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
How FICO Limits Clean Energy
by Forrest Watkins
December 15, 2019
How do you, as a company, define energy democracy?
For us, energy democracy is really about giving power over our energy systems back to everyday people. We know that for the whole history of the energy industry, the benefits and the impacts of energy systems have been very unevenly distributed. Low-income communities and communities of color have confronted the worst impacts of pollution from energy and industry – to the extent that a 2017 study showed that the very structure of our cities has been informed by which sectors of the city are downwind, and where the pollution will blow and have the most impact.
To this day, there are millions of people that lack access to electricity. Even in places where we think of our electric grids as robust and well-developed, like in the U.S., low-income households frequently experience energy poverty, where they don't necessarily have the money to adequately heat their homes. And this has real impacts on people’s health and livelihoods, especially those of children and families.
When we're working on energy democracy, we’re trying to ensure that the next iteration of our energy systems can reverse that dynamic, and really put the people that have been marginalized in fossil-fueled energy systems, at the core of the transition to clean energy.
On a practical level, that means that when we're building out solar and wind energy infrastructure, we need to make sure that low-income communities, communities of color, are included in the benefits of those energy projects, and equally importantly, that they have a say in the development of those projects. When there's a project going into our communities, whether it's a solar project or a gas pipeline, we really need to make sure they have a say in how that develops, and whether it's developed in the first place.
Finally, it's worth calling out that movements for clean energy and environmental protection have pretty consistently undervalued the needs and objectives of communities of color, low-income communities and other marginalized people. Movements for energy democracy and environmental justice, on the other hand, has been led by these communities, from Afton, North Carolina in 1982 to present-day groups like PUSH Buffalo, Greenlining Institute, and campaigns like the Portland Clean Energy Initiative.
Why do you think there's such a lack of understanding about where our energy comes from and how the grid functions?
I think it’s the same thing with a lot of the really important, complex issues that we’re facing today. I care a lot about energy and have worked really hard over the last few years to do what I can to contribute to equity in the space, but I don't necessarily have the same level of understanding on agriculture, or on health systems.
But I also don't know that in-depth policy and resource understanding is necessary to increasing democratic control. If we build the transition to clean energy on the idea that everyone has to understand regional power markets, or utility resource planning schemes, or different regulatory processes, then I don't know if we're going to get there. But if we can give people an opportunity to say, "Yes, I want the choice to participate in this renewable energy program." Or, "Yes, I think if you have the chance to build out more renewable energy in the coming years, you should include that in your resource planning." There's lots of ways we can take the incredible public support for renewable energy, and translate it into smart policies that shape the future of energy.
How do you engage the unengaged in a conversation about transitioning away from a system they’re used to, and might not mind?
Solstice does a lot of the direct engagement in getting people signed up for local, community-shared solar arrays. We know what people are thinking about when they're making these decisions. What we see is people might have different motivations for supporting renewable energy, but they really, overwhelmingly support clean energy, and they don’t want to wait. For some people, it is a climate motivation, or making a more sustainable energy system. Other people, it's not that. Some people say, "I don't believe in climate change," or, "I don't believe that humans are even having an effect on the climate. But solar just makes sense, because it's less expensive, and it gives us more independence in your energy supply.” For some it's about that, the cost savings of energy independence
I think for us, when we’re thinking about our impact, we really want to engage with everyone in the transition to renewable energy, regardless of their specific motivations for it. When it comes down to it, I think people have heard this is the right way to go economically as well as environmentally. When we get on the phone with them, or are at the town hall events with them, it's not something where we have to do a tremendous amount of convincing.
Energy democracy is really tied to clean energy. But the move towards clean doesn't necessarily have to incorporate the ideals of energy democracy. There is a version of this that's corporate, and the power structures won’t change. Why is discussing power, when talking about energy, important?
What we've seen so far in the solar industry, though, is that the early adopters who are able to make these decisions, are generally people with higher income, and the time to shop around and make a good investments decision. In many states, a lot of the wind and solar deployment is being driven by big, investor-owned utilities.
It can be argued that this is the most economically efficient way of rolling out clean energy, but we also know from a few centuries of hard data who benefits from an energy system that’s built that way - and who is marginalized. When we build at a scale that serves a community, and we create spaces for input on the project from the community, that’s how we fit the project to their needs and priorities, and make sure that it’s developed in an equitable way.
When you're building at that scale, it also increases the resiliency of the grid. If you have a more decentralized system with more local power generation, that's a way of reducing the risk for local communities, and making them more resilient to larger impacts. As we're looking at cases like California and Puerto Rico, if our goal is to get the power back on sooner for communities regardless of their economic or racial makeup, inclusive, community-scale solar is a great path to creating an energy system that is resilient not just for the people able to invest in a rooftop array, but also those who aren't.
And how does this all work in practice?
Community solar allows people to enroll in a local solar array and see credits on their energy bill as if they had the array on their own rooftop. Solstice typically uses a subscription model, because it allows people to participate without any upfront payment. So we’ll look at your utility payment history, and how your energy bill has fluctuated over time. That allows us to adjust the allocation size for your energy needs. Once that energy project's turned on, you will start seeing credits on your utility bill. Those credits will more or less zero out your energy bill, and you pay for that energy, but at a discounted rate. The typical discount that we see is about 10%.We advocate for contracts that let the customer pass the subscription on to another customer, should they have to move, or have to cancel their subscription for whatever reason. That just allows for everyone to participate, whether they're renters, or other people that have higher levels of mobility.
At Solstice, we don't develop the projects ourselves. We work with the people that develop and finance the solar projects, we help them get people signed up for the projects, then manage people’s experience, and their allocations, on an ongoing basis. We have a software platform that integrates this with utilities systems to manage the billing process and give people ongoing information about how much they're saving, how much their piece of the solar garden is contributing to carbon reductions, things like that.
We also have invented the EnergyScore, an alternative way of qualifying people for community solar farms that is more accurate in predicting people’s utility bill payment behavior and more inclusive of low-to-moderate income households than the FICO credit scores that are typically used to qualify people for projects. Our goal is really to make it as easy as possible for everyone to participate in these projects, regardless of their background, or how they're coming to the table.
How do you charge people, and decide the value of what that energy is worth?
There's a number of different ways people are approaching this. What we advocate for, is doing a direct percentage discount, because that is really the best way of protecting the customer and making sure they are seeing a discount, no matter what. There are legislated programs of community solar in 18 states, and the 19th, New Mexico, is likely to pass a bill before long. In those 18 states, currently, there is legislative program that allows for automatic bill crediting and the administration of these programs. Under those, people automatically see the utility bill credits that allow them to see savings at the end of the month.
Do you work outside the grid, or through the grid?
We work through the grid. There are definitely some exciting things happening in the microgrid space. At this point, they still have a fairly limited set of use cases because the economics often don’t allow people to save. But in some cases, like with off-grid communities, or organizations like hospitals that really need a high degree of reliability and resiliency, it can make financial sense for them to do that. As far as community solar goes, we’re operating through the traditional grid, and that makes the most financial sense in a lot of ways, not having to reinvent the whole grid system, but just adapting it to meet the new reality.
As energy storage becomes cheaper over the next decade and demand response technologies become more sophisticated, the line between on-grid community solar and off-grid microgrids will likely start to blur. In many places, this will make it increasingly difficult to restrict the decentralization and democratization of energy.
Can the grid handle a transition away from coal and gas, to wind and solar?
There are a lot of smart people working on that question.
But in the long term, we know having a more decentralized grid makes for better resilience, and more reliability. Utilities are not always the most popular among everyday people, or people in the solar industry. But they are really good at keeping the lights on, and managing the grid, which is an incredibly complex system. This is the direction we need to be heading regardless, and a lot of the brainpower going into this transition will happen at that level too.
Regulators also have an important role in shaping utilities’ incentives to make this energy transition while also maintaining affordability and reliability. Changing utilities’ incentive structures is vital, so they’re not just paid high returns for continuing to build huge, centralized generation plans, and instead paying them to make the changes that serve their constituents, like transitioning to a cleaner, more decentralized generation, and upgrading software systems to maintain grid security and make crediting and billing systems run more smoothly and with less overhead expense.
So it's definitely something that will require transition, but I think is on its way. We're already seeing some utilities really get on board. As I said here are 18 legislated community solar programs. But there are 42 states that have at least one community solar garden. Those states where it’s not legislated are where the utility is taking the initiative, and they're doing this because it's a way for them to control that transition a little bit more. Instead of just having people put up projects wherever they want, or having to manage an increase in energy over their lines - from a neighborhood with a lot of solar, for example - they can choose to site a community solar array right next to their distribution infrastructure. They get to plan it out themselves, and often save on upgrades in the transmission system.
You mentioned the idea of decentralizing the grid, as the thing driving some of this change. Some critics point out decentralizing as a security risk. Is that something that you talk about?
I've heard some of the big utilities make the argument that increasing the number of people who are involved in this system - people like third party generators - may increase some cyber security risks on their end. I definitely trust that they know what they’re talking about, but growing data systems and the risk associated with that is a reality across many industries, and there are certainly ways to mitigate data security concerns. As an organization that is working with large energy companies on software for community solar gardens, I can tell you there are a lot of strict standards around data and software security that we have to deal with.
I think it’s also worth pointing out, though, that at the end of the day, if you end up with a system that is more decentralized, and what they call islandable, where basically, you could take a local energy grid, if the larger grid goes down for whatever reason, and power the local grid in a town, or a county, at a localized level, then you’re actually better off in terms of the resiliency of the overall grid, because it's harder to just hit one large piece of the grid, and take the whole thing down.
What policy needs to exist to make your work sustainable, profitable, compelling, incentivizing, etc.?
We do work at a state and local level because that's where we are seeing a lot of movement and innovation on the policy front. Solstice was founded to get as many people access to clean energy as possible.
Community solar addresses some of those needs, but there's also a whole set of barriers on the financial side. There are a lot of people that could theoretically get solar in some way, but who don't have the FICO credit scores, or the upfront savings to be able to participate.
One of the areas we focus on most closely are financial and policy innovations that empower those communities to participate. We are working under funding from the Department of Energy to develop an alternative to FICO, that's more specific to needs of community solar. We talk to people every day to try to get them connected to projects and so many have been paying their energy bill on time for decades, and just don't quite have a FICO credit score of 650 or 700 that they need to sign up. The people who are putting up the money for the projects would rather keep their risk low, and they see people with a FICO score below 650 or 700 as potentially to risky.
What we need to do is gather the data to show them otherwise, to show that someone who pays their bill on time every month is likely to pay their bill on time every month with a 10% discount.
We want to make something more accurate in saying, not can we rely on you to pay your mortgage, but will you pay your community solar bill on time? So we’ve come up with the EnergyScore, a machine-learning algorithm based on over half a million customer utility records. As I said, we've taken that aggregate data and made it into something that is both more accurate, in predicting people's future utility bill payment behavior, and more inclusive of low-income communities. We’re now testing it out in pilots in New York, and proving it out in a real-world context and using the data we collect to improve it, and we’ll be scaling it across the country in the coming years.
On the policy side, we're active in advocating for community solar programs, ones that will allow for third-party participation, for community-led solar projects, but also for policies that really encourage innovation on the inclusion front. Kelly Roache, our Director of Inclusion, has done amazing work building consensus between environmental and energy justice advocates like PUSH Buffalo and the NY Energy Democracy Alliance, as well as people in the solar industry, to push for policies that support financial inclusion, and that directly address the issue of finance. Two victories that Solstice has been a part of advocating for are winning a $21M pool of grant funding and a loan-loss reserve, and both of those went to support pilots innovating on low-income inclusion.
Our hope is that with this in place, we can work with communities in New York to prove that low-income folks can and should be full participants in the transition to clean energy, and scale that approach across the country.