As student debt continues to dominate the higher education debate, one resident in the Yale New Haven Health System is launching a company to curb medical student loan payments.
Last April, Shady Henien, a resident at Bridgeport Hospital, founded Student Promise, an Iowa-based company that aims to help students secure low interest rates for their student loans. By bundling students’ collective debt for investors, the company plans to offer students interest rates lower than the federal loan rate for post-graduate students, which is currently 5.4 percent. In May 2013, the company made it to the semi-final round of “Shark Tank” — an ABC television show that brings in aspiring entrepreneurs to pitch their ideas to potential investors — and is now in the process of securitizing the student loans and issuing bonds.
“The idea is that we collectively combine all of our medical student debt, and then send it off to shareholders in the form of student tuition bonds,” Henien said. According to Henien, the U.S. government’s high interest rate on student loans makes little sense for medical students, who are a low-risk group. Unlike homeowners, whose interest rate hovers at around 1.5 to 2 percent and whose average default rate is higher, medical school students have a 0.5 percent default rate, he said.
Though the federal government is unlikely to lower student interest rates anytime soon, Henien said he believes investors will see medical student loans as a low-risk, high-reward investment. The fact that Student Promise will bundle debt also stratifies the risks, he added.
In addition to helping out students and investors, Student Promise could be a creative solution for states that are currently losing doctors, Henien said.
By 2020, Henien said there will be a shortage of around 150,000 physicians across 10 states, including Connecticut. While some states already offer loan forgiveness to medical school graduates if they stay in-state, Henien said he recommends that every Student Promise investor also get a tax-free return on investment from the state.
“It’s a triple win — investors have security, the student’s interest rate is almost cut in half [and the state benefits,]” he said.
According to Dean of the Yale School of Medicine Robert Alpern, 80 percent of Yale medical students graduate with some debt. The average amount of debt among these students is $124,000, compared to the $170,000 national average, he added.
In 2008, the medical school improved its financial aid policies, allowing students with annual family incomes below $100,000 to receive financial aid. While Alpern said the new policy has decreased the average debt for Yale medical students, he admitted that $124,000 is still a significant burden. The medical school continues to encourage alumni to make financial aid scholarships their top giving priority, he said.
While pressing debt may incentivize students to turn to alternative outlets like Student Promise, Mark Kantrowitz — senior vice president and publisher of Edvisors Network, a resource center that advises students on financial aid — said Student Promise is still unlikely to be successful.
“I don’t think this program will work because investors will be comparing these bonds with safer and more secure places to invest their money,” he said, adding that Treasury bonds and other investment options offer a better combination of lower risk and higher returns.
Kantrowitz added that Student Promise’s website is misleading because it claims that government loans are higher than they actually are. Congress passed legislation last year tying interest rates to 10-year U.S. Treasury notes and locking in individual rates for the life of each loan, he said. Because of this new policy, Kantrowitz said government loans are in fact lower than the 6.8 percent rate advertised on the Student Promise website.
But Henien said the reduction of the current federal loan interest rate of 5.4 percent was likely artificial, noting that it was announced during an election year and at a time when there was sustained media attention around the issue of student debt. He added that in future years, it is likely that the federal loan interest rate will rise unless more competitive alternatives such as Student Promise are introduced.
“We’re also looking to create a new model of investing, philanthropic investing, where investors are not only getting good returns but they’re helping alleviate a pressing national issue of student debt,” he said.
Still, to make the bonds economically competitive, Henien said Student Promise is working with state and federal politicians to make them more attractive to investors, citing tax breaks and subsidies as two possible ways policymakers could support the organization.
All four prospective medical school students interviewed said they would need to learn more about Student Promise and similar third-party organizations before deciding whether to utilize its services over the more trusted and traditional support provided by the federal government or medical schools.
“It sounds like a good idea, but a lot of medical schools are giving out institutional loans at very competitive rates,” Enrico Ferro ’14 said.
Having been accepted to a number of top medical schools, Ferro said he would prefer receiving support from either these institution or the government because those sources are more established.
Although all students interviewed said they were concerned about medical school debt, none said it would influence which field of medicine they would choose.
Still, Kantrowitz said that on a national level, certain specialties such as primary care that tend to pay less are finding it more difficult to recruit promising graduates because of student debt. He added that one of the best ways to rectify this gap is to promote specialized and subsidized loan programs for students who pledge to enter an understaffed specialty rather than a more lucrative field.
According to Student Promise’s website, the organization will provide two types of tuition bonds — an IOWA-Practice Tuition Bond, which requires students to work in Iowa for five years after graduation, or a USA-Practice Tuition Bond, which permits students to work anywhere in the nation.