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April 4, 2012

Student Loans Meet the Future

The student loan market has become a classic blue model example of good intentions gone wrong. In the beginning, subsidized federal loans helped make a college diploma part of the American Dream, but over time the combination of rising tuition costs and some dubious choices regarding course selection have saddled students with increased debt levels and decreased earnings prospects, leading to an ever more dysfunctional system.

This story reminds us that, while some are busying themselves with plugging the holes in this sinking ship, others are trying to re-imagine student loans in a post-blue world. The folks at TechCrunch bring us news of a new company called SoFi:

The company is creating university-specific funds for alumni to invest in, and those are used to make loans to students. SoFi says it’s offering to cover the full cost of attendance for participants, with loans ranging from $5,000 to $200,000. The loans are 6.24 percent fixed rate, and they can drop to 5.99 percent, lower than federal Stafford and PLUS loans and many private loans. So students get relatively low interest rates, while alumni get a significant financial return.

SoFi doesn’t just connect students with alumni money; it also allows alumni to play an active role in mentoring the students they support. Students get guidance to go along with their loan, and the alumni get a chance to help the next generation, as well as play an active role in making sure students are equipped to pay the loans back after they graduate. Meanwhile, Uncle Sam—and taxpayer money—disappear from the equation. Everyone, it seems, wins as smart disintermediation offers both borrowers and lenders better deals than the status quo is able to provide.

Via Meadia has no idea whether SoFi will succeed, though its initial prospects sound bright and we wish it the very best. It doesn’t address core problems like inflated costs and the inefficient way that university education today is organized, but by giving students access to experienced mentors it can help students avoid some of the worst pitfalls of the present system.

Whatever the outcome, this is the sort of innovation and creativity that has, historically, made America great. Big problems require more than just tinkering around the margins. The decline of Blue and the bubble in higher education are big problems; it’s good to see people working on a fix.

Posted in *Post Types, Blue Social Model, Economics & Business, Education, Quick Takes
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  • Jacksonian Libertarian

    “Big problems require more than just tinkering around the margins.”

    I’m afraid this is just tinkering around the margins. The problem is that a college education has become so expensive that huge loans are required to pay for it. What is needed isn’t a new loan program, but huge cuts in Price, and major improvements in the Quality, and Service, so that loans are no longer needed. The bricks and mortar nature of higher education must make way for cheaper, more personalized, and convenient on line education. On line education requires no dorm rooms, no commute with gasoline, parking expenses, and lost time, no scheduling conflicts, access to an unlimited course catalog which includes courses from every school in the world, access to the finest Professors in world, and a personalized course of study designed for the specific needs of the student. All the time consuming red tape of college admissions which blocks access to a higher education for so many, needs to be cut. Credentialing needs to be separated from institutional control, and become a matter of standardized testing of a student’s knowledge, so that merit trumps money.

  • John Barker

    @Jacksonian Libertarian

    Thanks, Jackson, you have clearly expressed what I was struggling to write. I believe creative destruction is in order here.

  • JKB

    Seems to me the alumni would also have a vested interest in influencing the university to do away with the worthless majors. Majors that didn’t produce successful alumni would be at a disadvantage or if the alum had discovered their “education” was not of use in finding success.

  • peter38a

    I like this innovative idea. I want to point out though (I can hear everybody sighing) that the idea “students are saddled with… “ is too broad. For example I read a short time ago that 110,000 students graduate with a degree in English every year but there are, on average, only 15,000 jobs in this area. Just as a guess I would bet that grads in electrical or bio engineering would fare a good deal better. So one might say, if one were harder of heart than myself, that if you want to take a chance in a glutted field then you accept the consequences without whining.

    That being said I also think that education costs more than it need to.

  • Kris

    “good intentions gone wrong”

    Boo! Hiss! You lie! There is no such thing as unintended consequences!

    [/sarc]

  • Alex Weiner

    Access to such large loans is what is driving the rise in tuition costs in the first place. Much like the hosting bubble, this is being fueled by leverage. Prices would drop if so many students didn’t have such ample financing access.

  • Jacksonian Libertarian

    Not until courses are being sold on ebay, will we know that competition has finally arrived in the education market.

  • Gringo

    I am in agreement with others who have stated the problem is that the cost of a college education is too high. For a generation or so, the increase in college tuition has outpaced inflation. Have there been corresponding advances in instruction during that time? No, no a thousand times no.

    Years ago, I could pay a semester’s tuition from a 20 hours a week dishwashing job. Pay as you go. That is impossible today.

    A good place to start lowering the cost of a college education would be to have all colleges and universities cut the administration budget in half.

  • Occam’s Beard

    >Not until courses are being sold on ebay, will we know that competition has finally arrived in the education market.<

    Khan Academy provides courses online, free, and they're superb.

    The difficulty lies in breaking academia's stranglehold on providing credentials.

  • BC

    Jacksonian Libertarian:

    I’m a graduate of exactly one of those cheaper, more personalized, and more convenient on-line educational programs: I completed a JD through Concord Law School, which pretty much pioneered legal distance learning. I graduated with honors, with academic awards for oral and written advocacy, in the top 10% of my class. I passed the California bar exam in one try.

    My job prospects, however, are negligible. This is partly due to the legal services bubble bursting just as I was coming out of school — job prospects for entry-level attorneys are lousy across the board. But it also owes in no small part to rampant credentialism: a degree from a distance learning program is taken roughly as seriously by hiring managers as a toy from a box of Cracker Jacks.

    I don’t disagree that higher education needs to move towards a lower-cost delivery model. But that’s not the only thing that needs to change — both accreditation and this-is-the-way-we’ve-always-done-it attitudes protect the incumbent educational establishment to an absolutely ludicrous degree.

  • teapartydoc

    Not so new. This sounds like stuff that’s been going on at Hillsdale College for decades.

  • George S

    Anytime the government makes more money available for some ‘program’, whether it’s health care, home ownership, unemployment insurance, or higher education, the associated costs simply go up to match the increase in funding. So it is with student loan programs and college tuition.

    Whether it’s because of poor service (emphasis on research/publication over actual teaching), a poor product (degrees that have no market value) or crippling high prices, potential students are already beginning to look for alternatives. As those alternatives become more available and gain market acceptance, today’s schools will either improve cost/benefit ratio, go out of business, or become strictly research institutions (I guess there will still be a few schools needed to churn out our pro athletes!).

  • http://powerandcontrol.blogspot.com/ M. Simon

    Bucky Fuller predicted all this some 60+ years ago in his book “Education Automation”.

  • http://powerandcontrol.blogspot.com/ M. Simon

    How to beat credentialism? Go for a job that doesn’t require them. Like aerospace engineer.

    OK. How did I do that? I was a contractor. An at will employee. If I didn’t work out (I did for over 2 years – twice – ten years apart) they could fire me.

    Job protection enacted into law is stasis. And once you stop moving you are dead.

  • Steve Wertheimer

    No one so far reveals any knowledge about the financing of higher education (cutting the administrative budget in half will not make a quantum change in the cost of college). No one has offered any metrics on what an education, emphasis on education, provides in the form of life skills (contra career skills). Learning on-line is fine, but no one has made it the equivalent of an eager learner confronting in person a master teacher (at any level). No one has calculated the learning that occurs by going, emphasis on going, to college (or school, for that matter). Efficiency and education are not now, never have, been correlated. If education costs too much, try being stupid.