Marketplace student finance and the meaning of life

Tears (mine, hidden) and glasses of wine (mine, also hidden) are the main things I remember about helping my son pack up his room prior to his triumphant exit from childhood life into the scary world of the university student. A traumatic and at the same time exciting moment for parents around the world as they see their baby transform almost overnight into (gasp!) a grown-up, or close enough, anyway. I still am unable to watch Toy Story 3 without bawling my eyes out. And, honestly, my tears have nothing to do with the student debt we as a family have had to incur.

image from deathtothestockphoto.com

image from deathtothestockphoto.com

Because we’re among the very lucky ones. My son studies in the UK, where tuition has gone up a whopping 300% over the past few years, but is still a relatively reasonable £9,000 a year. And the UK government does offer subsidized loans, even to European students, to cover the tuition. These loans need to be repaid once he starts earning above a certain amount, and increase in line with his income. To be honest, it sounds very fair.

Again, we’re lucky. You’re probably familiar with the horror stories of students being saddled with debt for the rest of their lives, of nightmare collection practices that do not care about the financial well-being of their targets, and of the ballooning economic problem of defaults. You’ve no doubt seen the headlines about the student loan crisis in the US – it is the second largest source of debt, behind mortgages and ahead of credit cards. Outstanding federal student loans have almost reached $1.3 trillion, almost 17% of which is not being paid back. And there doesn’t seem to be any let-up in the growth on the horizon, as a college degree becomes more of a necessity, and as the cost of these degrees increases.

You’ve also probably heard about the effect on financing that the P2P lending platforms are having, about the democratisation of debt, the reduction in cost, the increase in speed and the spread of transparency. P2P lending platforms allow individuals and non-bank institutions to lend directly to individuals or businesses, achieving reasonable rates of return on their funds and contributing to the economic ripple effect from an increase in the circulation of money.

Here’s the thing: P2P lending has already moved into the scary but potentially lucrative area of student loans. And while I think that P2P finance is so much more than just an innovation (I’ve written about it here and here), this development has got me thinking.

Strangely enough, it’s got me thinking about the value of a liberal arts education.

I’ll explain:

P2P (peer-to-peer) lending matches people and businesses who need a loan (to expand inventory, to buy a car, to refinance old debt) with investors who are looking for a higher return on their money than they could get by parking it in a savings account (which here in Europe pays virtually nothing). It’s a brilliant idea, and is taking off, with 128% growth in lending in the US in 2014, 144% in Europe, over $2 trillion of VC funding and at least 3 platforms already quoting on public stock exchanges.

The P2P platforms that focus on student financing work pretty much the same way. Investors (usually institutions, or wealthy alumni) lend money to (usually graduate) students in exchange for interest-bearing repayment once they graduate. As I’ve written about before, the “P2P” part seems to be fading: Sofi, one of the largest platforms, started out aiming to pair alumni with students, but discovered that it was simpler to allow institutional money to benefit from the relatively good rates. CommonBond is increasingly relying on institutional funds, but still strives to cultivate a community of alumni and mentors to help graduate students get a good start. London-based Prodigy Finance stresses the financial returns as well as the social benefits of encouraging diversity in business schools and economic growth in the students’ home countries. “Marketplace lending” is a more efficient name, which also includes new entrants such as Earnest, which uses data analysis to channel institutional funds to worthy candidates, charging much lower rates than either a bank loan or a federal loan.

(It’s worth pointing out that marketplace lending is a very small part of private student debt financing. And private student debt financing, which can offer variable interest rates and no limit, is a very small part of overall student debt. Marketplace lending offers much lower rates than traditional private student debt. Federal loans still account for about 70% of student debt. They usually carry a fixed interest rate, defer repayment until after graduation, and offer a cap on repayments according to income as well as the possibility of capital forgiveness if income remains low. Most students end up relying on both federal and private loans, since federal funding is limited per individual, generally to amounts well below the soaring cost of tuition.)

The marketplace lending platforms are mainly limited to helping out with graduate school debt, specifically MBAs, law school or similar. And that makes sense, because MBA graduates, lawyers and technical PhDs tend to earn a very good salary. But, what if you want a graduate degree in German political history? Or, what about undergraduate degrees?

image by Jeff Sheldon for Unsplash

image by Jeff Sheldon for Unsplash

Obviously, lending to undergraduate degrees is not nearly as profitable. So marketplace platforms, which exist to give a good return to their investors, are understandably going to focus on the profitable end of the spectrum, leaving undergraduate studies increasingly to the federal loan system.

And yet, obviously the federal government needs to do something to reign in the ballooning potential deficit. Over 7 million loans are currently in default, and it is likely that that number will increase. Especially by those who have dropped out of university, or who have chosen low-paying liberal arts degrees.

The federal government is still the largest funder of undergraduate bachelor degrees. But, as competition for graduate debt increases, it is likely that the private marketplace platforms will start to move into undergraduate territory. Of course, they are unlikely to fund just any undergraduate degrees. They are likely to focus on the “profitable” ones.

It’s a question of economics: a reasonable starting salary for an electrical engineer is about $57,000, while someone with a “humanities and liberal arts degree” can expect to earn $39,000. At that level, it increasingly hard to service the debt, which can reach an average of $35,000 per undergraduate borrower.

In June of this year, writer Lee Siegel published an article in the New York Times in which he explained why he defaulted on his student debt:

“Years later, I found myself confronted with a choice that too many people have had to and will have to face. I could give up what had become my vocation (in my case, being a writer) and take a job that I didn’t want in order to repay the huge debt I had accumulated in college and graduate school. Or I could take what I had been led to believe was both the morally and legally reprehensible step of defaulting on my student loans, which was the only way I could survive without wasting my life in a job that had nothing to do with my particular usefulness to society.

…It struck me as absurd that one could amass crippling debt as a result, not of drug addiction or reckless borrowing and spending, but of going to college. Having opened a new life to me beyond my modest origins, the education system was now going to call in its chits and prevent me from pursuing that new life, simply because I had the misfortune of coming from modest origins.”

And that’s why I’ve been thinking about the value of a liberal arts degree recently, and worrying that it is being crowded out in favour of more technical, profitable options. I worry, because not only would the world be less interesting and more difficult to understand, but also because I strongly believe that the liberal arts are due for a strong resurgence.

A liberal arts education may not teach directly applicable skills, but it instils the ability to think, analyse, question and connect. These are all qualities that, contrary to common belief, are more necessary and useful than ever. Writing poetry hones the control of words. Art creates an aesthetic of thought which goes beyond the obvious. Essay-writing teaches the power of conviction and eloquence. Deep reading, debating, communicating and exploring create abilities that more technical fields understandably tend to overlook. In a world with a surfeit of information, the ability to collate and understand is essential. In a world of algorithms and filters, the ability to dispute and to see the bigger picture is necessary.

And looking to the future, in a world of increasing automation, engineering will become easier as computers do more and more of the work. Accounting will become more efficient. Programming will move along faster, using previously-created blocks and auto-generating code. Software will help architecture, construction and technical design be more responsive and intuitive. Even the medical profession will benefit from better data, better robotics and better diagnostics. Many technical jobs will eventually be replaced or perhaps reduced. Thinking jobs won’t.

The current financing system is leading to the commoditization of education. Ironically for someone with a technical degree (Applied Mathematics and Economics), I find that sad. We need money to live on, so we need to earn a reasonable income, that much is obvious. We also cannot expect to borrow money and not pay it back. But the current system is hurting our present and our future. Something needs to change. Maybe it’s the introduction of non-interest-bearing student loans. Maybe it’s a focus on reducing the cost of education. Maybe it’s the encouragement of private altruistic funding from alumni in exchange for tax breaks and public recognition. Maybe it’s a combination of these and other better-thought-out, possibly initially expensive but ultimately profitable initiatives.

We all can agree that education is the key to intellectual and economic development. And I’m sure that we can also agree that one of the many wonderful things about our society is the rich diversity of interests, talents and experience that the young bring to the playing field of life. Do we want them to feel obligated to choose “profitable” careers when they strongly feel drawn down a different path? Do we really want to create the kind of society that chooses their future for them? Generalizations aside, there is nothing wrong with making lots of money. But wealth shouldn’t be the only factor that influences choices that important.

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