The Voodoo Economy of Student Debt: How the Hope of Higher Education Forged a National Crisis

"You take the blue pill, the story ends. You wake up in your bed and believe whatever you want to believe. You take the red pill, you stay in Wonderland, and I show you how deep the rabbit hole goes." - Morpheus ( The Matrix, 1999)

For the last three years, my team and I have been working to understand the breadth and depth of our nation's federal student debt crisis. If you're a fan of The Matrix, then you'll know what I mean when I say that we took the red pill. This rabbit hole is deep, and it certainly isn't Wonderland; this is a $1.4 trillion national catastrophe that is so complex it makes Churchill's "...riddle, wrapped in a mystery, inside an enigma," seem simple by comparison. Our quest has yielded a mountain of disconcerting information, including four salient, basic conclusions:

Getting into student debt is easy.

It is easier for a college student with no job or credit history to rack up a series of loans totaling over $100,000 than it is for an employed thirty-something with average credit to get a $500 credit card. There is so much fundamentally wrong with that statement. Both the credit card and the student loans are unsecured debt, so what's the difference?

The answer lies in cui bono, or who benefits. 

For credit card debt, this is simple: the credit card company makes a reasonable assessment as to the viability of the debt, and then it earns revenue off of its repayment. 

With student loans, the answer is murkier. Beneficiaries fall into two categories:

• Direct beneficiaries, such as the college, the government, loan servicing companies, and even the local economies that build up around colleges and universities; and
• Possible beneficiaries, a.k.a. the student debtor.

Think about it: an engineering major and a sociology major borrow the same amount of money to complete their education at the same four-year university. After graduation, the engineer will have an average salary of $61,000 per year, while the sociology major will be lucky to break $30,000. One clearly has a higher earning potential, and yet the government charged them the same interest rate and gave them the same amount of time to pay it off.

Understanding the complexities of the student loan repayment system is next to impossible using conventional means.

Most people are surprised to find out that all federal student loans aren’t the same. There are 32 different loan types, 59 unique loan status codes, and ten distinct loan origination date segments that all come together to determine which of the 100+ repayment, deferment, forbearance, forgiveness, and cancellation options are applicable. Finding the best solution is like looking for a needle in a stack of needles; often the only actual difference is in the fine print.

The government holds the note for all Direct student loan debt, which means that means the government is earning the interest on over a trillion dollars in student loans. As any good portfolio manager will tell you, it's all about assets under management: revenue increases are as easy as adding more money to the portfolio and retaining what's already there for the longest term possible.

The government has several brilliant retention strategies. Consider the most popular, most advertised, and most frequently suggested pathway for people struggling with their student debt, income-driven repayment (IDR) plans. The government publishes a "short" 26-page document outlining the four IDR plans it offers for Direct loans: the Revised Pay-as-You-Earn (REPAYE) Plan, the Pay-as-You-Earn (PAYE) Plan, the Income-Based Repayment (IBR) Plan, and the Income-Contingent Repayment (ICR) Plan.

I'm not going to explain the differences or outline each plan. The Internet does that ad nauseam. The things that no one talks about is the complicated method of determining eligibility per the loans in a given portfolio and how interest is accrued and/or capitalized under each plan. Suffice to say that the odds are always on the house.

Another brilliant strategy to is to incentivize borrowers to consolidate their loans, either to move them to one of these IDR plans or to simply extend the repayment term of their loans. You'd think that having one loan instead of ten would simplify things.

You would be wrong.

Every loan in a consolidated loan remains as a zero balance "zombie" loan that colors the consolidated loan with IDR plan eligibility attributes. Do you need to consolidate to get an IDR plan? Not necessarily, but if you already did, those old loans paid off through consolidation are going to be there forever, influencing your eligibility for plans and programs that may actually provide some relief. 

Once you have student debt, the only sure way to get out of it is to die.

Even then, you’ll be taxed on the debt as income.

The key to unravelling this knotted ball of red tape? A curious mixture of recursive algorithms and machine learning.

Student Debt Solutions is actually the third version of student loan analysis software by eFiscal Networks. The first two versions fell victim to the premise that the student loan economy was benevolent and simple. In reality, it’s a roiling, volatile marketplace where the rules are as steadfast and dependable as "'I' before 'E', except after 'C'."

(Side note: There are 923 words in the English language that break the "'I' before 'E'" rule. Only 44 words actually follow that rule.)

We developed Student Debt Solutions to be a smarter and more agile platform in order to create additional depth and breadth for each analysis. I can wax poetic on the nitty gritty details for hours, but to summarize:

• We harness the power of machine learning (and, incidentally, provide some really powerful reporting capabilities using the same data sets).
• An asynchronous, recursive, single-page application processes all of the business rules and uses its own user interface to add and adapt logic rules without re-coding a single thing.

So far, our platform is the only thing I've encountered that truly empowers consumers to understand and take control of their student debt.

If you have student loan debt...

Try us out. The first 50 people who email me at HELLO [AT] STUDENTDEBT [DOT] SOLUTIONS can go through our patent-pending student debt analysis for free. If you miss the freebie sessions, you can still go through our portal at a special LinkedIn rate ($24.95) at https://studentdebt.solutions/linkedin.

If you work with people that have student loan debt...

If you want to become an affiliate, please reach out to us too. We have a new pilot program launching in 2018. You can learn more about our features and benefits via this slide deck, or just give us a call at 855-283-2356 and we can set up a demo.