Skills as Collateral: Why Not Ask Employers to Co-Sign Educational Loans?
College affordability has gone from the arcane to the mainstream, with efforts to curb college costs quickly becoming a litmus test for presidential hopefuls. With good reason: an estimated 45 million borrowers now owe $1.5 trillion in student loans, more than any other category of debt besides mortgages.
But the cost of college is just one side of the affordability equation. Far too many students are leaving college without the skills they need to generate a return on their educational investments.
Despite record-low unemployment, job offers for recent college graduates continue to decline. Scarcely 40% of the Class of 2018 received job offers after earning a college degree. And 41% of all recent college graduates are underemployed.
The challenge stems from the fact that employers just aren’t “buying” degrees the way they used to, and students are left holding the bag. In a recent national survey, only half of employers said a degree is a “fairly reliable representation” of a candidate’s skills and knowledge — and almost two-thirds said they were actively working to de-emphasize the degree in hiring or exploring how to. And surveys by Strada Education Network and Gallup found that only 40% of Americans with bachelor’s and 48% with associate degrees strongly agree that their education was worth the cost. Only 26% of working adults with college experience strongly agree it is relevant to their work and day-to-day life.
This situation casts doubt on how well-prepared students are to enter the workforce. It reflects a serious and growing disconnect between the skills the employment market demands and those acquired by students at colleges and universities.
Against that backdrop, colleges can sell lazy rivers, luxury dorms, championship-caliber football — and claims of an easy path to great employment. But students have precious little data to validate those claims. It’s a dynamic that invites students and families to make emotional decisions on education divorced from labor market realities.
The challenge stems from the fact that student loans ignore the most basic tenets of lending. In other major categories of personal lending — mortgages and auto loans, for example — the value of the collateral drives decisions and loan terms. Similarly, business loans require a sound plan for generating the revenue necessary to repay the loan. Student lending is, in contrast, unsecured lending without any demonstration of future ability to pay.
Federal loan programs don’t view a degree in puppetry as any different than a degree in chemical engineering. Far too often, this leads to the accumulation of debt with little to no return. Private lending also does not differentiate, but compensates by almost always requiring a prime or super-prime co-signer for approval. This reliance on backward-looking criteria, like credit scores, irrevocably links the ability to borrow to the earning power, educational attainment, and wealth of a student’s parents — reinforcing structural inequities across generations.
What if, instead, student loans were tied to the skills acquired by the student? What if earning power formed the basis for a security created in the process? Labor market value would drive lending, and credentials — and skills with less value in the marketplace would receive less favorable terms.
Such an approach would be particularly powerful if employers had a role in the business of student loans, making a financial commitment to students who successfully obtain the skills industry needs. A loan “backed” by an employer could offer more favorable terms to the consumer and create incentives for students to evaluate programs based on the likelihood of employment after graduation.
Employers are hungry for new ways to grow their talent pipeline and have shown an increasing willingness to put up big money. Major corporations like Amazon and AT&T have announced huge ($700M and $1B, respectively), multi-year investments in worker retraining, and companies are increasing their offerings of education as a benefit to attract better talent. Through my work, I’ve talked with hundreds of companies looking to hire who would be willing — eager even — to invest in a potential hire’s education when and where the students share in the responsibility for positive outcomes.
The imprimatur of employer support alone cannot address the national crisis of runaway college costs. But it might lead to healthier and more sustainable financial outcomes for borrowers. From an accountability standpoint, employer backing also offers the ultimate signal of a program’s quality.
Employers will vote with their feet — and their dollars — faster than legislators can defund a public workforce development program or a higher education accrediting agency can revoke a college’s stamp of approval. And if an employer is unwilling to “co-sign” for the cost of an education or training program, then it’s not likely a program that leads to a positive return on investment.
This would be a new frontier for higher education finance and accountability — allowing employers to act as arbiters of quality, gauging and endorsing education outcomes and credentials by co-signing student debt.
The likelihood of any of this becoming reality is far from certain, with dimming prospects for a rewrite of the federal Higher Education Act and the vast complexity of the federal student loan system.
Still, policymakers feel pressure to create new federal measures to hold institutions accountable for outcomes, or at least steer higher education investments toward programs that will pay off.
As difficult as that task may be, policymakers may find a new and powerful ally in employers.
All the trends point to a new wave of education and training where companies can use their financial heft to tip the scales in favor of affordability.
By “co-signing” student debt, employers can help employees pay for their educations while ensuring the credentials they earn will help move them — and their companies — forward.