Institute For The Future

Designing new mortgages & student loans to engender economic equitability

(This is part 2 of a series on creating free market tools for bolstering economic resilience against disruptions in the employment landscape. Part 1 (about automation insurance) is here.)

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Where will you be in 20 years? What work will you do, and where will you live? Amidst the vast uncertainty masking the future, one thing is probable. If you’re like 64% of Americans, you’ll own property of some kind. That statistic hasn’t changed much in half a century. Accruing value through property investments is part of many retirement plans, and owning a home is the part of the American Dream.

...or was.

Will Millennials ever own property at the rate of previous generations? At least right now, the answer is no. Millennials are spending more and saving less, and developing unrealistic retirement plans. Due to the Great Recession, many are hesitant to invest in the stock market (40%), buy a house (36%), or dedicate money into a retirement fund (19%). Also, only 8% trust financial institutions. They bore witness to their parents’ generation being led into unpayable mortgages, thus the subprime bubble.

 

In fact, Millennials would rather visit a dentist than listen to a banker. Given the explosion of student debt, a lack of enthusiasm toward additional debts is unsurprising.

Other factors behind millennials’ lack of home purchasing include the following. The unequal economic growth and decline of small business creation throughout most of America means property value in most of the country is unlikely to appreciate consistently. Complementarily, young people of means are moving to those few growing cities, leading to growth-stifling real estate costs.

It’s not a bad thing young people aren’t buying homes. It’s not a bad thing young people distrust banks. But I wonder if these things are necessary.

Right now, students can take out a loan with payments adjusted based on their income, called income adjusted student loans. There are lots of different structured options, but in most, your payments top out at 10% of discretionary income, and all remaining principle is forgiven after 20 years. IASLs are imperfect, in part because the lendee must pay taxes on the forgiven principle at the end of the loan.

One thing good about income adjusted student loans is that they can align the interests of borrowers and lenders. If the student goes on to get a high-paying job, more of the loan gets repaid. Lenders want that. Students want that. Creating more of these win-win systems creates trust through aligned interests between institutions and individuals.

 

The problem is, all of these income adjusted student loans are federal loans. Right now, there are are no private IASL lenders. Right now, there are more than 6 Million borrowers with some kind of IASL, totalling $330 Billion.

If private lenders offered income based repayment options, we would see the alignment of interests between these private institutions and students. This engenders trust. Right now, students know that lenders profit even if they don’t. Lenders don’t offer IASLs because banks prefer to play it safe, stick with known, proven business models. Offering IASLs would mean evaluating loan applicants on new factors, including perceived future earning potential based on degree and university. It also means taking automation and economic disruption into consideration. If private banks offered IASLs, they would be more likely to pursue other investments and lobbying efforts to promote stable, equitable economic growth.

Through my work with banks and insurance companies, I understand first-hand the trepidation institutions encounter when considering exploring new business models. Given myriad new data sources, startup disruption, increasing competition, and low interest rates, playing it safe becomes more dangerous than ever.

Which brings us back to considering home purchasing. What if private lenders offered income based mortgage loans? From a game theory perspective, that aligns new sets of interests. It would offset concerns about income degradation and unemployment caused by automation from individuals to large banks, who would actively map, using many lenses, perceived ? income in various regions around the country.

This is just a thought experiment- I’d be curious to hear your thoughts. Do you think private income adjusted student loans and private income adjusted mortgages would change the incentives for banks, and align the interests of lenders and lendees? What do you think would happen?