Rethinking the Student Loan Status Quo, with Daniel Altman

If you’re a recent college grad frustrated that the salary you needed to pay your private student loans never materialized, you have the sympathy of Daniel Altman, Big Think’s Chief Economist. The recent economic downturn saddled thousands upon thousands of young adults with crippling debt at high interest rates with very few avenues leading to solvency. Obviously, this is an unsustainable way of doing business. What’s the solution?

Some would suggest hitting the reset button — to simply forgive all student debt and start again at square one. Altman doesn’t find that a sellable solution because of the risks associated with what economists call “moral hazard:”

“If we were to forgive some of these loans or have a government program that would help to bail students out, then you could argue that anybody should take out loans because they needn’t worry that if they weren’t able to pay — that they would somehow be bankrupt — that somebody would always come to scoop them up and help them to pay.”

While universal forgiveness would be great for the currently indebted, it wouldn’t solve the debt problem as a whole. Instead, Altman proposes a new system to redefine the roles played in a money-for-education transaction:

“One way is to link how students raise money for their education to the income that they’ll actually earn. So instead of lending a student money you actually would buy shares in that student’s future income. You’d become an equity investor rather than a debt investor in that student.”

Altman explains that this seemingly-novel idea has been kicked around for years by startups and researchers who have determined that potential systems could operate transparently and protect students from exploitation. The main obstacle, Altman notes, is the inherent risk of investing in something as dynamic as a college student’s ambitions and pursuits. For example, what are the constraints placed on someone who entered school as a future attorney only to exit a soon-to-be sociologist? Or actor? Or poet? Even if we’re talking about the next Walt Whitman, the value of that student’s shares will have crashed.

So how do we get around that problem?

“We need to structure interesting contracts, we need to do the actuarial basis to figure out how likely the students are to actually make these earnings and then we might have a shot at creating some of these types of devices, these types of securities. But I think the most important thing is for this to be something that can be widespread.“

Altman’s solution is to give investors the ability to invest in swaths of students just as they do with mortgages from Fannie Mae or Freddie Mac. The ability to diversify risk by bundling across students, he says, would make investing in their equity quite appealing.

For more on Altman’s proposed alternative to student loans, watch this clip (transcript available here) from his Big Think interview: