Investing in Students

Panel Overview and Core Thesis

• The panel addressed the inadequacy of the current U.S. student loan system, characterized by $1.3 trillion in outstanding debt, and proposed alternative financing models as "investing in people" rather than just capital.
• Moderators and panelists agreed that the current system lacks "skin in the game" for educational institutions, allowing them to charge high tuitions without facing financial consequences for student outcomes.
• A recurring theme was the cultural resistance to treating higher education as a financial investment, with many universities viewing ROI discussions as "vulgar" despite the economic necessity of student debt repayment.

Innovative Financing Models and Metrics

• Social Finance (SoFi):

  • Operates as a community-based marketplace connecting alumni and students for loan origination and refinancing.
  • Statistics: Over $500 million in student loans and refinancing completed; currently processing approximately $100 million monthly; second largest peer-to-peer lender in the marketplace.
  • Borrower Benefits: Average borrower saves $9,000 on refinancing compared to federal/private rates; 28 borrowers lost jobs but were re-employed via SoFi career services; 19 borrowers received seed financing for startups through the entrepreneur program.
  • Risk Trade-offs: Borrowers trade federal protections (income-based repayment guarantees, specific forbearance terms, disability/death discharge) for lower rates and community support.
  • Default Rates: SoFi reports a 0% default rate and 0% 90-day delinquency across 5,000+ borrowers, attributing this to "moral suasion" and community accountability.
  • Capital Structure: Approximately 80% institutional capital and 20% alumni capital; alumni capital takes the "first loss" position in securitization transactions to maintain peer-to-peer integrity.

• Upstart:

  • Founded by former Google employees to replace fixed-interest student loans with income-share arrangements (ISAs) for entrepreneurs and young professionals.
  • Core Mechanism: Borrowers repay a fraction of their income over a set period; "you don't pay if you don't earn," designed to eliminate unemployment as a primary cause of default.
  • Market Strategy: Launched traditional loans in addition to ISAs; capital composition is roughly two-thirds institutional and one-third individual retail investors.
  • Investor Dynamic: Institutional capital follows retail investors, creating a "Kickstarter-like" model where individual investors often provide mentorship and career connections.

• 13th Street Funding:

  • Operates as a 501(c)(3) nonprofit entity making equity investments in students rather than loans, avoiding the term "lending."
  • Deal Structure: 15-year contract where repayment begins at 5% of income only if the graduate earns over $18,000 annually; no repayment obligation if income is below the threshold.
  • Pilot Status: Early stage with only 11 students funded; the cohort is described as having "great career aspirations but no mentors."
  • Community Model: Students form a "club" with governance oversight, pooling their obligations to foster a sense of joint and several responsibility and community support.
  • Investor Returns: Investors receive money back via the income repayment mechanism over 15 years at a 0% cost of capital to the entity.

Government Role, Risks, and Regulatory Challenges

• Federal Safety Nets: Former Department of Education official David Bergeron highlighted critical protections lost in private models: income-based repayment caps, loan forgiveness after 10-20 years for service work, and total discharge upon disability or death.
• Graduate Debt Crisis:
  • Median MFA debt rose from $16,000 in 2008 to $54,000 today (a 230% increase).
  • The top 10% of MFA borrowers saw debt rise 85% in four years, reaching $133,000 (up from $72,000).
  • PhDs in Education saw a near 100% increase in top-tier debt; PharmDs saw a 68% increase.
• Regulatory Hurdles:
  • Income Share Agreements (ISAs) currently face legal ambiguity; Bill Bennett noted a bill (HR 4436) co-sponsored by Marco Rubio and Tom Petri could create a legislative path but currently has a "zero percent chance of passage."
  • Federal preemption of state usury laws and the classification of ISAs are ongoing regulatory concerns.
• Taxpayer Liability: The entire $1.3 trillion student loan portfolio is ultimately backed by U.S. taxpayers, creating a shared risk that private sector models attempt to bypass.

Proposed Solutions and Future Outlook

• Market Signals and Accountability:
  • Panelists argued for tying loan amounts to the projected economic return of a specific degree (e.g., limiting borrowing for philosophy majors if ROI is low).
  • Advocacy for "No Before You Owe" mandates requiring schools to provide transparent data on earnings potential and reasonable borrowing limits before enrollment.
• Institutional Skin in the Game:
  • Proposal for educational institutions to hold a portion of the bonds associated with their students' loans, facing financial "haircuts" if graduation rates fall or default rates rise.
  • Bill Bennett noted that even low-default institutions resist this proposal due to a perception that profiting from lending is "shameful."
• Alternative Education Pathways:
  • Recognition of non-traditional education like coding bootcamps (10-12 weeks) as high-ROI opportunities, with potential for $10,000 investments yielding 50% salary increases.
  • Shift toward micro-credentialing and lifelong learning rather than the rigid 4-year degree model.
• Forward-Looking Projections (Lightning Round):
  • Market Size: Expectations for alternative platforms to move only $5 billion by 2020 (roughly 5% of the market), deemed "dream on" by Bob Whelan.
  • Political Outlook: Optimism that Washington will facilitate these markets is low ("scared straight" rather than "friends with benefits").
  • Consumer Perception: Panelists view ISAs as "liberating" and a path to freedom, though the public reaction to terms like "indentured servitude" remains a significant marketing hurdle.

Specific Data Points and Trends

• Undergraduate Debt: 70% of undergraduates graduate with debt; average BA debt is $26,500.
• Refinance Volume: SoFi processed $36 million in applications in a single day but could only fund $15 million due to capital market constraints.
• Default Mechanics: Government loans are non-dischargeable in bankruptcy; the DOE collects on 85 cents of every defaulted dollar, a rate Bergeron termed "predatory."
• Cultural Barriers: Private sector solutions are stymied by the belief that "profit is a shame," preventing universities from aligning incentives with student outcomes.