Heba Dafashy’s column titled “Shining through the cloud of student debt,” which ran Thursday, outlines an additional method for allocating student loans. Depending on the individual, loans through SoFi may or may not be preferable to loans through the federal government such as Stafford Loans. First, “SoFi investors receive a 5-percent to 8-percent” return on their loans, which may or may not be lower than the interest rates offered by the federal government. Second, SoFi does not offer subsidized loans — students are responsible for interest that accumulates while in school. Finally, it appears as if loans through SoFi do not discharge in bankruptcy, and neither do loans through the federal government.
There is a big problem at hand: the amount — $1 trillion — and growth rate — $100 billion per year — of student loan debt. The employment-to-population ratio for 18 to 24 year-olds is near a record low at 54 percent, with an associated unemployment rate of more than 15 percent. Furthermore, according to Fitch, “as many as 27 percent of all student loan borrowers are more than 30 days past due.” Since the majority of loans are disbursed through the Federal Family Education Loan Program and these loans are federally guaranteed, the implication of this problem is clear: taxpayers are on the hook for any future bailouts to the program. In this context, the benefits of the SoFi model, minus a federal guarantee, become apparent.
One advantage of the SoFi model is its ability to motivate students. In a free market, interest rates are a function of several variables, among them the level of risk in an investment. Thus, the least risky investments — that is, the best students — would receive the best interest rates, which would encourage all students to do their best.
Finally, one additional method for allocating student loans would be to combine the SoFi model with a proposal published in The Economist, which would allow students “to sell equity in their future earnings.”