Student loans are different from other asset classes for a number of reasons, which means we need to start thinking about how we structure them to ensure we’re optimizing for the success of the end recipient, the learner. Below I’ll highlight:
- Why student loans are different
- Structural issues that exist in today’s traditional model
- Recommendation for changes
Why student loans are different
- There’s no tangible asset or collateral attached to the loan. Unlike a car loan or home loan, there’s no Kelly Blue Book or appraiser to confirm the value of your education. And when a person isn’t able to pay back, there’s no way to repossess an education to pay off the loan. So, since there’s no physical, tangible asset, the stakes are quite a bit higher for both lenders and learners.
- When a learner buys an education (with or without a loan), there’s significant ambiguity around the value compared to other similarly large investments — especially those that similarly require financing. And because it can be so difficult to assess the true value of an education prior to obtaining it, this type of loan should be treated differently from others.
Today’s model has major structural issues around incentives
The traditional financing structure in higher education incentivizes schools to enroll learners but doesn’t provide clear incentives to ensure strong outcomes. After all, once someone pays tuition at enrollment, all of the financial incentives for the school are gone. Of course, there are many, many schools out there that genuinely want their learners to succeed and will help them thrive even post-graduation. But without a systematic way of aligning incentives around this success, it’s hard to envision a system where there is a true resource investment in success post-graduation on behalf of learners — especially those in need.
Financing should (and can!) be structured to align incentives
Risk-sharing, incentive-aligned loans — or the “skin in the game” concept — is when schools are invested in their learners by making their total revenue contingent on learner success. At Climb Credit, we exclusively offer incentive-aligned loans today. Meaning, if a learner gets a Climb loan to attend a program, the school gets some of the tuition up front, and then is eligible to earn the remainder as the learner pays their loan back. This encourages schools to invest in the learner’s success through graduation and job placement because they have a significant upside.
The “skin in the game” incentive alignment product that Climb Credit offers (since our first loan in 2014!) is very similar to what senators have proposed applying to Title IV colleges.
If a graduate is able to pay back their loan because their education enabled them to find a good job, not only does the lender get paid back, but the school earns more. This provides a much clearer alignment of incentives between learner, school, and lender — and more focus on the learners’ eventual success. In a system we all know is broken, with risk disproportionately placed on the most vulnerable party (learners), a shift in incentives alignment can have a massive impact for the better.
1 – https://www.finder.com/college-degree-value
2 – https://www.washingtonpost.com/education/2019/09/10/a-dereliction-duty-college-dropout-scandal-how-fix-it/
3 – https://www.nerdwallet.com/blog/nerdscholar/college-and-career-study/