Education Technology and the Business of Student Debt
This is part three of my annual look at the year’s “top ed-tech stories”
As an education technology writer, I’m often chastised for considering student loan companies as part of my analysis. Certain folks try to explain “that’s financial tech, Audrey” as though I hadn’t realized that student loans involve money. Student loan companies are “not really ed-tech,” some people still try to insist. What counts as ed-tech are only “technology companies whose primary purpose is to improve learning outcomes for all learners, regardless of age,” one ed-tech publication has argued. Of course, this is a silly delineation as much of what people count as ed-tech doesn’t improve learning at all, and many individuals who are actively seeking to improve themselves – their “learning outcomes” – require financial assistance in order to do so.
Here’s why I insist that student loans are ed-tech: if you don’t pay attention to what’s going on with student loan companies – among the most well-funded venture-backed education-oriented companies for the last three years now – then you’re really only painting a partial picture of what investors and what industry is up to. If you pretend like student loans don’t matter, you don’t just get investors’ interests wrong; you cannot fully grasp what most students’ lives (past and present) are actually like.
I mean, even John Grisham’s new novel is about student loans. Don’t try to tell me the topic of student loans matters for pop literature but the business of student loans doesn’t matter for ed-tech.
Why are student loan companies so popular among investors and entrepreneurs? In part, this reflects the state of the industry overall right now: personal loans, commercial loans, industrial loans are booming. Investor interest in loan companies also reflects the promise of new technologies – AI and analytics, for example – that lead both established financial institutions as well as upstarts to think that this will continue to be a lucrative market. (One loan startup that recently raised $200 million from Credit Suisse boasts no human decision-making in its application process, for example. It’s all machine learning and algorithms.)
Americans are deep in debt – credit card debt, auto loan debt, student loan debt. According to a CFPB survey released in January, one out of three Americans had been contacted by a debt collected in the previous twelve months. So that’s also a business opportunity, of course.
Investors and entrepreneurs are not only interested in the business of issuing loans: they’re interested in the business of consolidating loans, collecting on loans.
Education and Indebtedness
The message has long been – whether during economic boom or bust – that education is a key way to expand one’s opportunities: Go to school. Borrow money if need be.
And borrow students must. As Sara Goldrick-Rab demonstrated in her 2016 book Paying the Price, financial aid often does not cover tuition, let alone living expenses. This year, tuition and fees continued to rise faster than financial aid (although the increase was the slowest it’s been in decades).
The push for free college, a central part of Vermont Senator Bernie Sanders’ Presidential campaign message in 2016, did continue in some cities and states this year: Tennessee, Rhode Island, Oregon, New York state, New Hampshire, Pasadena, San Francisco, and Boston, for example – with varying degrees of success (and various strings attached). And that push is, no doubt, partially a response to the growing problem of student loan debt.
The amount of student loan debt owed by Americans is staggering – over $1.31 trillion. (And again, this is all part of the appeal of debt financing and refinancing startups for investors.)
Some numbers from the year:
- In January, NPR reported that “as of 2015, more than 2.8 million Americans over 60 had outstanding student loan debt – up from some 700,000 in 2005.”
- In March, Inside Higher Ed reported that the “number of federal loans in default at the end of 2016 increased 14 percent from 2015.”
- “The number of borrowers with balances over $100,000 has more than quadrupled in the last 10 years,” MarketWatch reported in April.
- “Women currently hold two-thirds of the $1.3 trillion in outstanding student-loan debt in the U.S., but because of the gender pay gap, it takes them far longer to pay off their loans than men,” The Cut reported in May.
- “Students and parents are borrowing more to pay for college, according to the latest installment of a survey by Sallie Mae,” Inside Higher Ed reported in July.
- “The percentage of student loan borrowers leaving college owing $20,000 or more doubled over about a decade,” Inside Higher Ed reported in August.
- “The percentage of borrowers defaulting on their student loans within the first three years of entering repayment ticked up fractionally, from 11.3 percent to 11.5 percent, for those who began repayment in 2013–14,” The Chronicle of Higher Education reported in September.
- “Students who attended for-profit colleges were twice as likely or more to default on their loans than students who attended public schools,” the AP reported in October.
- “Black students who started college in 2003 had a 50–50 chance of defaulting on their federal student loans, according to a new analysis of government data – a virtual coin-flip of default that stands in stark contrast with a 21% default rate for white borrowers,” Buzzfeed reported in October.
- “7 percent of federal student debt holders are over the age of 50. This group of older borrowers collectively hold $247 billion in student debt, an amount that has roughly tripled since 2003,” Inside Higher Ed reported in November.
- “3.9 million undergraduates with federal student loan debt dropped out during fiscal years 2015 and 2016,” The Hechinger Report reported in November.
The Politics of the Business of Student Loans
In early January, Rohit Chopra, formerly the student loan ombudsman at the Consumer Finance Protection Bureau, observed that stocks in student loan companies had risen – in some cases quite dramatically – since November of the previous year:
After Election Day, a slew of student loan outfits scored big gains before 2016 came to a close. Nelnet, which collects payments from 5 million borrowers, climbed 39 percent. Discover, the credit card company that has bet big on student loans, rose 29 percent.
But the biggest haul belongs to Sallie Mae, whose investors saw their stock surge 64 percent – just one month after Election Day.
Chopra sounded hopeful at the time that, under President Trump, investors would not see the financial windfall that they and the loan industry were wanting. “I’m crossing my fingers that a sweetheart deal for Sallie Mae and the student loan industry that soaks Americans with more debt won’t be high on Trump’s list,” he wrote.
Crossing his fingers hasn’t worked so well.
Reforming student loan policies has been near the top of Trump’s policies – and not in a positive or progressive way. The new administration is – quite literally – invested in the business. As I noted in the previous article in this series, Secretary of Education Betsy DeVos has personally invested in the student loan industry. She’s hired student loan industry executives to manage the federal student loan program.
For its part, Chopra’s agency, the CFPB, has faced the ire of the new administration. (Of course, it’s been a target of Republicans’ ire for quite some time.) And that’s despite (or because of, perhaps) the work that the CFPB has done to help consumers address their complaints with the financial industry. According to a press statement from the agency in October, the CFPB received some 20,000 complaints from student loan borrowers in the last year alone, and these complains have “driven actions that have produced more than $750 million in relief for student loan borrowers and strengthened the student loan repayment process for millions more.” In January, for example, the CFPB filed a lawsuit against the largest student loan company Navient “for failing borrowers during every stage of repayment.” The agency said in April that it was investigating discrimination in the industry and “whether loan servicing companies are making it difficult for people with past-due student debt to work out a solution because of their race, ethnicity, gender or age.” In September, it reached a $21.6 million settlement with National Collegiate Student Loan Trusts for making false and misleading claims. In November, it fined Citibank $6.5 million for illegal student loan practices. But good work never goes unpunished in the Trump administration. The Department of Education announced in September that it was ending an agreement with the CFPB to share information about the businesses involved in the student loan program. And in October, Senate Republicans voted to strike down a rule, written by the CFPB, that would allow consumers to file class-action lawsuits against financial institutions. In November, Richard Cordray, the head of the CFPB, announced he was stepping down. Trump’s pick to replace him: Mick Mulvaney, a long-time critic of the agency, who’s frozen all hiring and rule-making.
Dismantling the CFPB is just the tip of the iceberg.
There were concerns this spring that the Trump Administration was going to end loan forgiveness for public servants – a move that would affect some 400,000 borrowers. (That threat seems to be back on the table in legislation the House GOP is currently drafting that would re-authorize the Higher Education Act.) In March, the Department of Education revoked an Obama-era policy that had prevented some student loan collection programs from collecting fees. In April, the Secretary of Education withdrew three Obama-era memos aimed at streamlining the student loan process. In May, the Department of Education rehired two debt collection agencies that had had their contracts canceled by the previous administration. Trump also announced his budget in May, which called for large budget cuts to federal financial aid programs. James Runcie, who’d led the Federal Student Aid office under Obama, abruptly left his position the day after that budget was announced. This spring, the Department of Education began to ramp up a program to sue borrowers who were in default on their loans. In May, debt collection ground to a halt when a judge issued a restraining order against the system as part of a pending legal case. If all this doesn’t sound chaotic or frightening enough for borrowers, the administration also toyed with the idea of moving the loan program from the Department of Education to the Treasury. The Department of Education also indicated in the spring it planned to give the contract to handle the entire student loan program to one single vendor. (After an outcry, the department changed its mind.) Oh and meanwhile, the interest rate on student loans went up.
But that’s not all – there’s also the ongoing issue of the hundreds of thousands of student loan borrowers who were defrauded by for-profit colleges and who were promised a chance at loan forgiveness.
It’s hard to separate the business (and politics) of student loans from the business (and politics) of for-profit higher ed. Some elements of the latter I’ll cover in more detail in a subsequent article in this series on the future of work and “the new economy.” For-profits have been limited by the “90–10” rule from receiving more than 90% of their revenue from federal financial aid – that includes loans, grants, and work-studies. But as a Brookings report found in January, “a sizable percentage of for-profit colleges get between 80 percent and 90 percent of their revenue from federal financial aid.” And as in previous years, there were many stories in 2017 about for-profits losing their aid eligibility, for one reason or another: The Charlotte School of Law, perhaps most notably.
The Department of Education did initially make some moves this year to help those student defrauded by for-profits. In January (before the Trump inauguration, to be fair), it announced that those who’d attended the now-defunct American Career Institute would have their loans discharged. The department reached a settlement in August with the Wilfred American Educational Corporation to wipe away the debt of the (mostly low-income, immigrant) women who’d attended its beauty and secretarial schools. But for most of the students who have filed claims that their schools misled them, the wait for loan forgiveness continues. Indeed, it’s not clear whether these students will ever have their loans erased.
The “borrower defense” rules, negotiated by the Obama Administration, were set to take effect in July. The Department of Education’s website explains those rules like this: “Borrowers may be eligible for forgiveness of the federal student loans used to attend a school if that school misled them or engaged in other misconduct in violation of certain laws.” But under Trump, the Department of Education froze the rules before they could be implemented. (Eighteen states responded with lawsuits, as have some individual borrowers.) In a speech to the Mackinac Republican Leadership Conference this fall, Secretary DeVos described the borrower-defense policy this way: “Under the previous rules,” she said, “all one had to do was raise his or her hands to be entitled to so-called free money.” (The application process is actually quite burdensome, Betsy.)
Perhaps one reason why student loans have become a focus for the Trump administration: efforts to curtail fraud by the for-profit higher education sector was seen as one of the Obama Administration’s key higher ed “wins.” And undoing anything “Obama” seems to be the impetus for much of what happens under the current President. Furthermore, many Republicans seem to believe too that Obama had nationalized the student loan industry in order to pay for Obamacare. In an interview with Politico this fall, DeVos said as much.
More likely: student loans are simply too big a business opportunity (and too powerful a lobbying force).
Interlude: The FAFSA
Federal student loans are, of course, just one part of federal financial aid. There are other forms of federal aid – grants and work-study, for example. In order to qualify for assistance, students must complete the dreaded FAFSA (Free Application for Federal Student Aid). (Don’t think that it’s dreaded? Try searching on Twitter to see what students are saying about it.) The form is notoriously long and difficult to complete, in no small part because it requires students provide not only their own tax information but that of both their parents.
In early March, the tool that lets students autocomplete their FAFSA with tax return data pulled from IRS suddenly went offline. There had been no announcement from either the Department of Education or the IRS that there was a planned outage, and it took the agencies six days to issue a joint statement: “The IRS Data Retrieval Tool on fafsa.gov and StudentLoans.gov is currently unavailable. We are working to resolve the issue as quickly as possible. However, at this time, the IRS anticipates the online data tool will be unavailable for several weeks.” March, as anyone who’s completed the form knows, is near the height of FAFSA season, as many states’ financial aid deadlines loom. The timing was terrible; the lack of communication made things worse, as many observers feared that students would miss out on aid opportunities. (No doubt many students, because of the difficulties with completing FAFSA under “normal” circumstances, already do.) The tool’s removal didn’t just affect current students; its shutdown also complicated the application process for those students enrolling in income-based repayment programs for their existing loans.
Eventually, the IRS revealed that the tool was taken down because of “criminal activity,” as hackers had used the tool to gain access to the tax records of some 100,000 people. The information security analyst Brian Krebs called the IRS tool “a terrific resource to help identity thieves successfully file fraudulent tax refund requests with the agency.” That was March. In November, Krebs wrote about the FAFSA again: “Name+DOB+SSN=FAFSA Data Gold Mine,” detailing the 100+ pieces of data one could learn by logging into the system with a student name, date of birth, and Social Security Number. Even with the IRS data retrieval tool offline, “this post shows how easy it remains,” Krebs wrote, “for identity thieves to gather this same information directly from the FAFSA Web site.”
Students’ data is a commodity – that’s a theme that runs through almost all the stories in this series.
Student Debt “Innovations”
It was SoFi’s two enormous rounds of funding in 2015 – one for $1 billion and one for $200 million – that first made me take note of the student loan industry as a key part of “the business of ed-tech.” That year, several other companies offering student loans raised venture capital: Earnest raised $275 million; Affirm raised $275 million. CommonBond raised over $600 million in 2016.
These companies have continued to grow and evolve since then. CommonBond began issuing student loans directly this year rather than simply being in the debt refinancing business. Earnest was acquired by Navient.
Despite their pitch of being “good guy student loan companies” – this is in opposition to the “bad guys” who service loans for the Department of Education, I guess – a Buzzfeed investigation found that these startups, with their reliance on student data and algorithms, tend to only serve an affluent population, cherrypicking the “best borrowers”:
In their buzzy ad campaigns, SoFi, Earnest and other fintech startups say they want to help fix the student loan crisis by bringing Silicon Valley-style meritocracy to one of the oldest financial instruments in the world, the loan. In practice, however, private student loan refinancing looks more like an updated version of the same wealth management services that have always catered to the rich – except these startups capture customers while they’re still young.
Initially, it looked like SoFi would spend 2017 using all that venture capital it had raised to expand its reach and its offerings. “SoFi buys Zenbanx to offer banking and money transfer services to its users,” Techcrunch reported in February. “SoFi plans to apply for a bank charter in the next month,” Techcrunch reported in May. “SoFi gets into wealth management,” Techcrunch reported that same month, detailing the startup’s plans to expand from student loans into low-cost wealth management services.
Then mid-year the headlines shifted. (Perhaps we should have anticipated this when The Wall Street Journal called SoFi “the Uberization of Banking.”) “Another Silicon Valley Start-Up Faces Sexual Harassment Claims,” The New York Times reported in August. From The NYT in September: “‘It Was a Frat House’: Inside the Sex Scandal That Toppled SoFi’s C.E.O.” And from Reuters in September: “SoFi withdraws U.S. banking application, citing leadership change.”
This doesn’t really map onto Gartner’s “Hype Cycle,” does it?
In August, The Outline published a story headlined “You can now buy $400 pants with a subprime loan.” The subhead: “Affirm is trying to convince millennials that taking out loans for things you don’t need is cool.” And on one hand, this accusation of predatory lending runs counter to the arguments made by that Buzzfeed piece that claims these loan startups tend to carefully (and algorithmically) target a more affluent clientele. But there’s something to this incredible marketing push to take on more debt; and it’s no surprise that all these loan providers work quite closely with the bourgeoning coding bootcamp industry – the incredibly socio-economic push to take on more credentials.
I’ll look at this industry’s promises about career opportunities and advancement – promises that certainly echo those long made by for-profit higher ed – in a subsequent article in this series. But I’ll note here that the trend to watch in the coming months and years – one that the loan industry, coding bootcamps, and their investors all started pushing this year: income-sharing agreements.
Income-sharing agreements typically involve some sort of deferred tuition in exchange for a cut of a student’s future income. Some schools in the news this year for offering this financing option:: Purdue (didn’t I just mention how hard it was trying to be run like a business), New York Code and Design Academy, and Revature. As the student loan industry moves towards a more pervasive data-mining of students’ history in order to identify who has the “best potential” for repayment, these sorts of new funding agreements raise all sorts of questions about both overt and algorithmic discrimination.
Edsurge, a good indicator of the sorts of stories investors want to hear, wrote about ISAs eight times this year (1, 2, 3, 4, 5, 6, 7, 8). One of those, I’ll note, was with sociology professor Sara Goldrick-Rab who called them “a dangerous trend.” Goldrick-Rab argues that these agreements move all the risk of financial aid and student loans) onto individuals’ backs, and as such are steps towards privatizing funding for education.
Of course, those are exactly the reasons why many are hoping student loan and financial aid startups will be profitable investments.
This post first appeared on Hack Education on 6 December 2017. Financial data on the major corporations and investors involved in this and all the trends I cover in this series can be found on funding.hackeducation.com.