Illustration of percentage mark
Illustration by Chris Gash

How Can You Take a Smart Approach to Student Loan Debt?

We asked three members of the Booth community: Madeleine Barr, AB ’16; Chad Miles, ’13; and assistant professor Seth Zimmerman.

Madeleine Barr, AB ’16, is a cofounder of CommonCents, an app that helps college students use spare change to repay their loans. The start-up won the College New Venture Challenge in May.

My initial principal loan balance was about $28,000. I didn’t get any correspondence from my loan provider until I was a senior in college. When I got an email that said I had accrued $3,500 in interest, it felt huge to me. I definitely made more than that through on-campus jobs and paid internships during school, and I could have put that money toward my student loans. If the provider had been sending notices, maybe I would have been sending in money sooner.

Many students don’t understand that interest is accruing on your loans from your first day of college. Once the grace period expires, that interest is added to your balance, so then you’re paying interest on the interest.

There’s an app called Acorns that allows you to send spare change toward your investments. I wanted to use it, but then it occurred to me that my student loans are accruing way more interest than whatever return I would be getting from an investment app.

With CommonCents, you set a daily target that is your daily interest accrual on your loans. For the average student, that is $1.33 a day.

Madeleine Barr

With CommonCents, you set a daily target that is your daily interest accrual on your loans. For the average student, that is $1.33 a day. You can set the app to round up your spare change on purchases and put it toward that target. You can also get a push notification: “You have 20 cents left. Do you want to hit your target for the day?”

If you hit that daily target from the time you’re a freshman in college, there will be no interest capitalized at the end of your grace period. Say the average student has $35,000 in loans. With accrued interest, she would pay about $57,000 by the time they’re done. But if he meets that $1.33 daily target, he can decrease that final cost by almost $20,000.

Student loans are a totally different category of debt. For a house or car, you pay it down over the period that you use it. For student loans, the repayment period may be only 10 years—yet you’re supposed to be using your education for your whole life. You should have 40 years to pay off your loans, not 10.

The dialogue around student loans is that people often will say, “Well, not everyone should go to college.” It makes me angry when people have the perception that it’s the students’ fault. There’s a lack of transparency about what people are getting into. If we can change perceptions, that will be really helpful.

Illustration of pencils Illustration by Chris Gash

Chad Miles, ’13, is associate vice president of strategy and analytics at LRAP (Loan Repayment Assistance Program) Association, a for-profit company that partners with colleges and universities across the United States to help students overcome the burden of student loans, based on their postgraduation incomes.

We partner with over 100 colleges across the country to give LRAP to students as part of their financial aid package. It’s a safety net. If a student graduates and earns less than $40,000, we will reimburse all or a portion of their student loan payments until their income rises or their loans are paid off.

For example, one of the graduates we are providing assistance to right now works at a Chick-fil-A. This may not be his long-term career aspiration, but while he is navigating these early years of his career journey, we are providing a significant “hand-up” to him by helping repay his loans. On average, LRAP is providing over $850 per quarter to graduates receiving assistance.

The LRAP model has proven, over many years now, to be a more efficient way to deploy financial aid and help manage student debt.

Chad Miles

Colleges use LRAP for a few different reasons, primarily to differentiate their institution in the minds of students and families who are increasingly worried about value, affordability, and student debt. LRAP is also being used to shape the incoming class. Perhaps a college wants to encourage growth in specific majors or other programs. Right now, our core client base is composed of not-for-profit, liberal arts–focused colleges.  The college pays LRAP Association an annual fee to fund the program. The student receives the benefit at no direct cost to them.

The LRAP concept has been around law schools for quite a while. Two of our advisory board members were deans at Yale Law School when they first created the Yale LRAP in the 1980s. The program gave law students the freedom to practice law in any arena without overly burdensome income and loan payment considerations. 

The LRAP model has proven, over many years now, to be a more efficient way to deploy financial aid and help manage student debt. Unlike traditional student aid, which is awarded based on a snapshot of a parent’s income and assets at the time of application, LRAP benefits are based on the student’s income and need once they graduate. 

Seth Zimmerman is assistant professor of economics. He studies the economics of education. 

We see big differences in income between people who go to college and those who don’t. That gap has been growing for the last 30 years. If college graduates earn so much more, why aren’t more people going to college? One reason might be that they are constrained in some way. Another might be that people who are ambivalent about college, but go anyway, might not end up earning so much more.

To try to answer this question, we looked at some of the least-qualified people who get into college in Florida. These are typically not great students—they might score in the 20th percentile on their SATs. But it turns out that when they’re admitted to the state university system, they do quite well. Their graduation rates are similar to those of the average student. And they do well in the labor market afterward. Their earning returns to college are pretty similar to what you would observe on average. 

The results suggest this core question: When you think about going to college, is taking out the loan dollars worth it? The one-word answer is yes.

And if you go, you should be sure to graduate. It doesn’t look like the students with the biggest debts are the ones who are actually defaulting. When you look at default rates, the students who don’t graduate have much more trouble paying back their loans.

When you think about going to college, is taking out the loan dollars worth it? The one-word answer is yes.

Seth Zimmerman

Other research suggests that you want to go to the best college you can. Those colleges invest more resources in their students, and graduation rates are dramatically higher. Your graduation rate closely tracks the institutional rate. The returns vastly outweigh the differences in cost between community college and a state university. It’s not close.

There are some policy interventions around student loans that could be helpful. We know that you earn a lot more if you go to college, but if those earnings aren’t aligned with the time you have to repay the debt, that could be hard. It’s also possible that there are behavioral barriers. Navigating the student loan system can be difficult, and interventions aimed at making that easier could be helpful.

The US government has programs that cap what you pay as a percentage of what you’re earning. The goal of those policies is to align what you’re earning with what you have to pay back. People are increasingly signing up for that. If I go to Princeton and take out a lot of loans, or if I go to law school, I might feel pressure to take a corporate law job or a job in finance. If instead, for example, I’m a medical student and I want to practice medicine in an area with many poor residents, those programs that cap my payments could be something to take advantage of. 

One thing that concerns me about some of the research I do is that it’s very earnings focused. The market returns to different degrees may not reflect their social returns.

—As told to Amy Merrick