I recently read a disturbing article in a financial-industry publication.
In it, the writer attempts to explain why so few student loans have been refinanced at a time when mortgage borrowers have had little trouble accomplishing the same. This has been the case despite education loan delinquency and default rates that are not only compromising the financial independence of a generation of borrowers but also threatening the broader U.S. economy.
According to the article, the fact that so many student debtors are struggling is precisely why lenders are reticent to refinance. The thinking is that restructuring troubled loans is a wasted effort when, in the end, borrowers will have no choice but to pay up anyway. After all, the loans are virtually discharge-proof in bankruptcy, thanks to the financial industry’s successful lobbying efforts.
What’s not mentioned, however, are the other reasons regulated lenders such as banks are loath to help. Take for example the rules that govern so-called troubled debt restructures. Because education loans are uncollateralized, restructuring these for borrowers who would otherwise be unable to make their payments will lead to losses for the lenders that elect to do so.
And then there’s the matter of the institutions’ own financing methods.
Much of this debt—including loans that are federally guaranteed (FFEL, for example)—has been securitized, which means that it’s not just the originating lenders that are reluctant to face financial reality, it’s also the investors who are unwilling to accept anything less than the yields they were promised.
But as unsettling as that continues to be, it’s the direction in which the industry appears to be headed that’s just as troubling.
Rather than addressing the damage that’s been done—by implementing a comprehensive solution to the existing debt problem, or by formulating an action plan for reducing the unsustainably high cost of higher education that’s led to that—lenders, private equity firms and venture capitalists are turning their attention to other potentially lucrative ways of financing an upward cost spiral that won’t be reversed any time soon.
I’m referring to loans that are being offered to a select few on the basis of the schools they attend, their areas of study and the income they can be expected to earn as a result, especially for financing arrangements that call for a share of that future payday in exchange for the upfront dollars.
As a lender, I have no quarrel with credit underwriting methodologies that take into account, among other things, a given borrower’s long-term repayment ability. But in this case, it’s also important to think as a taxpayer with a social conscience.
In particular, I worry about adverse selection: how academically average students attending middle-of-the-road private and public institutions will have little choice but to finance their equally expensive educations with government-guaranteed loans—the same loans that may very well burden taxpayers when the borrowers are unable to find jobs that pay enough. This approach is also yet another example of a culture of disproportionality that promises to widen an already extensive gulf that exists between economic haves and have-nots.
Look, there will always be demand for concierge-level education just as there is for exclusive housing, travel and healthcare. The macroeconomic question we should seriously contemplate, however, is this: Will those at the top who are able to afford all these things consume enough to make up for those in the middle and at the bottom who won’t?
This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its affiliates.
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