FOUNDATIONAL FORGIVENESS – BUYING DEBT TO BUILD NEW FUTURES

I speak in my new book (Future Philanthropy: The Trends, Tech & Talent Defining New Civic Leadership – out in Spring ’21 through Wise Ink) about mergers and acquisitions and that the latter is more of a moot carry-over from the for profit world. However, this week my curious nature took me down a path that had me thinking that maybe decoupling the two from the same breath and looking at acquisitions through a different lens might be a new trend for the social sector we would be remiss to explore further.

I got onto this train of thought after reading in a bit more detail the case for student loan forgiveness. Do the economic benefits stack up and what are the risks associated with cancelling all of the debt for 80% of federal student loan borrowers.

While there is debate on the resolution introduced recently to the U.S. Senate, it is widely agreed that this move would deliver real relief to those feeling the effects of an economy ravaged by a global pandemic. Women, who owe around two-thirds of America’s outstanding loan debt, and people of color who carry disproportionate debt levels compared with their white bachelor’s degree peers.

According to the Center for Responsible Lending, approximately 85% of black bachelor’s degree recipients carry student debt compared to 69% of white graduates. The exclamation point on this being that around 38% of black students who started university in 2004 had defaulted on their loans within 12 years, 3 times higher than their white counterparts.

Yet this isn’t an acquisition of debt as I alluded to earlier, just a strong supporting narrative on how we can tackle inequity while at the same time targeting our most vulnerable borrowers during COVID. 

But are student loans really the best debt to tackle? A recent College Investor survey lends itself to this notion given they found around 75% of Americans support $10,000 in student loan forgiveness. However is this more of a meritocratic argument or would the country be better served by forgiving payday loans, auto debt or medical expenses? I recently read an article from the Urban Institute that showed those households that are in the top 25% of earnings hold 34% of the debt, and those with incomes of $173,000 or more held 11%.

Given we are in the middle of a worldwide health crisis I took a look at what philanthropy was doing in the health space and was quickly drawn to the work of the Pontiac Community Foundation in Michigan who partnered with a Presbytarian Church congregation to pay off $5.5 million in medical debt by purchasing for a shade under $30,000 the debt from the nonprofit RIP Medical Debt. It then forgave the debt which ultimately impacted around 5000 residents.

It was wildly ironic that a pop-up for the story asked me if I would like to apply for a loan to take a vacation but I digress.

You can read more about RIP Medical Debt here, but their approach to negotiating to buy millions of dollars of debt at a large discount is a noble endeavor especially when more nefarious actors are purchasing the same kinds of debt and then actively coming after individuals who in most circumstances have no idea their debt has been sold off to a different company.

A number of other heart warming stories around school lunch debt captured my imagination too including in my current city of Austin where a 14 year old raised over $10,000 to pay off this kind of debt of which (according to the School Nutrition Association) 75% of school districts nationally had unpaid meal debt at the end of the 2017-18 school year.

But this movement has to be more than just starting well intentioned gofundme campaigns regardless of the impact they have had.

So that got us thinking. Should philanthropy – especially those anchor institutions whose mission is to lift up their communities – be getting into this type of ‘business?’And what if the research shows that this approach to community investment yields higher returns than that of strategic grantmaking or even impact investing?

Some economists argue that giving cash to families with no strings attached is the best way to end poverty after all and forgiving debt is effectively doing the same thing without the political minefields associated with the introduction of a Universal Basic Income.

Philanthropic institutions would be well served by exploring the options available to them and actively questioning the best uses of its endowments as a catalyst for civic vitality and mobility. This could include an annual fund focused on these approaches, forming giving circles where they can learn about the issues and support accordingly ($1 committed on average can abolish $100 in medical debt), and other more technical methods such as loan loss reserves and providing loan guarantees in support of charitable causes. This should also include advocacy.

The bottom line is that we need to break from what is perceived as best practices in the traditional sense and re-imagine what assets and vehicles we have at our disposal to make a real difference in our community.

Maybe the strategy is acquisitions after all but not in the ways we (or those that sit on our financial and investment committees) perceive it as. Maybe tackling inequities in our society is getting to the root cause of wealth gaps and helping sections of our community get back to even rather than deal with a lifetime of compounding effects relating to the color of their skin and the zip code they were born into.