Let Students Sell Equity in Their Higher-Education to Finance It | Hacker News Reader

Let Students Sell Equity in Their Higher-Education to Finance It

economist.com

24 pointsseibelj61 comments

In Australia, one can obtain government funding to pay for higher education -- this is a heavily regulated system of government loans.

For example, suppose after your studies you have accumulated a "debt" of AUD $X. There are a few options available:

1) you can leave Australia and never pay it back

2) if your annual taxable income remains in a very low bracket (< AUD$54k / year), you never have to pay it back

3) if your annual taxable income sits in a higher bracket, the tax department takes a chunk of your income in addition to the usual income tax. This scales from 4% of your taxable income through to 8% if you are earning > AUD$100k / year.

The debt itself is tied to the consumer price index and has no further interest applied.

I do not have much knowledge of the grim details of this system, or alternatives, but from my perspective it seems pretty reasonable. Student debt can be okay, if it is appropriately regulated.

More information here: https://en.wikipedia.org/wiki/Tertiary_education_fees_in_Aus...

That is pretty much it. I would guess that most people pay back their debt in the end, so it is not entirely equity-like, it is more like a mix of debt and equity (the interest rate is below market, so lower income people end up paying back less in net-present-value).

I guess this is the economically efficient solution. The main problem is that it needs to be administered by the government, for practical reasons as well as adverse selection. In Australia it also happens that the top 5 universities are of roughly equal quality, and the next 5 are not far below, so that a one-size-fits-all approach makes sense (there are no good private universities in Australia). I don't see how this system could work in the US where there is such a wide range of qualities in universities.

A key feature that seems to be missing is that the people making the decision about what course to take and even what students to send to university are still the students themselves who are notoriously bad at deciding that. With a proper equity system, the decisions would be influenced by people who are actually trying to be most efficient.

Both equity and debt have an element of moral hazard, and both provide some incentives to make the efficient choice about whether to get an education. A student taking on a loan for education (Australian style or otherwise) might make themselves worse off if their future income change from education is sufficiently low.

In my opinion, returns to college education are so high that the focus should be on having as many people go as possible, not on selection the efficient subset.

>the focus should be on having as many people go as possible.

There is only so much college to go around, and it makes sense to try to use the limited amount of college in an efficient way.

Do you think more colleges should be built?

yes I think more colleges should be built, or existing colleges should expand.

On the other hand, when you say "most efficient", I'll ask naively -- "most efficient at doing what, exactly?".

If the answer is "generating profit within the current economy" then that clearly isn't always a positive thing. In many cases there are some very negative effects.

I think there is arguably more value in having an additional well-educated poorly-paid person reflecting upon society and suggesting alternative objectives (provided that this can eventually be translated into public debate) - who perhaps never earns very much, and never pays off their student loans - than an additional highly profitable person who is (at best) making us all incrementally more efficient at doing whatever it is precisely that we're already doing (and at worst just reallocating wealth to themselves).

Generally "efficient" means maximizing social utility, which in practice for economists means GDP [0].

I agree that there are benefits to an educated population (in spite of disagreeing with the progressive bias in university education). But you are wrong that "efficiency" is meaningless or means "making us all incrementally more efficient at doing whatever it is precisely that we're already doing". Efficiency means increasing the size of the "pie" so that however we choose to divide it up, there is more pie to go around. We could divide the GDP from the year 1800 as evenly as we liked and not reach the standard of living of 2015.

[0] and no, the broken windows fallacy does not apply here, no one is trying to literally maximize GDP, but GDP represents the kind of thing that economists care about.

Despite things like Upstart sounding cool, selling equity in higher education is actually a horrible solution to the wrong problem.

The problem in higher education is not that it's hard to get loans, it's that doing so is far too easy thanks to government subsidies on both sides. (Like healthcare, spending other people's money is a great way to guarantee runaway costs.)

A much better idea would be to eliminate the subsidies and guaranteed public lending entirely, thus removing the funding for negative-return for-profit universities.

the problem with this idea is that we generally do want more people to get more educated, rather than a small percentage of population, especially those who can least afford it. So, perhaps rather than eliminating government subsidies, make them more targeted. Mostly, runaway costs are there because payoff to education is going up.

There's no reason you need subsidies for quality education.

I as a private investor would happily extend loans (with interest) for a smart student from an underprivileged background to attend an excellent non-profit university. There's a high chance of them graduating, getting a good job, and paying me back.

I would not, however, give loans for a mediocre student to attend the University of Phoenix. There's very little likelihood of that leading to a better life for them (and my loan getting paid back), and I fail to see why we as a society should subsidize it.

Loans are great. They allow all kinds of people who can't afford high-return investments like higher education to buy them in exchange for sharing the profits. Why do we need a subsidy to facilitate this?

For-profit schools also target recent veterans for their GI bill. Should we get rid of that as well?

Absolutely. It's a poor use of taxpayer money to pay a for-profit school and it's a poor use of the veteran's time.

In my view, the ideal way to structure these subsidies would be as tax credits. If you can successfully convince private lenders to invest in your education, taxpayers will help to foot the bill. But we shouldn't pay for arbitrarily poor programs.

What an incredibly bad idea!

How do you underwrite the sale of female equity? My wife has taken about 3 years off to raise our kids. This would have a negative impact on a bankers ownership of her.

If this is the future, let's skip the bankers and form trade guilds. I'd rather payoff somebody to get my kid into the IT Guild than sell a piece of him to some banker. This is the kind of excess that sparks revolutions.

"How do you underwrite the sale of female equity? My wife has taken about 3 years off to raise our kids. This would have a negative impact on a bankers ownership of her."

Oh, jeepers, you're not even trying. The banker obviously gets equity in your children.

Am I kidding? Am I?

There is nothing in the article that suggests that the bank would be entitled to anything but a fixed share of your income, female or otherwise. In theory [0], if women on average earned less than men because of taking time off to raise children, then they would have to pay a higher percentage of their future income for their education. But on average they would pay the same total amount (in an efficient market). I'm not sure why you think this would be unfair. This would not differ from the present market where women and men also pay equal amounts for education.

[0] Personally I don't think that selling equity in oneself would ever be possible for practical/legal reasons. As mentioned in another post, the only thing that comes close is Australia's higher education loans.

I'm just thinking about the practical aspects of such an idea. Bankers like their cash flow. Shouldn't people who work more and make more get a better deal? It's only fair!

Bankers like their cash flow, but they also have to compete with other bankers. My claim (and the claim implicit in the article) is that people will get an actuarially fair rate for their education. And given this, they will not pay back more (on average) than if they paid up front, or if they took out a loan under a competitive loan market. I don't think your parody of how bankers think makes sense. Our economic system is not perfect, but it has a certain logic to it, and refusing to engage with that and instead making up nefarious motives, is not productive.

The punchline:

> To help limit adverse selection, the government might also gradually withdraw subsidised loans, which the best students will usually prefer to equity. The main role for government would then be to help to collect payments through the tax system, as the administrative burden of monitoring incomes would be too great for investors to bear.

"Ultimately, this would only prove profitable if the government didn't compete with us & instead did all the legwork on our behalf."

It amazes me the level to which people forget or actively oppress the idea that they live in a community - small at the lowest of levels, hundreds of millions at the upper - and an educated, healthy populace is good for everybody in the community, and is exactly where government should be focusing its energy.

Between this and the other top story today on overdraft fees, it's amazing how many people are willing to profit in unscrupulous ways by taking advantage of other members of their communities.

And if the stupid government would get out of our way and stop offering better alternatives to our money-making schemes, we could make more profits.

Charitably, that would read "the government already has enough information to collect payments anyway, so it might as well do this, but should let private industry do the rest". Personally I don't think this is an appropriate use of the information the government has, or the government's power. In Australia they do it this way, but the government also does the loans. However your critique lacks substance as it ignores the legitimate reasons why some tasks are more appropriate for the government, and some for private industry, and repeats the tired old "privatize the profits, socialize the losses" schtick.

I'm sure investors will be lining up to invest in poor minority first-generation college students.

It's depressing how far we've returned to feudalism and serfdom.

I'm quite confident JP Morgan would invest if they saw a bargin in a under-valued minority student. Banks want money and returns; they don't have time for casual racism.

Poor kids have a much higher risk of not finishing their degree, even adjusted for scores on aptitude tests: http://www.nytimes.com/2014/05/18/magazine/who-gets-to-gradu... ("Take students like Vanessa, who do moderately well on standardized tests — scoring between 1,000 and 1,200 out of 1,600 on the SAT. If those students come from families in the top-income quartile, they have a 2 in 3 chance of graduating with a four-year degree. If they come from families in the bottom quartile, they have just a 1 in 6 chance of making it to graduation.")

A rational bank would charge much higher rates to a kid from a poor family than one from a rich one, and would be justified in doing so by the statistics. The question is: do we want to live in that kind of society?

Sure, they would probably charge higher rates. They may also provide other support to make sure the kid actually graduates, since they are invested in that happening.

All I'm saying is, the parent post that "nobody will invest in minorities" doesn't really properly reflect the incentives.

The problem is that using that system for financing education would directly promote existing class privilege. Children from wealthier families would have more opportunities for education than children from poorer families to an even greater extent than they already do.

Personally, I would prefer a system that lessens the effects of class privilege rather than one that increases the effects of class privilege.

Yay! Indentured servitude! It's the next best idea if we can't have slavery!

A better idea is to force schools to underwrite student loans and keep at least a substantial portion on their books. And get rid of the rule against discharging student loans in bankruptcy.

Then schools will have a disincentive to saddle students with giant debts in exchange for degrees that make it difficult to pay them off.

What if things like education, sociology, art of the middle ages, African studies or paleontology don't average as well paying jobs as finance, law or cs?

the question is, do you need a four year degree to study art of the middle ages, if you decide you want to? But suppose you do. First of all, there are private foundation which can sponsor this. Secondly, some people will do it simply because its fun, regardless of payoff, but then you don't need to sponsor them either via govt programs.

Great idea, although the article highlights the biggest problem: adverse selection. Students who want to slack off will choose equity, whereas go-getters will choose debt. Given this, no provider of equity could be sure that they would be getting high-quality income streams, so they would charge more, worsening the effect, etc. etc. I doubt that all the analytics in the world could counteract this effect.

To get this off the ground, you'd need some sort of coordination, either at the school or government level, to enforce risk pooling. How about free education at state colleges coupled with a higher lifetime marginal income tax?

And watch colleges raise their prices even more.

Yes. We need to move to a system of paying market prices for education and end all this easy money. Let colleges compete for the dollars and a diverse market of educational choices at many price levels will appear.

I believe it was tried already with My Rich Uncle https://en.wikipedia.org/wiki/MyRichUncle. They folded in 2009.

MRU looks like they pivoted to private student loans, and then got caught up in the credit crunch, so I don't know if it's a perfect comp. It was probably just a lot easier to latch onto the largest-growing consumer finance sector than to try and sell an actually innovative product against a heavily subsidized existing alternative.

The problem with the system is not that it's too hard to get more money into it. That's actually the opposite of the problem.

Very right. Education, homes- all get more expensive as you make taking loans easier.

It's almost as if the further the asset price gets disconnected from the amount of labor it takes to own it, the more expensive it gets.

Yep. If your neighbor is willing to enslave their-self to buy a home, then you are going to have to do the same to buy a home on salary (unless you strike it rich).

Various European and Scand. models (I like Denmark's especially) would be ideal by a large margin, but that's very unlikely to happen in the US, so this at least attempts to deal with the problem in a way that might actually happen.

The advantages of this over the current system could and should be:

- Your family income is not considered, so you never wind up in the "donut hole" where they make too much to allow you to get much in terms of loans, but too little to get you full-rides for having tiny income.

- Your own savings shouldn't/couldn't be considered, so if you've managed to save up some money (emergency fund, etc.) as an adult (because we need our personal safety nets in the US) it doesn't vanish in a semester. With the current system, the amount you're given is dependent on your own savings as well as income. Everything is considered. That's a huge risk.

- The money is guaranteed to be there when you need it. Not subject to shifting political winds or anyone's variable income. No yearly reapplication.

- The amounts calculated with the current system are sometimes laughably low, particularly when it comes to housing costs. You should be able to ask for what you need based on actual extant reality.

For the investors, it could potentially be very lucrative. Most of the students would likely go on to make decent money and so you'd get paid back plus extra, but in cases where students hit it big, you could make a windfall (I'm sure Larry Ellison's school wouldn't mind 10%/year of his income.)

As someone who had to leave home as a teenager and has had zero family support (but would still love to go to NYU or Columbia: https://medium.com/@opirmusic/why-software-developers-should...) - if I could take out $300k or so for 10% income for 30 years, I would do it in a second. They'd probably wind up with 450k or so.

There are some alternatives to continue shifting the burden onto students in various disguises:

- Government subsidies as an investment into reaping future taxes and economic prowess. Many countries already do this.

- Co-op ownership of universities which allows students (or govts on their behalf) to invest in institutions.

Perhaps a combination of fair equity exchanging between universities and students would "align interests" so-to-speak, so that institutions and students are positively motivated to help, rather than exploit, each other. This gets students thinking critically about balancing the two inseparable aspects of education: the actual education and "keeping the lights on."

> Many countries already do this.

I don't think I could name a 1st world county that doesn't do that.

I see this as an attractive way to establish an apprenticeship. At least for software engineers, it is rather common to move around every 2 to 4 years, which makes it hard to maintain and nurture a mentor relationship.

If I were to invest in a student, my advice and attention would help secure my investment and would probably be worth more than the principle to the student.

This type of Money and Mentorship scheme would be especially valuable for poor, minority, or first-generation college students that come from a community or family unable to offer them informed direction or advice.

After college in America, I went to study in Sweden where education is free. So if money is an issue you can just look outside your comfort zone and try a new studying in a new country. Problem solved.

College is not job training. This would be an excellent way to fund trade schools and coding bootcamps. College is for something else entirely.

[0] https://aims.uchicago.edu/page/2000-robert-pippin

[1] http://harpers.org/archive/2015/09/the-neoliberal-arts/1/

Given that the battle has been lost, why should we continue to subsidize the hollowed out shells and the armies of deanlets and deanlings swarming over them?

The battle has been lost only in political discourse, not really reality. Small liberal arts colleges and places like UChicago and the Ivy League continue to uphold those values; most state schools still have liberal education programs - even if their enrollment and funding is declining.

Why should we continue to subsidize them? Same reason we subsidize art, or space exploration. Because it's human progress, and it shouldn't only be available to the rich.

What are you expecting the vast and growing population of economically unnecessary people to do all day? In an economy that doesn't need people to work at production anymore, we can move up Maslow's hierarchy to something more interesting, like what the wealthy in academia have been doing all along.

The idea is interesting, actually, it's better to sell your student equity than to get into debt.

However, it's not something that would allow people to evolve economically.

It would be financially rewarding for people searching for low-risk investments, but it's not something that will increase the life standards of the poor and the middle-class in comparison to what exists today.

Instead, we should just accept that that the formal education system is fucked up and that efforts to empower informal education should be done.

Society would undoubtedly benefit.

> The idea is interesting, actually, it's better to sell your student equity than to get into debt.

Only if you don't expect to make a high income.

I personally would never sell equity in my income when debt is available.

How is that different from selling your startup's equity? Would you prefer to start a business on a loan?

One is in perpetuity.

> Would you prefer to start a business on a loan?

Absolutely, as would almost any entrepreneur. If I could fund my startup with a long-term low-interest loan that requires no collateral I'd jump at the chance.

Diploma loans sound like they would bring all the benefits of title loans and payday loans to a younger group of consumers in an age when credit card debt does not really offer high enough returns on capital.

Let students study for free. Germany did this, why not your country?

Because higher education in the US is considered a privilege, not a right. If you can't afford it, you're not entitled to it, in many cases. There are scholarship programs and things for some low-income or special needs children, but the idea of universal education, like universal healthcare, is still considered too socialist to be acceptable here.

If they want to consider education a privilege, then it's not wise to spray student loans to every potential student, including ones who only study to access student loans, to pay for living expenses.

Either make it a right, or make it privilege. The rampant student loan is the worst of both worlds, directing money into the pockets of university administrators (and bankers, for now). It's like socialism for the rich, capitalism for the poor.

equity is like debt, but you can write it off (when the biz fails). The better solution would be to allow student debt to be written off. That's a much cleaner solution.

I think it is fairly clear at this point that student loans have worsened the problem they were supposed to solve.

That's not clear at all. Education fees have gone up, but it's not clear that the cause is student loans (and the subsequent increase in demand for education), and even if they did, we would expect at least some increase in education as a result of loans that allow more people to get an education. Should people who have the cash up front be expected not to compete?

But I think the main difference is a shift in jobs where higher education becomes a requirement, and this is not just because of competition among employees, but because the supply of jobs is changing. Low skill jobs are moving offshore or taken by (sometimes illegal) immigrants who can live more cheaply. In order to obtain the (higher) standard of living of today's America, people need to create more value which requires more skills. A perfect example is the IT industry. Company's like Google create huge amounts of value[0], and employees who contribute this are rewarded.

[0] no, not selling ads, but the service that people use in exchange for the micro-payment of viewing an ad.

The fact that students, most of whom have no assets and have never worked, and cannot prove their future earning potential, can get over $100k in loans that cannot be discharged in bankruptcy just by signing their name, has clearly caused massive distortions in the education market.

During the past few decades, the number of administrators in American universities has grown significantly, tuition has risen dramatically, and even public universities are investing in luxury amenities to attract student money, and raising tuition to pay for them.

The past few decades have also seen a proliferation of for-profit universities which are being investigated by the government for exploiting students by encouraging them to take out huge loans to pay tuition for programs without any value. They are taking advantage of flawed student aid policy by using the students to take money from the government.

None of these things have happened in any other wealthy country, even though those countries have also seen the same shift in the job market that the United States has. This is not a consequence of the changing job market, because if it was, it would have happened elsewhere. It is a consequence of policy choices.

The incentives for bad behavior are abundantly clear. In other developed countries, it is harder to get student loans, and easier to pay them back, and college is more accessible to poor students than it is in the United States. That's because public universities in other developed countries have caps on tuition, and students have caps on how much they can borrow, so universities can't use students as a vehicle for diverting government money to themselves.

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