Opinion: Struggling with student loans? Think 'fintech'

By Virgie Rollins

Nearly two in three Michigan college graduates face student loan debt. The average graduate owes $31,000.

With hefty monthly payments hanging over their heads and virtually no savings in their bank accounts, many grads struggle to pay for expenses like car insurance or security deposits. Juggling these bills would be tough for anyone -- but it's even tougher because many new graduates lack credit histories. That makes it nearly impossible to get a short-term bank loan. 

Fortunately, Michigan's representatives in Congress have a chance to help these young Michiganians secure the low-interest loans they need to start their professional lives off strong. The legislation would allow community banks to partner with financial technology firms to offer affordable loans to folks with poor or no credit histories.

A shiny, new 2018 tassel waits to be switched to the other side, signifying graduation.

By joining this effort, lawmakers could give working Michiganians the financial tools they need to thrive in the middle class. 

Of course, recent grads aren't the only ones without savings to fall back on. More than three-quarters of Americans live paycheck-to-paycheck, according to a recent survey from CareerBuilder. Not all of them are low-income. In fact, one in 10 of these individuals earns $100,000 or more per year.  

For Americans living paycheck to paycheck, even a small unexpected expense could force them to turn to predatory lenders for quick cash.

Take Tameka Massengale, who works full-time as a saleswoman in Detroit. When her car broke down, she didn't have the $300 needed to fix it. She turned to a payday lender, who provided her with the cash, but at an outrageous interest rate. By the time she made her last payment four months later, Massengale had paid more than $450 in additional fees, according to a profile in Crain's Detroit Business. 

Massengale isn't alone. Many Michiganians have trouble accessing low-interest loans because of their credit scores -- or lack thereof.  

Most banks won't give out short-term loans to anyone with a score under 700. The average Experian credit score in Michigan is just 688.  Since 2008, bank lending to so-called "subprime" borrowers has dropped by more than $140 billion nationwide.  

A sizable number of Michiganians must now resort to high-interest sources of credit, such as payday lenders or credit card companies, to cover unexpected expenses. The average Michigan resident has nearly $5,000 in credit card debt.   

Financial technology, or "fintech," companies can break this cycle of debt by helping people secure affordable bank loans.

Such firms don't rely solely on FICO credit scores to determine an individual's creditworthiness. Instead, they use sophisticated data analytics and examine thousands of factors to gauge whether someone is likely to repay a loan.  Banks then use these evaluations to safely extend loans to borrowers otherwise deemed too risky.

For Michiganians struggling to find affordable short-term financing, fintech could be their saving grace.

In fact, Michigan is already a hub of fintech innovation, with organizations like the Detroit Fintech Association attracting ample venture capital funding from all over the country. Quicken Loans Chairman Dan Gilbert has even described Detroit as "the center of our country's FinTech revolution." 

A number of recent court rulings could soon make it difficult for fintech companies to match customers with bank lenders. Judges have classified fintech firms as the "true lenders," even though banks or third parties often assume the risk in many fintech partnerships. Because of complex, arcane banking laws, this "true lender" designation can prevent banks from working with fintech firms to offer low-interest loans to borrowers.  

Congress can address this problem by ensuring fintech companies are treated as the financial consultants they are, and not as lenders.  

Michigan's fintech industry could change the way millions of people -- from freshly minted college graduates to workers facing unexpected expenses -- access short-term credit. But it's up to Congress to lay the legal groundwork for this financial revolution. 

Virgie Rollins is a community activist in Detroit.