loans for students

some of the casualties of the recent economicdownturn have been students and former students who are carrying huge burdens of loans fromtheir education. now these are not the government backed loans that have very low interest rates.these are loans taken out in the private sector that have much higher interest rates thatstudents use to top up the money they need for their scholarship. now what happened wasthat students came out of school at a time when jobs were hard to find and incomes weredepressed or at least not moving up. and so the money that they thought they would haveto pay off their student loans wasn’t there. and they were also in an environment whereit was hard for them to renegotiate these loans because they didn’t look like verygood credit risks. so a lot of people are

stuck with loans that they simply can’tpay at the rates that they promised to do. what should we do? well, if we were to forgive some of theseloans or have a government program that would help to bail students out, then you couldargue that anybody should take out loans because they needn’t worry that if they weren’table to pay that they would somehow be bankrupt. that somebody would always come to scoop themup and help them to pay. and that’s a problem that economists call moral hazard. that there’sa probability that people will take risks and behave badly that increases when theyknow there’s a safety net waiting to catch them if things go wrong. now putting thataside though i think it would be more useful

to consider some innovative solutions to thisproblem. the problem essentially was that no one predicted that things could be so badfor these students that they wouldn’t be able to pay their loans. not even the peoplewho lent them the money in the first place. it’s better for them if the students actuallypay. so how do you deal with this possibility, a sort of black swan that nobody thought somethinglike this could ever happen? well, one way is to link how students raisemoney for their education to the income that they’ll actually earn. so instead of lendinga student money you actually would buy shares in that student’s future income. you’dbecome an equity investor rather than a debt investor in that student. this is somethingthat a lot of people have wanted to do for

quite some time and there have been startupcompanies that have tried to figure out what the numbers would look like to do this butthere’s a lot of risk. you don’t want to constrain a student too much in his orher education but if a student enters college saying i’m going to become a corporate lawyerand then decides to become a poet, well the value of the shares might drop somewhat becausetheir expected income might be a little bit lower. so how do you make a good match betweenstudents who want to get some of their money right now that they would earn in the futureto pay for their education and investors who see a possibility of a high return? i think that to do that we need to structureinteresting contracts, we need to do the actuarial

basis to figure out how likely the studentsare to actually make these earnings and then we might have a shot at creating some of thesetypes of devices, these types of securities. but i think the most important thing is forthis to be something that can be widespread. if there are any regulations that are standingin the way of this we need to perhaps reconsider them because what’s going to make investorsmost attracted to this kind of investment is if they can diversify their risks by bundlingacross students. so just like you buy bundles of mortgage which are put together by governmentsponsored enterprises like freddie mac, fannie mae, sallie mae even for students, you wouldbe able to buy bundles of students who have certain credit ratings, certain tiers justlike those mortgages did that got us into

a little bit of trouble a few years ago. buthopefully we can do this in a way that’s transparent, that doesn’t exploit studentsand actually makes that money available to them with a slightly lower level of risk.