Private student lenders need to reset ability-to-repay expectations
As higher education is creating new models to keep up with workforce needs in the middle of the coronavirus pandemic, innovative student financing also needs to be part of the revolution.
Otherwise, the gap in access could lead to further economic and social inequity in the country.
Federal Reserve Bank of Richmond President Thomas Barkin asked in a recent essay: “What happens to young workers?”
He was referring to those who are currently facing major labor market dislocations as the economy weathers the pandemic. Indeed, a disproportionate number of young workers in the economy — especially within the personal services sector like restaurants and retail) — will lose their jobs, potentially forever, and face an uncertain economic future.
Even before the pandemic, it was well known that we urgently needed to improve workforce training and retraining for ongoing relevance and financial independence. The economy continues to grapple with labor shortages in key sectors, including transportation, skilled-trade labor, cybersecurity/IT, education and healthcare.
The solution to this now pandemic-exacerbated problem that Barkin suggests appears simple: The economy “needs smart, flexible and concerted training efforts to prepare people, particularly displaced workers and young people with less education, for other in-demand fields.”
Barkin is right. In order to increase training, there needs to be policies that expand the scope for Pell Grants and increased community college funding, as he prudently suggests.
These are helpful policy suggestions, but alone will not empower individuals to pursue the range of career-advancing training and education they seek, and that the economy demands.
Innovative private-sector student payment and financing models will also need to be part of the solution.
These solutions, however, must align with student interests by helping them pursue educational programs that truly expand economic opportunity and professional advancement, while not saddling them with debt and illusory benefits. There have been far too many headlines over the years of educational institutions that fail to deliver on job placement or other promises made to students.
The key to advancing a system that furthers student interests, while also solving the skilled-labor shortage the economy faces, is to prudently incorporate data and empirical outcomes into student payment and financing models.
In the case of my company, Climb Credit, it is critical we compare the cost and duration of education programs with expected outcomes. This includes graduation rates, job placement rates and expected salaries to ensure that students are not burdened with unsustainable debt loads and weak economic prospects.
Such an approach, which follows the Federal Trade Commission’s student guidance, is a responsible and functional way to support student borrowers who are attending professional and vocational programs exclusively focused on tangible career skills that can drive economic advancement.
Recently, however, some have raised questions regarding the use of expected future income (typically based on prior college majors) in underwriting. Other observers are generally concerned about for-profit vocational and skills-training programs.
On the first item, the concern is that using future income may have an unfair impact on protected classes of borrowers. However, income information — especially for programs focused exclusively on career and earnings advancement — is not only appropriate from a fair lending standpoint, but is essential in order to avoid saddling students with debt they can’t repay.
The importance of analyzing a borrower’s ability to repay was detailed in various federal laws enacted in the past decade. And both federal and state regulators have taken actions against student lenders who made loans to borrowers who were unlikely to repay.
To solve for ability-to-repay concerns — and to increase access to funding — lenders should consider the future expected income based on empirical data about the value of the professional or vocational education to ensure that loans are likely to be within the borrower’s capacity to repay. From a fair lending standpoint, it’s well known a creditor can assess an applicant’s income, both present and future, in deciding whether to approve an application.
On the second concern, the way to solve for problematic for-profit schools is through increased data and transparency. The more lending platforms can help shine a spotlight on actual outcomes, the more prospective students will be able to make informed decisions and select programs that live up to their promises.
Of course, the quality of the information disclosed by educational schools and programs must be held to the highest standard. Schools found to mislead or misrepresent data, should be (and often are) subject to state or federal actions.
The way forward for the American workforce, especially as the nation confronts the COVID-19 pandemic, is through expanding awareness and financial access to career-advancing education and training.
An unequivocal part of that solution is by using innovative student lending models. Most importantly, it provides the answer to Barkin’s main question on how to help young workers “thrive in a resilient American economy.”