to secure a favorable loan. So with homes—there is a check and balance system, albeit very imperfect, there is still a system. Education does not have this system of checks and balances. The biggest difference between a home mortgage and a student loan, however, is the financial equity gained in a house. Homes have an extrinsic value. Payments towards a house increase the person’s equity within that home. They’re paying into a liquid future value. A future value which historically appreciates. Student loans may or may not result in a Degree, and that Degree gains no equity. The Degree also doesn’t gain future value, in fact, it becomes more commoditized as more people attain them.

When the mortgage crisis of 2008 struck—it crippled the global economy. The mortgage debt in 2008 was over $9 Trillion. When the mortgage markets began defaulting—mainly due to speculative home values, sub-prime loans, adjustable mortgage rates, and personal discretionary spending ballooning to over 130% of income—the results were far reaching and catastrophic. Household earnings decreased, jobs were lost, the stock market collapsed nearly 50% in September of 2008. It took until 2012 for there to be financial parity to pre September 2008—and that was with very aggressive government bailout programs and significant austerity being imposed. If something isn’t done in the very near term—we’re going to see similar problems arising in student loans.

As student loans become more expensive—they also become more lucrative. With the flavor of deregulation running supreme—I don’t think it will be unreasonable to assume more exotic loan structures to hit the student loan market. With interest rates increasing to 8% or 9% (which is double what interest rates for mortgages have been over the past decade)—buyers of those loans will need to find a “cheaper” way to lend money. I would not be surprised to see adjustable student loans. I also would not be surprised to see initially deferred interest loans with a very high adjustable rate to incent a buyer. Given, in my opinion, that essentially every student loan is sub-prime (they’re given to people who won’t have an income for 4 or 5 or 6 years), and that the income of the buyer isn’t predetermined or guaranteed)—the introduction of exotic loans into the student loan structure is what will cause this to balloon further and create a massive default rate. Also, please keep in mind, these loans are being bought by and issued to 18 year olds.

Student loans are crippling. They’re one of the only loans that bankruptcy won’t absolve (because there is no physical asset to inherit, garnish, or leverage). Monthly payments on student loans, combined with increasing costs of living, will force households to spend more than they make (remember the 130% metric we saw in 2008?). This will cause other market problems. Student loans are already facing massive delinquency problems—nearly 11% of loans are delinquent—which is the first step to default. The average student loan costs $350 per month (and this is increasing rapidly)—so in a dual student loan household, that’s $700 per month. The average cost of rent is $1200 per month for comparison. The median income for a person who has a bachelor degree is $66,000. The median income for a household that is college educated is $93,000. Rent and Student loans, on average are close to $20,000 (individual) and $23,000 (household) which is about 30% of an individual’s income and 25% of a household gross income respectively. Work in taxes, insurance, car payments, phone—and there is very little discretionary spend left for that individual or household.

I’ve thrown a lot of numbers around—and I understand that can be hard to follow. The bottom line is this. Student debt is one of the fastest accruing debts in this country. It’s a debt that has no equity or extrinsic value—so it’s not a debt that can be portioned off or sold. This debt is going to become more and more expensive if left unchecked—this is due to increases in interest rates as well as a steep increase in tuition. As this debt becomes more expensive—students will be given more options with how to structure their loans and payments—this will introduce more exotic loan types, which aren’t predictable and can have significant financial ramifications on the 18-20 year old students they target. I don’t have the answers to this problem—but left on its current course, I am certain it will lead to disaster. This is something that must be tackled by policy and market combined. In my opinion, there has to be a better way to economically go about our education system than our current method—this needs to be disrupted. With communications technology, costs of tuition should be decreasing, but they are not. With the internet and the access to online, accredited education—tuitions should be decreasing, but they’re not. Why?

Given this—I’m interested in a discussion around how technology can influence and help drive down costs of student loans? How can technology democratize education? How can it improve the lending system? How can the technology sector and industry contribute towards a solution? Feel free to discuss and throw out ideas.