One of the founders of a student debt education platform knows he can help Americans with the growing problem of student debt simply by directing them to resources which already exist in the marketplace.
Peter Wylie and his partners began developing Gradible 18 months ago to address the growing problem of student loan debt, which they saw affect many in their immediate circle, including one of the founders.
And what a problem it is. At $1.3 trillion and growing the collective amount of student debt is second in size, only to mortgages, Mr. Wylie said.
Yes, it is higher than credit card debt, which sat at $890.9 billion in March, according to NerdWallet.
Roughly one in eight Americans, or about 40 million people, have outstanding student loans. One in seven will default, Mr. Wylie said though he also warned it is the one debt that is not discharged in bankruptcy.
The effects of America’s student loan problem reverberate throughout the economy. Household formations are down as graduates struggling with debt have to rent or live with parents as they try to pay the loans off.
That means fewer are buying houses, which hurts any industry associated with home improvement. Graduates are also not buying newer vehicles, taking vacations, shopping or eating out as much as they would like.
Most companies in the alt-fi debt repayment space have developed underwriting algorithms which allow them to underwrite in different ways and help more people. Gradible provides a needed service simply by finding the different repayment programs that already exist and let eligible people know they exist.
“There are really great programs that exist to make this repayment easy,” Mr. Wylie said. “But so many people are struggling with it.”
Mr. Wylie said Gradible locates the different programs and incorporates them into their proprietary algorithm for what is a seamless user experience. In less than five minutes people with student loans can learn how to save money both in the short and long term, he added and so far more than 20,000 people have signed on.
When looking at the problem of student debt, My Wylie advises against simply looking at aggregate data.
“Like most things averages really lie when it comes to student loans,” Mr. Wylie explained. “Some people are borrowing large amounts and seeing a great return, but that is not the whole story.”
He said the larger debt amounts are often accrued by people with masters or higher professional degrees. In those cases, they are indeed setting themselves up for a more prosperous future.
The highest default rate is with those owing $5,000 or less, Mr. Wylie said.
“It is a small amount that really torpedoes one’s ability to borrow in the future.”
Because the loan is not forgivable in bankruptcy, the eight million people currently in default on their student loans will not be contributing in any way to credit-fueled consumption, Mr. Wylie said.
That’s one more kick in the ass for a middle class that is already hurt by the amount they borrowed relative to the economic impact of their education he said. While wages have remained relatively flat over the last two decades, college costs have increased 700 percent, Mr. Wylie said. The owed amount and duration have also increased in the last decade.
Why don’t more people know about options which could save them money? Unfortunately, people holding student debt are at the mercy of three of the poorest communicators known to man.
The first are the 11 companies paid to service student loans – four Title IV Additional Servicers, and seven not-for-profit servicers that are paid close to $1 billion annually by Uncle Sam to service the loans (Mr. Wylie said 2016 is on track to be the first $1 billion-plus year).
Mr. Wylie said those firms do not operate in a structure where innovation or reaching borrowers more effectively is encouraged because for the longest time there was little incentive to do so.
Up until September 2014, those firms were paid a fixed amount for every borrower, regardless of the state of their loan. They now make more money for every borrower who is current in their payments and receive nothing if someone has missed payments for nine months.
Another group with some ‘splaining to do are colleges and universities, especially those with a high cohort default rate, Mr. Wylie said.
“If you dig into this industry you’ll find there is a shock at what is considered acceptable performance,” Mr. Wylie said. “You have to get above a 15 percent cohort default rate three years in a row three years after a group has left school.”
At that point, penalties are first assessed, but Mr. Wylie described them as weak. The next level is when a 25 percent cohort default rate is reached.
“That means one in four is in a worse place three years after leaving your institution. It is a travesty.”
Government departments like Education also have to look in the mirror, Mr. Wylie said. The way the rules are written the Department of Education is not in a position to affect needed outcomes, he added.
“They must move faster and they are not suited to that.”
“It is outrageous there’s this much failure in something designed to improve someone’s future and earning potential and career and not have more sweeping and aggressive change.”
Mr. Wylie said Gradible has been growing by word of mouth. It is not so much because Gradible is marketing to millennials as it is because they are addressing topics both uncomfortable and bland.
“It is always a challenge to get people to talk about financial topics,” he said. “The topic is both personal and private.”
Debt problems are often compounded by a lack of financial literacy, he said. Getting people to admit they have a problem does shape what you can do in terms of marketing
The key is to reach people where they are comfortable so they can tell you the information you need in order to make a recommendation, he said. Determine their goals, tell them what they are qualified for, then show them what this will do on a monthly basis and throughout the life of the loan, he added.
Gradible is free to use, Mr. Wylie said. After an initial consultation, people complete an automated form in a few minutes.
Most people benefit from an income-based repayment program which helps protect against unemployment, Mr. Wylie said. Working people find their new monthly payments much easier to handle.
Student debt forgiveness may seem like the lottery and after seeing some of the facts, the chances of benefiting from it are similar to winning a lottery. Mr. Wylie said some people can obtain student debt forgiveness if they work for a not-for-profit or municipal or state government. Some departments in the federal government also fit the criteria.
To qualify people must make ten years of qualifying payments while in the program. The catch – the standard repayment time frame is 10 years too.
Gradible offers other benefits too, Mr. Wylie said. They provide online financial literacy resources and offer an affinity program that provides their members with extra income opportunities to help them erase their debt faster.
Like many in the industry, Peter Wylie would like to see the student loan program modified to an income-based repayment structure, saying it makes “perfect sense.”
“The market is interesting,” he remarked. “Because the government issues loans at a fixed rate regardless of your ability to repay. That creates an inefficiency.”
“If the person has the opportunity to earn a higher income, they should get the benefit of a lower rate (to reflect less risk).”
The U.S. Government has issued all federal loans directly since 2010, and previously, paid private lenders to issue loans that they guaranteed. These loans are “serviced” by 11 companies currently: 4 “TIVAS” (Title V Additional Servicers) and 7 “NFPs” (Not for profit servicers). The federal portfolio contains more than 40 million loan holders, and these companies receive varying compensation based on the status of a loan holder’s loans (grace/in-school, forbearance, active repayment, delinquent, default, etc). This compensation comes out to just over $22 per year per borrower average, so you can arrive at the figure of ~$900m for the government servicing, which is growing because the rate of borrowers paying off loans is lower than the rate of new borrowing. 2016 is likely to be the first $1B servicing year for the federal portfolio alone.
Additionally, companies like Navient and Nelnet are paid by private holders of student loans to service those portfolios, and there is separate servicing activity for the Federal Perkins Loan portfolio, which are issued directly by schools, but funded through govt grants and guarantees.