Looking at Student Debt as an Opportunity

Summary: There is a $128 billion dollar untapped demand for student debt assistance, if you can find a way to meet it. The conditions of the environment in which this demand exists may even contribute to an increase in the demand as you provide a debt-assistance service.

We all know that students have no money- many of us have been there and scraped by on ramen and coffee often for weeks on end, and now we are all, to a greater or lesser extent, burdened by the cost of our education as we have leveraged part of our future to gain the success we have now. It’s part of our environment. It’s who we are, it’s what we expect, it’s part of our lives, and it will be part of our childs’ lives as they grow up. We don’t think much about it- it’s simply there.

If you’ve watched this video from TED on how schools kill creativity, you know that there are some salient points to be made about how our primary and secondary educational system encourages a certain type of talent – science and maths – while actively discouraging the humanities and arts. While I would love to see more study on the topic, I want to extrapolate on Sir Ken Robinson’s argument and apply it to the space of postsecondary education.

Consider: If you were a student entering college today, and you were told that you’re going to walk out with an average of $23,000 in debt ($33,000 for private schools, according to this study [PDF] ), would you choose a career in engineering or in the fine arts? To quote one student, borrowing so much only makes sense “as long as you’re going to the school for a career that will pay enough”, so it certainly seems like we are actively discouraging pursuit of “cultural” careers in the arts and humanities.

Is this a problem? Good question, but it certainly shapes our national identity. If we want to be known as a country of technical innovators, then this system is perfectly fine as it fills our homes with highly technical thinkers. If in contrast we want to be known as a cultural mecca, it’s the worst thing ever as we are actively discouraging our students from pursuing fields that contribute to that.

But that’s not the point I’m trying to make here, it is simply the path to how I got to this blog post. See, I see this as a problem, and problems need solutions, so I want to take a business-side approach to this issue and ponder on any market opportunities that might exist. After all, if federal programs are unable to meet this country’s educational needs, then private business will have to pick up the slack, and they’re only going to do it if there’s money to be made.

Some Numbers

To take some numbers from this study [PDF], I’ve extracted the following table:

Table 1: Total Student Aid and Nonfederal Loans Used to Finance Postsecondary Education Expenses in Constant (2008) Dollars (in Millions), 1998-99 to 2008-09
Year 2004 2005 2006 2007 2008
Federal Grants $21,441 $20,503 $20,579 $22,328 $24,784
Federal Loans $63,674 $65,272 $66,327 $72,938 $83,981
Work-Study $1,257 $1,183 $1,127 $1,123 $1,171
Tax Credit $7,030 $6,990 $7,000 $7,000 $6,830
State Grants $7,681 $7,696 $8,195 $8,446 $8,492
Institutional Grants $25,140 $26,840 $28,330 $29,960 $31,160
Private Grants $9,890 $10,620 $11,280 $12,200 $11,960
Private Loans $16,030 $19,250 $22,050 $23,760 $11,900

What we can easily extract from this is the individual line items which add load to students. The loans are easy, and I am also including Work Study and Institutional Grants. The former, because it’s activity that actively detracts from a student’s attention to their studies (by having a job) and the latter for reasons I discuss below. Given that, I’ve generated the following table:

Table 2: Total unmet need covered by students in Constant (2008) Dollars (in Millions), 1998-99 to 2008-09
Year 2004 2005 2006 2007 2008
Total Unmet Need Financed by Debt $106,101 $112,545 $117,834 $127,781 $128,212

Do you see what I see? I see a $128 billion dollar demand for a solution, but demand is only useful if a supply may be found that may be profitably offered to that market. Thankfully, the actual act of marketing any solution you can come up with is easy- between high school career counselors and college students’ naturally viral nature you effectively have a captive audience, assuming your solution is a good one. But unless you’re the treasury or the federal bank you can’t exactly pull $128 billion dollars and slap it on the table, and even if you were I doubt the taxpayers would be willing to pay for that (though we do love our bombers).

Universities as Contributors to the Problem

On of the real culprits in this whole situation is Universities themselves. College Tuition has been increasing at an average rate of 8% a year, while the median household income is hardly keeping up, especially if you take inflation into account. My own Alma Mater for instance (Carnegie Mellon) posted an annual tuition rate of $40,000 dollars this year, which from what I can tell is the highest in the nation and a significant uptick from the $18,000 I was paying in 2000. So how exactly can universities justify this increase?

Fact is, those tuition numbers are simply not real, because universities are skimming the market. Simply put, all the financial data a student is asked to report when they apply for financial aid year after year is used to calculate exactly how much the student and their family can afford. Once they have this number, they will add as many student loans as the student is eligible for (maxxed out of course), and might even add some private loans to it as well. Once they have that number, they will add something called a “Need based grant”, “Merit based grant” or “institutional grant” (or something similar) as a line item to make up the difference because they can’t charge you any more.

This makes identifying a good solution to student debt a far more difficult problem, because as soon as you find a business solution to meet the above noted demand, universities can simply respond by adding another line item to their financial aid calculations and the problem is right back where it started.

Or… is it?

Here’s where things get a little devious, and I apologize for suspending my personal ethics to even suggest this. Consider: If you provide a method for students to raise money against their debt, and universities in response raise their tuition to capture that value so that the debt doesn’t actually go away… then they are increasing the size of the market. That’s right, simply by helping students find a way to meet their debt obligations, the behavior of the other actors in the market environment will ensure that your market size grows. And while this certainly doesn’t provide a real solution to the actual problem, it should have any finance guy’s salivary glands working in overtime.

If, of course, you can meet the demand. In a new and successful way.

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