Monday, July 07, 2014


Cherry Picking

You know the problem with serving the needy?  They’re just so...needy.

Several Silicon Valley startups have decided to cherry pick the least needy students and make a buck from them.  They’re designed around identifying the recent graduates most likely to repay their loans, and offering them preferred financing.  (Hat-tip to @tressiemcphd for catching this one.)

You’d think such a thing wouldn’t be necessary.  In any rational universe, students would be able to refinance their loans without much trouble.  (Taken farther, in a rational universe, they wouldn’t need loans in the first place.)  But that isn’t always possible, which leads to a market opportunity.

That’s not to say that the startups have necessarily done their homework.  Data-analytics types will feel their eyes roll back in their heads when they read quotes like these:

“Intuitively, it just makes sense,” said Paul Gu, co-founder of Upstart. “The same sort of person who is going to care about their GPA in college is later going to care about their FICO score. That same person tends to be somebody who is very organized and is going to be disciplined with their money.”

Winners are just so much more efficient than losers.  

In a way, I’m grateful to the startups for demonstrating the basic flaw in treating loans as aid.

The point of “aid” is to help the people who are least able, financially, to attend college.  Cherry picking the people with the highest likelihood of repayment should, all else being equal, make the remaining public program look that much worse through a process of adverse selection.  Take away the easy cases, and you’re left with the hard cases.  

In other words, a sort of short-term rationality would lead to a greater long-term irrationality, because aid and cherry-picking operate by different logics.  Aid is based on helping those who need it.  Profit, here, is based on finding the ones who don’t really need it.  If the startup succeeds -- a big “if” -- then I predict we’ll start seeing ideologically-based victory dances celebrating the superior efficiency of the private sector, and ignoring its roots in cherry picking.  

I’m all for efficiency in the service of a coherent mission.  But efficiency for its own sake -- in econ 101, I remember learning that profit derives from identifying inefficiencies -- can easily send you in directions contrary to your mission.  The insidious part of that is that it happens step by step, and each step seems obvious or inevitable at the time.

From the perspective of one of the lucky few students to whom the startup reaches out, the appeal is obvious.  You get a better interest rate, and you replace a loan that can’t be discharged in bankruptcy with one that (presumably) can.  You may even get better customer service.

But as a substitute for a meaningful financial aid policy, this is nuts.  

In a way, it’s reminiscent of Sebastian Thrun’s statement that students from non-elite universities just weren’t capable of handling the demands of MOOCs.  A disruption that was supposed to save higher education turned out to work only with the students who least needed the help.  As for everyone else, well, on to the next thing.  Only the worthy shall be disrupted.  The rest can continue to flounder in public institutions whose funding pales next to what any self-respecting venture capitalist could blow on the next variation on instagram.

I can’t exactly condemn the startups for offering a service that should be freely available anyway, even if their methods seem a little, uh, undercooked.  But the sheer audacity of the business plan should give the rest of us pause.  What if we were to direct that kind of creativity to helping the people who actually need help?  What if we decided to disrupt economic polarization, instead of universal programs?

Yes, it’s harder.  Those of us on the ground have known that for a very long time.  Cherry picking our best successes, and then blaming us for what’s left, just makes it that much harder.

Maybe the cherry picking people who make the loans have been cherry picked by others in their lives?
The situation DD describes is eerily similar to the attacks on public K-12 education by the charter school section (which also includes for-profit schools, as well as many charters that are "not for profit" on paper, but contract many of their services out to a for-profit management company).

Charters tend to thrive in large cities with high poverty. While officially enrollment is by lottery, there is often an arduous application process that families must complete to participate in the lottery (thus introducing selection bias for those families who can navigate the process). More cherry picking happens after enrollment as most charters do not systems in place in serve students with serve learning disabilities (which public schools are legally required to accommodate) and they reserve the right to dismiss students with behavioral problems (whom public schools may not dismiss) and students with low test scores. Some of the most prominent players in the Charter market (Geoffry Canada, Eva Moskowitz) have track records of dismissing large numbers of students who test poorly on standardized exams. The charter lobby and corporate-reform crowd then point those test scores as evidence of the success of charters, yet the students who took the state tests are only those who would test well in any environment.
I understand why this development could have the effect DD says it will. And that effect will be a bad one. But I'm not sure this development is wholly a bad thing. To be fair, DD doesn't say it's "wholly" a bad thing, either, but I see a lot more benefits here:

The lenders might make a profit, and in that sense, they're no different from a bank that negotiates, say, a Home Equity Loan to help the homeowner pay off debt. Except in this case, the loan might be available to a wider pool of people (e.g., people who don't own a home on which to draw an equity loan).

It *could* become like the charter school example, with people pointing to the success "private-sector loans" as the reason to finally end or sharply curtail the federal student loan program. But in doing so, it might actually underscore the problem: college costs too much and students are taking out a lot of loans they find it very difficult to repay. The lending is bad not because it creates the problem, but because it highlights the problem.

Finally, the end result could (though I wouldn't hold my breath) serve as an argument for some sort of student loan forgiveness. People who secure loans through these startups are paying off the loans and right away. So the federal programs could lose some more money in writing off or forgiving bad loans because it's already been paid by those who went to the startups. Sure, I imagine the feds lose interest money--and maybe that's a big loss--but are they really in it for the interest?

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