- Younger Americans are postponing major life events due to high levels of student debt.
- Innovative fintech companies are focusing on these social costs of student debt.
- Putnam is identifying leaders in financial technology as potential fits for our sustainable equity portfolios.
Nearly 45 million Americans have student loans totaling approximately $1.5 trillion, and the social and financial consequences of this massive debt load are coming to light (Source: Federal Reserve Bank of New York). Many student loan borrowers are at least one month behind on their payments. More than one out of ten, or 11.4%, were over 90 days behind on their student loan repayments at the end of 2018, negatively affecting their credit and long-term financial health.
The student loan crisis has increased considerably since the Great Recession of 2008. At that time, non-revolving loans such as student loans accounted for 62% of all consumer debt; by 2017, that figure jumped to 73%. Since the student loan program was federalized in 2010 through provisions in the Affordable Care Act, direct federal student loan debt is up 600%. The average graduate of the class of 2018 has at least $30,000 in student debt.
It’s increasingly clear there is a high economic and social cost to the student loan crisis. The social costs of student loan debt make it a natural fit for ESG investing.
The role of ESG investing
ESG, which stands for Environment-Social-Governance, is an emerging investment discipline that focuses on supporting companies that make a positive impact on one or more of these areas.
Why we think about sustainability
We believe ESG analysis adds to — and complements — our fundamental assessment of companies.
The demand for socially responsible investments has grown exponentially over the past two decades. The US-SIF Foundation, a leader in promoting sustainable impact investing, reports that social impact investing has grown from over $600 billion in assets under management in 1995 to $11.6 trillion in 2018, an 18-fold increase.
When an economic issue becomes a social issue
Individuals strapped with unsustainable levels of student loan debt have no protections via bankruptcy laws or statutes of limitation that apply to other types of consumer debt. Given the long loan terms (up to 25 years, in some cases), borrowers are still making student loan payments well into their 40s and even 50s.
The consequences of runaway student debt are sobering: Homeownership rates among individuals ages 24 to 32 dropped from 45% to just 36% over the ten-year period ending in 2014. The 9% drop was nearly twice that of other age cohorts during the same period—and the Federal Reserve places the blame on educational debt.
In a report published in October 2016, the Federal Reserve found that homeownership rates declined 1.5% for every $1,000 in student debt. Further, they discovered that each $1,000 in debt postponed homeownership by 2.5 months, suggesting that homeownership for today’s graduates carrying at least $30,000 in student loans could be delayed by more than six years.
Further downstream, the economic consequences are even more troubling. Experts believe high student loan debt causes individuals to postpone major life events such as getting married or having children. A 2018 University of Chicago/GenForward survey showed that, among individuals aged 18 to 34, 34% delayed buying a home, 31% delayed saving for retirement, 16% delayed having children, and 14% delayed getting married as a result of high student loan and consumer debt.
Fintech leading the way
Today, several innovative fintech companies are working to help solve the student loan crisis. Many focus on creating apps and other technologies to simplify money management and help borrowers develop strategies for paying down student loans in a cost-effective manner. They synthesize what is currently known about saving and spending behaviors with technology that young student borrowers prefer, helping them make better financial choices and manage their money using a smartphone.
Companies focused on solving social issues such as student loan debt via technology could be potential candidates for Putnam’s sustainable equity portfolios. Further, positive social impact and strong financial growth are not mutually exclusive goals; many of these technology companies are fundamentally sound and poised for significant growth.
Putnam offers two funds with sustainability objectives, and they use a research-intensive approach to identify companies that strive to solve a wide range of sustainable development challenges, including companies in the financial technology that take on such challenges.