Morgan Stanley
  • Access & Opportunity Podcast
  • Nov 3, 2021

The Snowball Effect of Student Debt


Carla Harris : 45 million borrowers in the U.S. owe $1.7 trillion in student debt.

Today, we ask how we got here, and what needs to be done to stem this crisis.

Farrukh Siddiqui: The landscape of student debt is so complex and convoluted that navigating that just becomes, for some people, literally impossible.

Carla Harris : We'll hear from entrepreneur Farrukh Siddiqui (Fuh-rue-k Sih-d-key), and about his mission to refinance student loans using income share agreements. And later, I'll speak with Betsy Mayotte (May-yacht), the president and founder of The Institute of Student Loan Advisors.

Betsy Mayotte: People talk about the student debt crisis all the time and it's a true thing. It's a real thing. But the fact of the matter is student loans are the symptom. The problem is the cost of higher education.

Carla Harris : Welcome to Access and Opportunity, I’m your host Carla Harris. We’re telling the stories of individuals working to drive change within their communities. We provide context about racial inequities and share tangible examples of how ideas around access and opportunity are being made real every day.

Based on findings by the Federal Reserve, as of 2021, $1.7 trillion in student loan debt is collectively owed by 45 million borrowers. In this episode, we’ll understand the size and scope of the student debt crisis as well as explore some of the more novel solutions to tackling this issue. Our first guest, Farrukh Siddiqui, is on a mission to change how we finance schooling.

Carla Harris : Farrukh has always had an interesting relationship with education.

Farrukh Siddiqui: I was a little aimless coming out of high school. Of course, you know, being from a Southeast Asia background, education is always emphasized, but I guess I wasn't too into it. Uh, so, you know, took courses for a couple of years, but I never really finished my degree. Then I just got, started working and got involved with that. And actually I was much better at work than studying at least in those early days.

Carla Harris: Before Farrukh knew it, he got married and had kids. The first time he considered finishing his degree was when his own children were approaching college age.

Farrukh Siddiqui: I kept telling them to go to college, get educated. And I started to feel like a hypocrite that, "Hey, you haven't completed your degree." So I actually went back and finished my degree in Florida. I went back to University of Florida. And so I graduated four years ago.

Carla Harris : More financially secure and savvy than most students, Farrukh was able to avoid student debt while obtaining his degree.

But he couldn't ignore what was happening to millions of others all around him.

Farrukh Siddiqui: It was actually a surprise to me as how bad student debt crisis has become. You know, it's one of those things, right, when maybe a problem is not in your vision, you don't recognize it, but once you start to see it, then all of a sudden it's the family members and the friends and the people that are close to you, you get to appreciate what they're going through and all the stories that I began to hear from all sorts of people.

Carla Harris : What hit Farrukh even harder than the sheer scale of people affected by student debt is the ways it impacts all areas of their life.

Farrukh Siddiqui: The statistics show, like more than 90% of people have suffered severe anxiety because of student debt: 90%. That's like, not more than nine out of 10. More than half have suffered depression. Right. And once we started to kind of peel the layers of that onion and see what's going on and how people are being devastated it's heartbreaking. We're burdening younger people with these problems and they're not equipped to handle them.

Carla Harris : In a world where certain groups of people are disadvantaged from the start because of the racial wealth gap, it should come as no surprise that members of those communities are set back even further when student debt is added to the equation.

Farrukh Siddiqui: Student debt is adversely affecting minorities. African-Americans for example, the average student debt they have is $52,000. And the overall average is 38,000. You know, that's almost what, 40% more that they're burdened with. You know, two thirds of, Hispanics have, student debt, you know. Statistics also show that Latinos and Hispanic Americans are the most likely to delay life, meaning starting families, buying houses, because of student debt.

The football analogy that I usually give is like starting every drive from the one yard line. Like, why are we creating all this handicap? And this is our future, you know. The young people that come in, come into the economy and really will become the future generations that drive our country and drive our workforce. Why are we having them start off like this?

Carla Harris : To help level the playing field, Farrukh founded Defynance in 2018. The company helps get students out of debt through an income share agreement.

Now, let's get this straight: an income share agreement, more commonly known as an I-S-A, is when a person contractually agrees to share a percent of their income with an investor for a set payment term. In exchange, they get financing to cover their education upfront. A handful of schools, like Purdue, offer I-S-A's to incoming students as an alternative to taking out a traditional loan.

But Defynance operates a little differently. Instead of creating new agreements with incoming students, the company works with former students to refinance their existing student loans. In this way, they hope to help lower that $1.7 trillion debt figure.

Farrukh Siddiqui: From a market opportunity perspective, we are the only company that's focusing on actually getting people out of student loans. We're saying let's pay off the debt, get them out of debt immediately, switch them to an income share agreement and a structure that's much more favorable for them.

Carla Harris : Unlike in the traditional lender-borrower model, where the lender demands payments no matter the borrower's financial or personal circumstances, or the lender profits from late payments that could end up punishing the borrower, in an income share agreement, Farrukh believes that everybody's goals are aligned.

Farrukh Siddiqui: We're not lending money, so they're not borrowers. We are sharing your income. So if you're doing well, we're going to make more money because your income is going to go up. But we also take the risk. So if you're not doing well, income goes down. We are also not making money. So guess what? We're incentivized to help you both ways.

If income falls below 25,000, like in our program, they don't have to make a payment at all. We pause their payments and then help them find a job through our career resources marketplace that's going to hopefully improve their situation, minimize their unemployment and optimize their income.

But also protection on the upside is a payment cap. So if you do very well in your career, you're going to hit a certain amount of payments. Your contract will end early if it needs to end early, because you've hit that cap.

So we've kind of built the protections on both sides, and that is one of the biggest benefits of how we solve this problem by aligning everybody's goal so that everybody's working for the same thing and everybody's succeeding together.

Carla Harris : And one unspoken benefit of no longer having student debt tied to a person's name is the elimination of the snowball effect it has on their financial health and their ability to build wealth.

Farrukh Siddiqui: Immediately that debt is removed from their credit report. So now hopefully their credit score goes up and they're able to buy a car, for example, right. And they're able to buy a house with a cheaper interest rate.

It used to be: people came out of college, they got good jobs, they started families, they bought houses. And that's how people build wealth in this country, they bought their first house. For most people, that is your investment in your wealth.

Carla Harris : Farrukh is chipping away at student debt day-by-day, but he knows his work needs to be complemented by change from universities.

Farrukh Siddiqui: You know, there's no accountability between the education that you're getting and the outcome that you're achieving afterwards. You can go to Columbia University, one of the best universities in the country, in the world. Is the cost of education at Columbia, which may be three, four times as much as going to a public university, is that going to produce three times, four times more income for you? No. So that, that's what I'm talking about, right? Like that doesn't make sense to me.

So I think that chain needs to be fixed. That accountability needs to be created. I think we have to document what happens afterwards and prove that empirically, that this doesn't make sense. If you get a social work degree, you should not be charging the same for that degree as you are for engineering degree, for example. So there's many things we can talk about in terms of things that are causing this problem. This is a problem that is gonna take a lot of time to solve. And I think a lot of different stakeholders have to get involved to solve it.

Carla Harris: And those stakeholders are going to have to get creative. When it comes to how student financing is administered today, Farrukh has noticed that most solutions focus on debt -- from refinancing debt to debt forgiveness.

Farrukh Siddiqui: I don't necessarily believe that just forgiving debt is the solution, because it's still underlying. The debt doesn't go away. It's still there. If you haven't fixed the underlying problems five years from now, we're going to have the same problem again. That's why I think we have to design better structures for how we fund education and align the goals between the institution that's giving you the education and the outcomes that they are producing. And I just wanted to kind of bring an outside the box perspective to this, right? And I just think we need better solutions and that's what we want to work on with Defynance.

And I think long term, even as Defynance scales and grows, there's many ways of handling this and tackling it because one company can't solve the whole crisis.

Carla Harris: Defynance has received nearly $10 million in funding requests, so there's an appetite for this alternative method of financing. But the company is just at the beginning of its journey with a goal of deploying $5 million in its first year of operations.

While income share agreements are one approach to addressing the problem, it's going to take the collective effort of many to tackle this student debt issue.

One of those people taking on the fight is our next guest, Betsy Mayotte.

Betsy works to enact change by sharing her comprehensive knowledge about the student loan industry with others. Betsy founded the Institute of Student Loan Advisors, or TISLA (Tis-lah) for short, to ensure that all borrowers have access to free, neutral, and clear student loan advice. Because like Farrukh, she recognized how confusing navigating the landscape could be for borrowers.

Carla Harris: Betsy thank you so much for being here with me today and it's a pleasure to have you on the show. Are you ready? Can we jump right in?

Betsy Mayotte: I'm ready. Thanks for having me. I'm looking forward to this.

Carla Harris: Okay. Me too. So let's start with, how did you get your start in the student loan industry?

Betsy Mayotte: Oh, that's a good question. Sometimes I tell people that I've been in the student loan industry since the earth cooled. But I started off in the student loan industry, getting a job at a student loan servicer, taking calls on the phone. Really because at the time that was the only full-time job I could get out of college. And I really wanted to move out of mom and dad's house. And then over time I ended up at a nonprofit, a student loan company and worked my way into their compliance unit. And I was there for almost 20 years. And then that company changed its mission, and while I thought their new mission was very important, which was essentially to help people prevent taking on student debt in the first place, I came to the conclusion that I could have a greater impact helping people that already had student debt. And I saw there was a real need out there for free expert and neutral student loan advice and dispute resolution. And that was in 2017 and we were busy from the moment we opened our virtual doors.

Carla Harris: Now you came across the student loans message board one day. Can you tell me about the story of that day?

Betsy Mayotte: Reddit is part of the genesis of TISLA actually. I discovered Reddit eight or nine years ago, and I was poking around and came across a sub that was specific for people asking student loan questions, and I was horrified. The sub is much better now, but at the time, there was some really poor information and inaccurate information being given. And it sort of shocked me that consumers were going to the internet and to strangers, anonymous strangers no less, where they had no idea what their background or credentials were, and asking questions about something so important and about something that could affect their lives for such a long time through Reddit. And that was one of the things that led me to realize that people are looking for a third party, neutral service for help with their student loans.

Carla Harris: You know, let me just back it up a little bit. One of the reasons, listeners, that we're talking about this today is that, you know, we're really trying to focus on, you know, wealth creation, wealth building, maintaining your wealth. And you know, when I think about the continuum, I think about the first piece is, “How do you get your money?” The second piece is, “How do you keep your money? How do you invest it and grow it?” And then lastly, later on in your life is, “How do you protect it?” And as we all know, we've seen lots of articles and seen many things on TV that talk about the fact that student loan debt, especially over the last decade or so I'd say even two decades Betsy it's become really onerous for lots of people. So here we are in 2021, and there is a total of $1.7 trillion in student loan debt across 45 million borrowers. So Betsy, let's talk about how did we get to this level and how have these numbers changed over time?

Betsy Mayotte: Oh, I love that question. People talk about the student debt crisis all the time and it's a true thing. It's a real thing. But the fact of the matter is student loans are the symptom. The problem is the cost of higher education. You know, and the cost of higher education has increased exceeding inflation for many, many years. And that's the issue that we really need to solve. And it especially affects the middle class. The very low income families can often get a so-called free ride or close to a free ride at many institutions. But once you get into the low, lower middle-class to upper middle class, that's who's taking on the significant amounts of debt.

The 2008 recession saw a lot of older people, the quote, unquote non-traditional students going back to school and taking on debt in the first place. People still think student debt is a young person's issue, so to speak. But the fact of the matter is that half of all student loan borrowers, over the age of 30, a quarter are over the age of 45 and the fastest growing population of, you know, age group, of people that carry student debt are the over 65’s and they’re the ones that also tend to struggle the most. And then of course we have parents that are taking on debt on behalf of their children going to school, either by co-signing on a private loan or taking on Parent Plus loans.

Carla Harris: So what else can you tell us about the profile of the borrowers and the most common misconceptions you hear?

Betsy Mayotte: One of the most common misconceptions that I hear from the general public as well as policymakers is they assume that the people that are struggling are the people that owe six figures in student debt. And the fact of the matter is the people that struggle the most with student debt are the ones that owe less than 10,000, if you can believe it. And the reason for that is that if you owe six figures in student debt, chances are you got your degree and not only did you get your degree, you probably have a degree beyond an undergraduate degree. So you're employable and employable probably in a higher income level field or area, whereas someone that owes less than $10,000, they almost certainly didn't get their degree. So they have debt and no degree. Not only are they not any better off than when they first entered college, they're worse off because they don't have that credential but they still owe the money.

Carla Harris: Oh man, that is a major playbook point there. So it, you know, if I could just digress here for a second, that says, even though you might already have a lot of debt, keep going, get deeper in the hole, but get the piece of paper because you raise the probability that you'd be able to pay it back.

Betsy Mayotte: Exactly. And you know, there's alternatives, you don't have to keep taking on the debt. There are other ways to get your credential without piling on the debt. One of the things I'd like to see more families do is consider a lower-priced institution for at least the first two years. So the average time it takes to get a four-year degree is actually five years. And the reason for that is because two-thirds of students change schools, majors, or both at some point during that four-year period, which means they have to redo some credits. Go to a state school, go to a community college that you can probably do debt-free for the first two years, and then transfer those credits into the dream school. So that's one way of saving money. The other is, if you do find yourself feeling like you need to drop out because you can't afford to continue, don't drop out altogether. Maybe take one class at a time. Most schools will let you pay for that class over the nine month or the three or four month semester. Work full time, take one or two classes at a time. It's going to take you longer to get that credential, but you'll get that credential and you'll get it without piling on the additional debt

Carla Harris: Wow, thank you for those playbook points. Those are excellent strategies. You know, what can be done to make it a little bit more clear for people to understand what they actually are taking on, or transparency around, you know, how you might pay it back or how you might manage that?

Betsy Mayotte: It's funny, you know, over my decades, working in this industry, who the finger is pointing at has moved. When most federal loans were done through private lenders, the finger got pointed at those private lenders. Now that they've eliminated that federal program and all federal loans come directly from the federal government, that finger is starting to get pointed more at colleges and universities. You know, it's about providing the right information at the right time. And right now, anyone who takes out a federal student loan goes through what's called entrance counseling. And that explains the impact of their debt and the terms and conditions and so on, but they don't get that counseling till after they've taken out that first loan. So they're already moved into their dorm. They're going to have their REM posters on the dorm room wall already. I just dated myself. But I think a really simple thing that policy makers could do that would have a good impact is to move that entrance counseling to the FAFSA. Now, the FAFSA is the application you fill out to get financial aid in the first place. All the counseling's done online now anyway. So move that entrance counseling to the FAFSA when they're applying for aid in the first place, so they get that knowledge before they're making the debt decision rather than after the horse is already out of the barn.

Carla Harris: And running quickly down the road.

Carla Harris: So let's talk about solutions. What are some of the solutions that you've been seeing that people are trying to bring to the table to help curb the growing figure? And let's talk a little bit about income sharing agreements as a part of that question. Because it feels like to me, Betsy -- and maybe I'm missing something so I just want to be clear on this playbook point -- it feels to me that as a tool, this is also a way to help you manage your budget going forward. It's not depending on you’re managing your own money. They're taking their money out first, and then you can do whatever you want to do with the rest of it.

Betsy Mayotte: Yes, income share agreements or ISAs, they've been sort of bubbling up in the background for the last 10 or 15 years. They're starting to become more prevalent. So prognosticating, I don't ever see ISAs becoming the main tool for paying for college. I think it will always sort of be in the background and will be available in some limited capacity, but I don't see it taking over replacing student loans. The trend I do see is -- you know, going back to what we were talking about earlier about how student loans are just the symptom, the problem is the cost of higher ed -- I do see us starting to make some progress there is America's College Promise, which, if it passes as written, it would create a free two-year college and an easier pathway to transition from that two-year degree into a four year degree. That policy change alone I think could make significant steps for our future accrual of student debt.

Carla Harris: So what other structures do you think will play more of a role in combating the student debt?

Betsy Mayotte: We're still trying to plug and play the different options that are available to student loan borrowers as far as lower payment options. I'm seeing an increased focus on financial literacy, and earlier financial literacy. And I think if we continue in that trend, that will also help families make better choices and more informed choices when they take on this debt.

Carla Harris: Yeah. I could not agree more, Betsy. You know, people often ask me, you know, what's one of the dream jobs, and while I have a few, one of them would be to be Secretary of Education simply so that I could mandate financial literacy in third grade. Because I think that when you're eight years old, you know, a little bit about money at that point. So I do think that would certainly make a difference.

Carla Harris:  So, you know, 2022 it's projected to grow another $3 billion. I mean. What do you see for the future of this if we don't have other measures?

Betsy Mayotte: Well, so there's a couple of things. First of all, from a cultural perspective, we need to make it more acceptable and expected that parents are talking finances with their kids. I've done a lot of research on financial literacy or lack thereof and what was really fascinating to me is 68% of parents would rather talk to their kids about sex then finances. And that needs to change. I mean, I grew up in a household, my father was, led a nonprofit credit union, so financial literacy and talk of finances was, you know, definitely earlier than third grade in my house, but I, you know, I'm the exception rather than the rule. The other thing is I'd like to see families look at the projected student debt in a different way. I don't care how financially savvy you are. If you hear the number a $100,000, like, you know, that's a big number. But I don't feel like you can absorb what the impact of that number is. So I'd like people, if they're looking, if their child's looking to enter college and they see, “Oh, I'm going to have to borrow $20,000 this year.” I want them to take that $20,000, multiply it by five. Because remember a minute ago we said it takes an average of five years to complete. So now we're at $100,000, and then translate that into what that payments going to be, and I want to see families think about it in terms of the future payment amount, rather than the total amount. That number makes an impact. And I think if we can get people to start thinking of future student debt in that regard, I think people will make different choices because they'll understand the impact of the debt a little bit better.

Carla Harris: Understood, understood. Because as we talked about at the outset, Betsy, this has implications. If you cannot pay it, it can impede your ability to grow wealth. And that's really what we're here talking about and the playbook around, how do you do that? So we're not saying that you shouldn't go to college. Of course we think you should. That is the smart idea. And it certainly does propel your success and your ability to, as I said, get the money. But what we're talking about is how you manage it and how you walk away from that preparation, i.e college, and then be able to manage that debt.

So what's next for you, Betsy? Any big goals for, you know, 2022?

Betsy Mayotte: I have to admit I'm a little anxious for 2022 because 42 of the 45 million student loan borrowers have had their loans on hold since March of 2020. And those waivers come off as of January 31st of 2022. So I'm projecting that we're going to be very busy doing outreach to try to get borrowers prepared for the spigot being turned back on, working with policymakers and the Department of Ed and the servicers to figure out what we can do as a team to make this transition easier, working with schools to sort of warn them about it, and then frankly doing fundraising here at TISLA to try to increase our staff so we can be ready to help the people that are going to need it once this spigot turns back on.

Carla Harris: Sounds like you'll be a great investment for someone thinking about how they can help on the other side of the pandemic. So thank you for telling our listeners about that.

So I'll tell you Betsy, that we have a tradition on Access and Opportunity called, “The Lightning Round”.

Betsy Mayotte: Oh.

Carla Harris: And it's a fun way for our listeners to get to know you as an individual. So I ask you a series of rapid fire questions and you answer in three words or less. So are you ready?

Betsy Mayotte: I think so.

Carla Harris: Okay. Twitter or Instagram?

Betsy Mayotte: Twitter.

Carla Harris: City or countryside?

Betsy Mayotte: Countryside.

Carla Harris: Winter or summer?

Betsy Mayotte: Summer.

Carla Harris: Coffee or tea?

Betsy Mayotte: Coffee.

Carla Harris: Working in an office or working from home?

Betsy Mayotte: Both.

Carla Harris: What's your personal mantra?

Betsy Mayotte: Doing well by doing good.

Carla Harris: Alright. If you had a talk show, who would you want to be your first guest?

Betsy Mayotte: Tom Hanks.

Carla Harris: Oh! One word to describe your legacy?

Betsy Mayotte: Impact.

Carla Harris: Amen. Betsy, thank you so much for taking the time to speak with us today.

Betsy Mayotte: Thank you. I had a lot of fun.

Carla Harris : One of the things that struck me most in our conversation today is that student debt isn't just a young person's problem. It’s a problem that spans age groups. And of the 45 million people that have outstanding student loans, those over the age of 65 are the fastest growing borrowers and the most likely to struggle to make payments.

What wasn’t as surprising is the fact that this crisis disproportionately hurts African-American and Latinx communities.  

You know, so often, we view the price tag of student debt in isolation. But, unmanageable student debt has a snowball effect. It hurts your credit, which makes it harder for you to qualify for major purchases, like owning a home or buying a car -- things that are key to building wealth. So, to truly understand the scope of this crisis, we have to look beyond the debt itself.    

And the thing is, there is no one solution that is going to make this problem go away. ISAs alone won't solve the student debt crisis. Neither will pointing fingers. It requires the creativity, knowledge, and thoughtfulness of everyone, from innovators like Farrukh to educators like Betsy.

But, we ultimately need more transparency.

For the students listening: if you're taking on school debt, there's nothing more important than finishing school, but there are ways to finish without digging yourself deeper into debt. As always, financial literacy is key.

What did you learn today from Farrukh and Betsy? Send us your thoughts at We would love to hear from you. Subscribe to Access & Opportunity on Apple Podcasts or wherever you listen. Thanks for coming along.


On this episode, we hear from Farrukh Siddiqui, an entrepreneur whose company uses income share agreements, or ISAs, to help student borrowers get out of debt. Then, Carla sits down with educator Betsy Mayotte to discuss how having the right information at the right time can make navigating the student financing industry more manageable.

As of 2021, $1.7 million in student loan debt is collectively owed by 45 million borrowers. On this episode, we learn about the size and scope of the student debt crisis and how borrowers, educators and policy makers can help stem this growing figure. We hear from entrepreneur Farrukh Siddiqui about his company, Defynance, which works with former students to pay off their loans and replace them with income share agreements. Then, host Carla Harris sits down with Betsy Mayotte, the president and founder of The Institute of Student Loan Advisors. Betsy shares her insights on the student debt crisis and discusses how access to free, neutral and clear student loan advice can empower borrowers to make informed decisions when it comes to financing their education.

Access and Opportunity is also available on Apple Podcasts, Spotify, Google Podcasts and other major podcast platforms. 

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