Student loans are back in the news again with the Department of Education announcing that they will start garnishing wages on past-due student loans for the first time since March 2020. Education debt has ballooned to become the largest bucket of debt for American consumers after home loans [Fig. 1]. In recent months, Income Based Repayment plans are in dispute again, forgiveness hopes have been diminished without any clear timelines. Student loan debt has become a defining financial burden for an entire generation, with 3 in 10 Americans reporting that it caused them to put off buying a home. Paired with tuition inflation, it’s easy to think there is no way out for recent and aspiring college graduates or, perhaps worse yet, the U.S. economy.
But cash flow underwriting, using open banking data, presents a major opportunity to ease the education debt load for Americans. Perhaps surprisingly, this approach has already meaningfully reduced the interest paid by student borrowers over the past decade without forcing lenders to take more risk.
[Figure 1: New York Fed - Quarterly Report on Household Debt and Credit]
At first glance, it’s easy to think that rising student loan balances are from more students enrolling in college. But the data tells a different story. Undergraduate enrollment has actually been declining in the past decade and a half [Fig. 2.1]. So why is student debt still surging?
Here’s what’s really happening:
[Figure 2.1-3 - educationdata.org, studentaid.gov]
The end result? A system where recent grads are paying high interest rates on loans that may not reflect their actual financial risk.
Let’s go back to 2011–2012. You’re a recent graduate and landed your first job. The economy is in recovery. Quantitative easing is in full swing, and interest rates on auto loans and mortgages are historically low. However, access to other forms of credit had diminished.
Due to the CARD Act of 2009, credit card companies were prevented from issuing credit cards to young adults under 21 without a cosigner and stopped from marketing on college campuses or providing sign-up incentives, making it difficult for young people to get cards. After the 2008 financial crisis, trust in traditional credit systems dropped [Fig. 3], both from lenders and borrowers, with fewer seeking credit cards.
[Figure 3 - Gallup]
For recent college graduates, traditional credit models saw fewer accounts, higher student loans, both yellow flags. But in reality, you’ve done all the right things:
This is where cash flow underwriting changes the game. Instead of relying solely on sparse credit scores, lenders turned to Open Banking transaction data to analyze real-time income and spending behavior. With this richer, more holistic view, these lenders could see what traditional credit scores couldn’t:
[Bank Account Cash Flow Insights, www.prismdata.com]
For many recent grads, this meant they were significantly lower risk than their credit profiles suggested.
By incorporating cash flow data into decision-making models, lenders were able to better assess creditworthiness, lower losses [Fig. 4], approve more responsible borrowers, and offer them much better rates than they'd get otherwise, representing savings of tens of thousands per borrower.
The result? Tens of billions of dollars in refinanced student loans, with many examples of borrower refinancing multiple times. Billions of dollars in consumer savings—in the form of lower interest payments, faster debt repayment, and greater financial stability for young professionals just starting out.
[Figure 4 - Morningstar DBRS Student Loan ABS Update— Performance by Months after Booking (page 6)]
