interviews
Who Profits from Your Student Loans?
by Cody Hounanian
September 27, 2020
This interview with Cody Hounanian, the Program Director of Student Debt Crisis, was conducted and condensed by franknews.
frank | What does the student debt crisis look like today?
Cody | I think statistics can tell part of the story. For example, in the seventies, you could use a Pell Grant to cover most of your college expenses, now you can’t. Anecdotes tell another part of the story. In the past, a part-time job over summer could be used to cover the cost of college. That is not enough anymore. We hear from borrowers every day who work many, many hours while going to school, and that still doesn't cover even a fraction of what higher education costs today.
As a society, we used to be much more willing to invest in covering the cost of education. Over the years, and particularly since the Great Recession, investment at the state, local and federal levels has decreased. As a society, we pulled back from investing in students and left families and individuals to pick up that burden. It's an investment issue. It's also a cost issue.
Can you speak more to the cost issue — why is college so expensive?
There are expenses to operate a major modern higher education institution — especially at the level that we have in the United States. But our political leaders have decided to not invest money into our higher education system, and, as a result, families and students have to pick up the slack and borrow to pay for college.
It is a vicious cycle — the more that colleges increase the cost of college, the more student loans will be taken out to fund those educations. The more that we open up the opportunity for borrowers to finance their education, the more room there is for institutions to increase their costs.
That is why at Student Debt Crisis we support a two-pronged solution. One, we need to cancel a broad amount of the student debt that exists. Two, we need to make many colleges, certainly public institutions, free for students. That is critical to creating a future where the student debt crisis that we see today can’t be recreated.
Do you think that canceling student debt is politically and fiscally possible?
If you accept the premise that our higher education and student loan system are broken, then you have to accept the fact that much of the $1.7 trillion in student loan debt is unethical, immoral, and, frankly, shouldn't exist.
Since the COVID crisis, canceling student debt has gone from a rallying cry of borrowers and advocates to something that is growing in its legitimacy. It has the support of many people in Congress, including Senator Elizabeth Warren, and even presidential candidate, Joe Biden.
But there are other common-sense solutions we should look to, as well. For example, there needs to be a federal refinancing option.
Because of predatory interest rates, many people have loans where they have paid back more than they originally borrowed.
Refinancing is not a new idea — people can refinance their mortgage or auto loans.
Let’s back up — what does refinancing look like for student loans?
Anyone that takes out a traditional lending product for their home or their car, can take advantage of a lower interest rate in the future. That helps them to lower their monthly payments and the total amount of debt that they have to pay back during the lifetime of the loan.
People who have federal student loans are not given that option. Importantly, federal student loan interest rates have fluctuated wildly over the years. There are millions of people that have very high interest rates, very high monthly payments, and no option to lower their interest rates.
With the support of folks like Senator Elizabeth Warren, there have been several attempts to pass common-sense refinancing. It came within two votes of passing in Congress several years ago but did not pass.
How many people are defaulting on their student loans?
A million people each year that default on their student loans. And that does not include a large portion of borrowers who are seriously delinquent on their student loans — these are borrowers who are between 90 and 270 days past due on their payments.
Unfortunately, we see that student loan defaults follow the inequity lines that we see in our society. Black student loan borrowers default at a much higher rate than their white peers.
We also know those who attend predatory for-profit colleges, often single parents, disabled veterans, and other vulnerable communities default at a much higher rate as well.
What happens when you default on your loans?
The consequences of default can be really catastrophic. It can mean huge fees. In many states, you can have your driver's license or your professional license revoked. It can mean that you can't complete your program or access financial aid. It can even mean you can't serve in the military, law enforcement positions, or other jobs that require credit checks. It can disrupt people's lives significantly.
As with other forms of debt, defaulting on your student loans also means that you're likely going to face relentless harassment from debt collectors. These are people that call at all hours of the day, they contact your friends and family, and sometimes they reach out to you on social media accounts. Defaulting can lead to a serious encroachment of your privacy.
Right. And there are repayment options to pay off student loans in an effective way — but no one seems to know?
Nobody with a federal student loan should default. There are affordable repayment options that are available to student loan borrowers through the federal government. The problem is, no one knows that these programs exist.
For example, if you are a low-income borrower or if you are unemployed, you can qualify for a monthly payment that's as low as $0 per month, and still be considered current on your loans. But your loan servicer has to tell you about that option and they have to help you enroll properly. For years, they have failed to do that. There's been a myriad of lawsuits against these companies, but that doesn't fix the problem.
California just passed a student loan borrower “bill of rights” to create enforceable standards. These companies have to give you your options, and they have to educate you on the best options for your situation, not the options best for their bottom line.
The federal student loan system is so complex that it makes it hard for students to navigate — you essentially have to be an expert. What's really important to know is that student loan borrowers are constantly hounded by what we call debt relief companies. These are people that prey on your inability to find any information. Any company offering to enroll you in a federal program with a fee is unnecessary - you can enroll in any federal program at the Department of Education's website at no cost.
But it's not just the private companies or organizations making a profit, right? In 2013, the Department of Education made over $41.3 billion on student loans. How are they making that money?
Yeah, you're right. Hundreds of millions of dollars every year go to the Department of Education through our student loan system.
Most of that comes from the interest on student loans. I think it is important to circle back to the conversation around the lack of refinancing here — we know that the longer that student loan borrowers are stuck with high interest rates, the more the Department of Education reaps in return. That is a perverse incentive.
Those funds go towards funding other government programs. To that extent, I think this is a question about balancing our books as a country and reprioritizing what we want to spend our money on. We need to think about different means of funding that doesn't happen off of the backs of student loan borrowers.
There's literally money on the table to be used to reinvest in education that instead is just being given as a fund generator for the Department of Education.
Can you talk more about the spread between what banks are borrowing and what the interest rates are there and how that differs from private loans?
Yeah. When you think of what a bank can lend money for, you're talking about single digits a — 1% to 0.5% of an interest rate. When a student loan is written by the federal government, it can be anywhere from about 3.5%, today's rate, to 6.5%, which was the rate that it was for me when I attended college in 2013. In the private market, student loan interest rates can be in the double digits — they can be as high as 15% or more.
Federal student loan borrowers, and those with private student loans from banks, are paying much more to finance their own education than what institutions pay to buy financial products. There is a huge spread. Again, I think that is a societal ill.
What does our society prioritize? Is it more important to keep banks afloat or to help young people afford education and make the future better and more bright for our entire country?
Why is the federal system profiting off of this system and these high interest rates rather than acting as a protector against predatory private institutions?
That's a great question. About a decade ago, when a student loan borrower went to the Department of Education for a student loan, the Department of Education would help facilitate that process, but the funds came from a private bank.
During the Great Recession, the banks unloaded this portfolio, they no longer wanted these loans. A lot of the loans were sold back to the Department of Education. From then on, throughout and after the Obama administration, all new federal student loans were not only facilitated by the Department of Education, but the funds themselves came from the government through the Department of Education.
The Department of Education shifted from being a regulatory agency, to essentially acting as one of the largest banking operations within the government.
They have a portfolio of trillions of dollars in student loans. Instead of acting as an institution meant to look out for the interests of student loan borrowers, they are now incentivized to look out for their large portfolio of student loans.
Was the transition of the government towards acting as a bank a partisan led movement?
The Obama administration felt strongly that borrowers needed an easy way to finance their education, or we would have a future where the future economy was void of high skilled labor and job opportunities.
We were also coming out of the recession, and there were deficit issues. So another motivating factor was also the idea of funding — the Department of Education could process these loans and create a revenue stream that could fund other programming in the government.
Do you think the move was well-intentioned?
I would say up until recently, these programs were well-intentioned. I think there were obstacles in making substantive change. But, since Betsy DeVos has become the Secretary of Education, we've seen more of what looks like overt attempts to make sure the system is as broken as possible.
I'll give you an example, there is something called the Public Service Loan Forgiveness Program. It started under the Bush administration, and the goal of the program was to motivate college graduates to work in public service by forgiving their student loan debt after 10 years of service. The current administration has proactively created roadblocks that have denied 99% of applicants to the program. There has been much more of an explicit attempt to prevent borrowers from accessing relief from the federal government — the likes of which we have never seen before.
Does the failure of the Department of Education lend itself to the idea that the government can't be in charge of things?
To those that look at the broken student loan system and say that is a great example of government failure, I would say, look to the other side of the coin — the exploitative private student loan system.
The federal government and the federal student loan system is not perfect by any means. It has created a lot of problems for student loan borrowers. However, the private student loan system that has no consumer protections when it comes to affordable payment plans. They have higher interest rates, they engage in profiteering, and a whole host of other issues that you don't see at the governmental level.
We look at the student loan system within the federal government and think that this is a bloated, broken system that can be corrected. It should be limited in size — meaning we should lower the cost of college and cancel a ton of the student debt to make this program more manageable. But we don't want borrowers to go to the private student loan industry where they lack the affordable options and consumer protections that are afforded to federal student loan borrowers. So the grass ain't greener in the private industry for student loan borrowers by any means.
Why do you think there's so much political resistance to embrace education as a public good?
This is where things are more insidious and, frankly, shameful. It comes down to the fact that there are partisan politics at play. There are some on one side of the aisle that treat a college education as something that should be reserved for the elites rather than as a public good and something that really benefits our society. At the Student Debt Crisis, we believe that America needs highly educated and highly skilled citizens who can compete globally for modern jobs.
interviews
There Is No Particular Entity In Charge
by Michael Casey
April 30, 2019
The interview below was originally published February 20, 2019 in our Energy Democracy Issue.
This interview with Michael Casey was conducted and condensed by frank news.
Michael Casey is a writer and researcher in the fields of economics, finance, and digital-currency technology. He is a Senior Lecturer at the MIT Sloan School of Management and Senior Advisor for the Digital Currency Initiative at MIT's Media Lab, where he explores blockchain applications that advance financial inclusion, economic development, and resource efficiency.
We look to define terms as we enter new themes, incorporating blockchain and what it represents within energy democracy would be especially helpful.
To start, how do you define energy democracy?
There's a spectrum of things that would encompass it. The one we've been most focused on, in terms of how it impacts blockchain, is the idea of the ability of the user, and therefore the pro-sumer [the person who is consuming and producing power], to have the right to sell and buy at a market determined price. As it is now, utility is in the middle, purchasing power at a rate they predetermine. There's no capacity to sell to an alternative, other than a single provider.
A world in which I can enter into agreements that have my power purchased at a particular rate, whether that is literally delivering the electrons, or is a contract in which my provision to the grid is compensated at a rate that is determined by the demand for that particular quality of power, is something we're really focused on.
Which is the way the current structure is. You build onto that notions of broader democracy. The right to go off-grid, the right to establish your own systems for setting smart meters, for determining what devices are used and when. There's something of a spectrum in the concept, but the starting point we care about most is price, at least that I do.
What about ownership?
That would fall into it for sure. Yes, we definitely would put that into that same spectrum. The idea that the assets can be owned by an individual. There’s varying degrees to this. One is ownership and the other one is finance. The ability for me to finance the acquisition with whomever I can tap, rather than the electricity infrastructure I depend upon, being itself dependent upon the financing vehicles of utility. That I, or my community, can tap external sources to fund what is essentially our contribution to the broader infrastructure. You can get broader and broader with it, but the right to own and control those assets would be part of it. The right to determine how and who finances it is another part.
Where does blockchain come in?
I'll speak to it from the projects I've been specifically involved in. One is a microgrid we are experimenting with in Puerto Rico. I look at it in two ways. First is this concept of finance. I can tap my home or community and establish a microgrid. How might we have that financed by some sort of external direct investor, a social impact investor or investment fund? The blockchain creates the capacity to form what are known as smart contracts.
Are you aware of that term?
No.
Blockchain is a distributed ledger. It, in a decentralized manner, without any particular entity in charge, records the sequence of transactions and then, through a consensus mechanism, every node, every computer, within that network, each maintain their own version of the ledger, and update that ledger through this consensus process.
If you think about how we might move to a world where my transactions, my sale of power, my provision of power, and the funds I receive for those, are not being dictated by centralized utility – then the idea that we’re now no longer going to have one entity in charge of those transactions, and who gets to set those prices and who doesn't, starts to move us into this direction of decentralization.
We might, as a community, decide we're going to nominate some party to be in charge of the ledger, but again you're now trusting that entity to do so. Maybe the community appoints one household to run the ledger, and they're billing everybody, they're acting essentially as a local utility. You really haven't changed the model that much, you've just made it smaller, but it's okay. That could be a more efficient way to do things. Once you bring an outside investor in who says, "I want to make sure my collateral, some claim on that power, and the income that's generated, is being managed in a way that I can trust. I'm external to the community. Who am I going to trust to do that?"
A distributed ledger that nobody can change, gives me the capacity, potentially – I always use the word potentially, because all of this stuff is completely and utterly, in experimental phase right now – it gives us the potential to have my transactions verified without me having to trust the community member that is in charge.
You can imagine a situation where there's an investor in the United States, let's say in Seattle, who has put a five-year bond into the financing of a local community's grid in Africa. He's going to want to have some assurances that asset is being managed in a way that is in the interest to what they paid for. This is one principle idea to think about. Decentralization gives us the capacity, not just for those inside the community, but also outside, to have a relationship like this.
A smart contract is the idea that in addition to managing transactions, in the plain vanilla notion of what that is, payments of money, the actions that are taken by software to instruct devices to do things, or manage a set of contracts, can be executed without any one computer being in charge.
A smart contract is a bit of a misnomer. It implies that the contract is what's going on. The contract is an agreement between you and I. A smart contract says that you and I enter into an agreement and neither you nor I have any power over the computers executing the terms and obligations of that contract, to manipulate it.
How does this work in terms of smart property? I've got collateral, even though I'm living in Seattle and the microgrid I’m financing is in Nairobi. If payments are not met, it's a form of foreclosure or default protection. I funded this thing at a low interest rate because I'm protected. If the payments are not being made, at a certain point the system recognizes this because those payments are digital, they have programmable money qualities, and they stop. A device – a smart meter, one of the devices within the system, can divert that power back to the grid for example, so that the user is no longer using it. You can create a pay-per-use type of structure.
We thought long and hard about this from a social impact, developing world scenario. Could you build tiers into it so that certain devices always stay on because they have to? The hospital needs to have its power. Various things need to stay on, but you could then have some sort of structure in which the least necessary, or least important devices, can be turned off. And that power is diverted back to the grid until the loan is renewed and payments are revived.
You're creating a certain amount of de facto property rights that is the structure of so many other forms of lending. That's the way we think we can drive down the cost of lending. Rather than having to depend upon very centralized public finance models, in which infrastructure is built with access to Wall Street's funding, we now have the capacity, potentially, because I don't need to trust anybody in terms of the execution.
In that structure we can potentially bypass all of that, and have pools of social impact investors have direct stakes in, and help to fund the development of these smaller off-grid or on-grid types of microgrids. That's what we're working on in Puerto Rico right now. That access to finance. How do we create a sufficient level of protection? There's always the capacity that somebody could monkey with the smart meter. There's various things that could go wrong, but any investment has these factors.
The other part of it is, if you have a true transactive grid, it's not just a two way transaction with me and utility. I'm actually trading with my neighbors and setting up transactions and relationships. Then potentially the blockchain could be there as a way to tokenize the rights of that electricity. The transaction is between each of the participants in that network which itself would also be managed in a decentralized way. There's no utility. There's no large national or state level utility, nor is there even a local community utility. The utility in a sense, is the blockchain. There has to be built into it some sort of price mechanism. People are only going to enter into deals if you can potentially program devices, inverters and like, to accept or divert power over their prices, and meet whatever parameters you've set.
All that functionality, do I transact, do I not? Has the transaction been recorded? So there's no way I could do a deal with one person and actually divert the power somewhere else, and essentially double dip on the thing. All of that needs to be managed to keep the system in balance. That is where we see the second layer of a decentralized blockchain to come.
I feel at this stage, after a long time looking at all this, unconvinced that transactive systems like this are necessarily going to work. I do believe that in some shape or form, if you're going to reach this true energy democracy idea, something like this is where we need to go. But we're not there now. I think that's partly because we have these big, sensitive, national grid structures and it's not clear that the power loads and various sensitivities that go with how you keep the grid alive, and not kill people, can be managed entirely by this sort of structure.
This is just my thinking at the moment. It's not as if the broad principle of a more decentralized way to manage transactions between users and the grid isn't something we should be striving for. I am a believer in the finance part of it. Transactive systems, certainly in on-grid environments, are going to have to be capable of interacting with the demands of large service operators needs.
What about working on microgrids, or moving off the grid? Do you think that creates a better opportunity at moving towards decentralization?
Harvey [Micahel] is actually more of a visionary when it comes to the broader idea of energy democracy. A lot of his thinking has helped me on this sort of stuff.
There's certainly potential in off-grid settings.
Can we have a hybrid? Where you have an off-grid community based microgrid? It's not plugged into the national grid, except at such times when it needs it. So the national grid becomes the back up. That would be ideal. There's a huge political move. You'd need to get these utilities to really step back into a different role. While the grid is functioning in it's off-grid strategy, that is the microgrid, if you wanted to manage transactions within that community in a decentralized way, the blockchain could step in and be that management protocol for that system.
It seems like the private sector and academic institutions are the ones leading this thinking. Do you think the public and the political follow private sector investments?
That's a really good question. I think there are two barriers at arriving at this broad image of energy democracy. The first is that incumbents have a lot of power. Public utilities are heavily regulated. We find this in banking as well.
The regulators are told they must regulate the grid in such and such a way, and that is defined by default, under this current centralized paradigm. You have a lot of inertia from regulators who don't want to disrupt the model because you'd obviously have to design completely different regulations for a world in which these decentralized microgrids are built along the lines I just described. That's one barrier.
Then of course, the utilities themselves have their own political clout. If we want to depend upon their infrastructure, all that expensive capital that’s been invested into it, so that their wires are the ones we use to transact amongst each other, how are we going to compensate those utilities? There's an interesting question about how we might do so. It could be that they cease to be the providers of the power, or at least the sole providers of the power, and instead are just service managers and they take a service fee. One way to think about it might be to think about how the US telecoms industry was deregulated in the middle of the '90's. The baby bells were broken up and the like, there was a mandate that the pipes had to be provided to all comers, there would be a fee that would be paid, but there was no way you could prevent, as the owner of those cables, other providers from providing services along that infrastructure. That's one model that might be interesting when you think about it. But those guys, nonetheless, because the way their current profit models are built, and because of their political clout, are a barrier.
It’s probably at this stage, too marginal. There's not a big enough change in my savings or my profits as a pro-sumer, to really exist. It just hasn't got that "gee whiz", great motivator behind it. I think that's essentially the problem with lots of business models. It's just too incremental. How do you make this big shift if there are a lot of inconveniences involved? On the other hand, I think there is something wrong with that to some extent. We're not thinking hard about how, if we do decentralize, there's all these other business models and ideas that can be built on top of a more decentralized energy democracy system. Rather than thinking about the savings or profits, that I as a household pro-sumer may or may not make on my existing usage and sale of electricity, how do we incentivize bill systems? We now have all this information generated around price levels and the use of IOT devices, and we get more and more sophisticated, down to the device level – there is a way to actually build all these other services in the community. You treat the excess electricity that's produced as a way to then produce batteries. There's a way to fuel electric vehicles that run bus routes around the system, and those buses end up being almost like a back up battery component to the system. You end up running a much, much cheaper traffic system because there's a dual purpose here. You're the backup, you're the recipient of the excess power, and you're providing a service.
How does that get baked into a model that makes the provision of those services cheaper and regulated through this decentralized price signaling mechanism that is a combination of IOT and blockchain, that renewable decentralized energy systems could provide? I don't know what that looks like, but I can envision some very smart, econometric design systems that bring in smart IOT devices that turn on here, turn off there, and create a really rich pool of data around optimizing power, and where and when. There's a whole lot of benefits that could be derived, in a future model that we're not yet visiting, beyond the pros and cons of using it under our current structure.
The problem is people just can't think beyond their monthly power bill. To do that, you need communities to be really forward thinking and experimental in what they could build in the future.
Utility is massive and ubiquitous, but still weirdly opaque, which leaves most people confused. I never think about my utilities bill. Where does trust come into play? Especially with blockchain. Does the public have a distrust in blockchain?
If designed appropriately, and if we reach the point where software and the models and protocalls that are being developed and constantly refined and proved, are trusted to the extent they should be, then they're actually a trust replacement system. That's exactly what they're supposed to be.
When I was talking about how a social impact investor in Seattle can feel confident that their interests are being protected in a smart property financing structure with a microgrid somewhere else, the question of trust is key. I can't trust the local village chief to act in my interest. We just cannot. We have all these barriers to trust around our economy built on those things. Just as there's no reason why the villagers should trust that if I had control over the devices, I wouldn't manipulate and divert the power to my own interests.
It is precisely the problem of trust you're trying to resolve through a blockchain solution. But you asked the right question because we're not yet there in terms of the public perception of blockchain. I personally feel there's a host of misplaced narratives and a deep level of misunderstanding. Some of which is promoted by vested interests who don't understand what's going on.
There's also a lot of really shady, funky people working in this space that have done some bad things. And they've been able to do bad things because the technology itself isn't advanced enough to be able to give the right level of protection. The good news is there is a lot of work being done on security and improving the system so that we're going to reach this level where a) the confidence that people can have that they won't loose their phones is higher and b) they can do so in a way that they don't actually have to trust a custodian. Because right now in a blockchain, bitcoin type solution, the broader ecosystem around it is still being serviced by entities who have control over your money. It's a bit of a hybrid that's not necessarily reliable.
Systems that have a more decentralized, but also highly reliable security model are coming, and that is going to hopefully bring people around to start placing better confidence and trust in the system itself.
If you just look at the way Puerto Rico’s public utility was run, and the abuse, it's hard to say I should trust that. Wait until you see PREPA and what's happened there. There's no trust in the system. One of the reasons why I think Puerto Rico looks like a really good opportunity for us to explore this is because there's such a breakdown of trust in the publicly run system. They're looking for alternatives and we're able to dive in and explore ways we can make it fairer for everybody.