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Changing Higher Ed


Jan 27, 2021

Student loan debt is impacting millennials’ a pressing topic as students graduate from higher education having significant debt. This podcast will feature Steve Ferguson and Jay Patel, who have developed a new way for students to pay off their debt in significantly less time than that currently takes.

Drowning in Debt

The cost of education has gone up in real dollars as per inflation, due to multiple reasons, such as Prop 13 and state budget cuts to higher education. At the same time, the cost to students has increased significantly, as state funding to education has dropped and students are required to pay.

Traditionally, people paid for an education out-of-pocket and from savings. However, the amount that students and families have to pay has gone up significantly more because there is less state government contribution.

Title IV came into existence in 1965, and student loans came into play in the 1980s. These loans filled a gap and helped more people go to school. However, colleges and universities significantly increased the cost of tuition as federal funding for loans became available. This led to the advent of the current debt-load issue where student debt is now $1.7 trillion. This is the largest amount owed by society collectively behind mortgages.

Over the years, the Department of Education has increased the amount of borrowing available to students. That money is mostly used to pay for tuition, but it also can be used to cover other expenses, such as the cost of housing. Starting around 2008-09, many private lenders such as Wells Fargo, CitiBank and Bank of America got out of the student loan business, causing the federal government to increasingly fill that gap.

Since then, the student debt issue has skyrocketed. The nation is at $1.7 trillion in outstanding debt and 45 million borrowers in the U.S. have some Title IV debt. The average debt is over $37,000, and it is crippling for individuals to come out of college with this level of debt load.

According to recent numbers, there are 60,000 borrowers who are over 62 years of age who have a combined total debt of $18.5 billion owed to the federal government. That is over $300,000 per borrower. This group is close to qualifying for Social Security while having a large outstanding student loan.

Another significant threat to the nation’s economy is the debt load for the 25-34 year-old age group, which currently stands at about $90 billion. There are 310,000 borrowers who owe roughly $300,000 per borrower. These significant debt loads can potentially impact the ability for individuals to start families, buy houses and cars, etc.

While many of these individuals who have these debts used these funds to earn a graduate degree, undergraduates also are coming out of school with $30,000-$40,000 in debt. These smaller amounts also impact individuals’ ability to buy a house and start a family.

Innovation in Student Debt Repayment

There hasn’t been a lot of innovation in student loan repayment previously. Many suggest that loans can be paid in a decade, but in reality that time period extends to 20-30 years.

SLR 67 is a new type of investment vehicle that is used to pay for education. This savings and investment program uses a different strategy that came out of conversations with more than 800 stakeholders, including individuals, brokers, dealers and universities.

This investment vehicle is designed for students and their families to repay their current or future loan faster. The SLR 67 has an interactive broker so when the student or family opens an account, they receive an automated investment strategy management plan over a specified time period. They can select a one-time investment or recurring investment. This gives individuals flexibility based on their income. The contribution program builds the principal to pay off the student loan.

Using two basic financial principles—time/value/money and compounded interest—to accelerate what is put toward the principal. This program also is going to be marketed to employers to consider as a match for their employees. This could significantly increase the amount of money that could go into this product to help pay off student loan debt. This could be an employee retention tool, especially if it becomes tax-deductible for employers.

The product has been launched and an account can be created and quickly funded so the automated strategy will take over. The company is focusing initially on the higher earner who has high debt but will expand the product’s scope in the future.

Three Recommendations for Higher Education Leaders

Ferguson and Patel suggested three takeaways for higher education leaders:

  • From a university standpoint, institutions are measured on their repayment rates. They have an obligation to monitor their repayment rates to ensure that they don’t come under a 30% cohort default rate. This is a real issue for smaller institutions because just a few borrowers can affect the institution’s cohort default rate. The college or university also has a social and moral obligation to provide information to help students repay their debts since the institution was the one that profited.
  • Employers also benefit from the students who enter their workforce. Therefore, employers can step up and help their employees figure out creative ways to repay the student loans through creating a match program.
  • This financial tool brings innovation to a part of society that hasn’t had much. This tool is trying to help all parties, whether they are large borrowers or individuals who have smaller student loans.

Bullet Points

  • The cost of higher education has increased significantly over the years due to multiple reasons, which has led to larger student debt.
  • Traditionally, people paid for higher education out-of-pocket and from savings. Title IV loans didn’t come into play until the 1970s. There was a significant increase in the cost of tuition as these federal funds became available.
  • Over the years, the Department of Education has increased the amount of borrowing available to students. That money is mostly used to pay for tuition, but it also is available for students to cover for other expenses, such as the cost of housing. As private lenders dropped out of this market, the federal government stepped in and took over a larger share.
  • Title IV filled a gap and helped more people go to school, but also led to this debt-load issue where Title IV debts are now $1.7 trillion. This is the largest amount owed by society collectively other than mortgages.
  • The nation is at $1.7 trillion in outstanding debt and 46 million borrowers in the U.S. have some Title IV debt.
  • There are 60,000 borrowers over the age of 62 who have a combined total debt of $18.5 billion owed to the federal government. That is over $300,000 per borrower.
  • The debt load for the age group comprising 25-34-year-olds is about $90 billion. There are 310,000 borrowers who owe roughly $300,000 per borrower. These are significant debt loads that can potentially impact the ability for families to start, people to buy houses and cars, etc.
  • While many individuals who have large student loan debts used these funds to earn a graduate degree, undergraduates also are coming out of school with $30,000-$40,000 in debt.
  • There hasn’t been a lot of innovation in student loan repayment previously. Many suggest that loans can be paid in a decade, but in reality that time period extends to 20-30 years.
  • SLR67 is a new type of investment vehicle that is designed to pay for higher education or student loan debt that uses an interactive broker. When the student or family opens an account, they receive an automated investment strategy management plan over a specified time period.
  • Using two basic financial principles—time/value/money and compounded interest—this financial tool accelerates what is put toward the principal.
  • This program is starting with the wealthier graduates—doctors and lawyers—who have larger student debt, but will eventually be offered to graduates with smaller student loan debt burden.

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Keywords: #studentdebt #university #highereducation #education