How to Resolve Student Debt Crisis according to Harry Harrison Barclays Former Non-Core Head
Harry Harrison, former head of Barclays Non-Core, recently posted a blog at Medium.com featuring an alternative to students drowning in student debt. This alternative is unique to the existing primary method of scholarships and federal funding augmented by non-federal, for-profit, student loans.
Look at the Numbers
In New York state for a student who’s family earns $30,000 or less a year the average student needs to come up with more than $10,000 additional loans to bridge the gap between the cost of going to college and what they received in scholarships, grants, and federal loans. This gap led to more than $26 billion in non-federal student loans in 2007. It accounted for more than 25 percent of all student loans issued, and interest accrues to the lender until the loan is paid off even if the student does not find permamnent employment.
These non-federally backed loans often have cosigner requirements that also put the parents’ financial well-being on the line. In some cases, parents must use their retirement or family home as collateral to back the loans. For the students who do not have a cosigner, they are forced to find alternative means of financing their education, such as racking up credit card debt subject to astronomical interest rates, late payment fees, and over-limit fees.
What this means is that many students graduate college so far in debt that there is no light at the end of the tunnel. Additionally, those parents who had to cosign or put up assets as collateral are forced into a financial hardship if students default on loans.
Harry Harrison’s Solution
Harry Harrison suggests a different solution. Instead of financers doling out student loans with the intent of making money from the interest, they should enter into Income Share Agreements (ISA). An ISA is an equity like product rather than a debt-based product. The financer and student enter into an agreement that provides the student the funds now to pursue a college education in exchange for a percentage of their future earnings only payable once they reach a pre-agreed level of earnings.
While debt-based funding is repaid based on the balance due and the interest charged, the ISA is based on a percentage of earnings. The better a student succeeds, the more the financer will earn, and the better will be the return on their investment. There is a, pre-agreed, maximum multiple of the original loan that the investor can earn though after which the agreement will come to an end early.
Harrison thinks that this type of arrangement will lead to three basic improvements over the current system:
1. Investors will release more high-quality capital for education because the way an ISA is written reduces the risk factor to investing in this sector.
2. Financers will act more like equity investors than debt collectors. They will have an vested interest in the success of the students, because the more they earned, the better return on the investment. This will lead to a positive social impact as they actively strive to make sure the students find success.
3. College endowments might also want to provide this type of capital too which will also increase focus on the quality of the education on campus.
Philanthropy and Finance
An ISA allows the characteristics of philanthropy and finance to work together to provide a balanced solution to students in dire need of capital. Through the finance aspect, the market should see an increase in return-seeking scale capital. While philanthropy balances the equation with concessionary capital that could reduce risk to attract more investors and reduce the cost of capital while encouraging higher quality educational outcomes. Together, they should work to provide more students the funding needed to increase their long-term earnings potential while still making investments in education capital a profitable undertaking for financers.
Through early implementation studies by such groups as the Jain Family Institute, Harry Harrison has deduced this type of equity-capital investment will have a long-lasting impact. This impact is an investment in the future with grand-scale social and financial returns.