The College Graduate as Collateral
nytimes.com
nytimes.com
The Australian system (HECS http://en.wikipedia.org/wiki/Tertiary_education_fees_in_Aust...) of managing higher education costs seems very fair. I studied two degrees at a leading university over 5 years. The accumulated cost for five years was about $30-35,000 for Engineering and Politics (some degrees are more expensive). My degree cost the university more than I paid with the remainder being covered by international students (thanks!), government subsidies/grants and donations.
All local students entering a university automatically go into this system. Each year you get a statement that lets you know how much debt you've accumulated and how much is left to pay. If you want to pay upfront then you receive a discount (10-20% off or something). However almost no one does because your debt is interest free and only indexed to inflation.
You don't start paying it off until you earn over $49,000/year (http://www.ato.gov.au/individuals/content.aspx?doc=/content/...), at which point you pay about 4% of your income until you've paid it off. If you earn more then you pay it off more quickly and at a higher percentage.
This system has enabled me to work on my startup right after finishing uni without the burden of a debt that needs to be repaid immediately. It also let me focus on enjoying university without upfront costs. I think it also removes the cost barrier for students wanting to go to uni, as all universities cost the same and are all covered by HECS. You can decide where to go based on convenience, degree and anything else without worrying about the cost.
Lots of people here still complain about the cost and the system could surely be improved a bit. But it's quite a good solution and I'm glad the article mentioned it.
A) That's awesome.
B) It's highly unlikely that it will be implemented in the US - not given the recent trends in this country.
(The school has to pay its operating costs, so these are at least partly real expenses, not numbers in a ledger.)
There are risks for the government. For example, lots of Australians work overseas and unless they return to Australia to work, they won't pay back the debt. http://theconversation.edu.au/expat-workers-have-cost-austra... But that's probably not a huge percentage of outstanding debt.
>Unfortunately, 18-year-olds aren’t particularly good at judging the profitability of an investment without expert advice, and when they do get such advice, it generally counsels taking the largest possible loan
AND
>Yet the venture-capital industry has shown that the private sector can do a good job at financing new ventures with no collateral. So why can’t they finance bright students?
It claims subsidizing students is wasteful exemplified by the increase in default from 6.7 to 8.8% but on the other hand VC are not wasteful all the while most VC funded ventures are failures. Plus, it's not as though founders are better able to evaluate their potential business than aspiring freshmen and women are at evaluating the success of their potential studies.
As if VCs were not "subsidizing" failed ventures and only picked winners all the time. Contrary to what the article claims, I only see benefit in the system. The risk is pooled amongst all students the 91.2% are subsidizing the 8.2% failures. I guess one might be able to trim that down a bit, never the less, the success rate (paid off) is way better than in the VC world, the ROI, may be more modest on the winners (and society), but overall, it's not that bad.
Something does not jibe.
To me it seems he, Luigi, is someone who maybe likes the idea behind venture capital, or perhaps more generally, the economic system it represents; likes the outcome he sees (perhaps only selects the best parts?) and would like to shoehorn the idea to higher education where investors "invest" in student potential. It seems a stretch.
How much "equity" would investors expect? 10-20% of future income? Is that comparable to a regular student loan? Why would students choose this route instead of the traditional route?
You are confusing risk-pooling with subsidizing. They are completely different.
If all else fails, how about we try the market? Make student loans dischargeable in bankruptcy and let the banks figure it out.
1. Give the school money, possibly aided by scholarships, grants, et cetera. This works if you've got the money or can get enough financial aid.
2. Take out student loans. These can be a real pain in the ass to pay off, especially for students who discover that an English degree is as unprofitable as everybody says. :-(
3. Opt in to a voluntary tax, and in exchange, get free or highly subsidized college. (This is the option you refer to as "indentured servitude.")
I'm having a hard time seeing how option (3) is a bad thing.
I wonder if this model could work on a smaller scale, much like a startup incubator: find talented students who would otherwise attend cheap state schools, pay for a prestige degree at an Ivy, and take a share of future income. Like an incubator, it would be in the investor's interest to provide mentorship and help students find high-paying jobs. But again, there's an adverse selection problem. Why not just offer the same students loans, and why would a talented student sell equity?
If anyone has $200m lying around, I'd be interested in running this experiment. Its success would also depend on whether college is more about learning things or signaling status.
How much equity? How much debt? The amount of equity depends on the student's expected future income as well as the cost of school; the amount of debt depends only on the cost of school and the risk of default.
An equity stake in such a student has a higher value than an equity stake in a mediocre student, so if an investor can tell what students look most promising, they'd have an incentive to offer education money in exchange for a smaller amount of equity. If the equity stake is small enough, then the lower risk (to the student) relative to loans may well cause the student to choose to sell equity rather than take out a loan.
High flyers are not going to opt-in to it. Why choose the '% of future income' option if you are sure you will make so much that you will end up paying 2x or 3x the sticker price?
Without some people over paying, you have no money to subsidize those that can't pay the full tuition.
No one ever mentions a time horizon on the repayment either. Are we talking 3% for life? 3% for 10 years? If they put a time limit on it, what stops me from just taking some kind of deferred income option? If they don't have a time limit on it, how can they claim my undergrad degree is driving my income 30 years later?
How can you claim that with any equity model? If you get 3% equity for being an early employee, you have a 3% claim to it forever (unless you sell), even if you can't realistically claim to be still driving the company's profitability 30 years later. That's just how equity models work. Now, you can critique them (Marxists, for example, make exactly that critique, that long-delayed dividends have lost any real relationship to the original service performed), but for better or worse it's a widespread model. I don't see why it'd be any worse with equity-for-education. Like a startup, you're betting that an n% equity stake is a fair risk-adjusted compensation to give a funder in return for them providing some up-front funding right now, and shouldering the uncertainty w.r.t. whether your future earnings will ever be sufficient to repay them. Sometimes it means you end up paying much more than the education is worth; other times, much less. Same as with VCs and startups.
It seems to me that for this to work, even the average performers have to pay something.
Also, people investing in equity choose their investments. The accepted risk can lead to higher returns. This system invests money across the board but only takes income from the highest achievers. It can't pay off for the investors.
It could potentially be used in conjunction with the loan system, but then you have all the problems of the current loan system - subsidies driving up prices.
However, if I make $35k, I don't pay anything.
This is very different than what you are describing, which amounts to a progressive tax on the more successful students. If anything, it would be fair to put some sort of a max on the amount of income that could be counted. For example, if I'm expected to make $60k, but end up making $6 million due to some luck or whatever, it doesn't seem entirely fair to attribute 10% of that to just education...
I could see varying the % required by the "investor" based on some sort of merit-related valuation process, where the individuals most likely to be worth the investment are given a discount.
If anything, equity at scale relies on outsized profits from a few big winners, which is why VCs play the probabilities by funding a bunch of fences-swinging startups. Perhaps university funding would be similar? Of course, if someone is sure they're going to get rich, they wouldn't sign on to giving a university a percentage of future income. But a lot of people who eventually got rich had no idea, at the time of going to college, that it was likely they would. Similar situation as startups, really: if you knew that you were a shoo-in for a multibillion IPO in the near future, you wouldn't give away nearly the equity that you normally do in venture rounds.
It doesn't really seem any more unfair to me that universities would get outsized profits from their equity share in a few big winners, than the same situation with venture capitalists getting outsized profits from their few big winners. In retrospect, you can always say that less than 10% of John Smith's success came from his university; but in retrospect, you can always say that less than 10% of a particular startup's success came from a particular Series A backer.
Incidentally, that's one of the factors making the "college tuition has doubled" statistics a bit misleading as a measure of how much higher-education costs to operate. While the sticker price college tuition has doubled, the proportion of students paying sticker price has declined, so tuition revenue has not doubled. In addition, for public universities, the state subsidies have declined in almost all states, so tuition hikes are often just revenue-replacement for lost state funds. Attending school gets more expensive, but because of a cost-shift away from taxpayers towards tuition payers, not because the school actually gets any more money.
A way to net-out all those factors is to calculate the cost of college education using aggregate numbers: total budget of the university divided by number of students. By that measure, rather than doubling, at some universities the cost of higher education has actually declined. For example, the University of California system spends 25% less per student, in real terms, than it did in 1990. Tuitions have nonetheless gone up, mainly due to a massive (~40%) decline in per-student state funding, and secondarily due to an expansion of student aid meaning that the sticker-price tuition has diverged further from the average actually-paid tuition.
State schools are still mostly affordable. The top 100-150 private schools (including both tech schools and private schools) can probably operate like the top schools. Many people go to them for their location, their campus, their athletics, etc.
But what should the 'lower tier' schools do? That's where the real problem is. They cost nearly the same but don't provide as much value. Rich people aren't lining up to go to East Crappy Value State University. So everyone has to pay much closer to sticker price - needy or not.
That only seems to be true at a few top private institutions. Which make up a very small percentage of overall college attendance.
Without a doubt if someone had offered me 100,000 for 10% of my earnings when I was 18-24 it would have been a great deal for them and I would have taken it. But, there are legal issues with indentured servitude (I looked it up because the concept facinated me).
If we could offer equity stakes in ourselves that were legally binding - then we could use people & companies to fund the best students in exchange for future earnings. The amount of money that would flow in would dwarf the government.
Imagine the Bill & Melinda Gate Foundation purchasing equity in 10,000 up & coming students. The dividends from that would end up in a very advantegous loop. But then instead of companies being treated as humans we would have to allow people to be treated as companies.
I for one would love such a system.
Not so fast. This doesn't show that the college improved the person's income at all. Colleges don't admit students randomly. It's just as possible for grads to have higher earnings simply because they were identified and selected as future successes as it is that the college made them successes.
A better, but still imperfect solution would be to compare the graduates earnings with those who were admitted but chose not to go.
Or we could go back to actually putting state funding into our public universities, thus rendering tuition itself so cheap that you can pay for it by working over the summer and never need an investor at all.
That is unsustainable, so recently a new law passed, which makes all public university graduates pay a special tax, which starts five years after graduation, and depends on the length of the career (4-year degrees pay less, 5-year degrees a bit more and so on).
http://en.wikipedia.org/wiki/Education_in_Uruguay
Fortunately, college debt is not something people have to consider when enrolling their children. Sustaining them through university, however, is not cheap (and public university is structured in a way that makes working unfeasible).
Not everything is a bed of roses, however... it's constantly underfunded and goes on strike lots of times.
1. If there's a single tax for everybody, then there's no incentive for this education monopoly to improve learning-per-dollar. Or per peso, I suppose, this being Uruguay.
2. As you mention, the lack of coverage for living costs is a problem. This disproportionately puts poorer families at a disadvantage. In a for-profit system, this is an obvious opportunity for an investor to get those students by offering a better deal.
3. If it applies to everybody who goes to college, then people from families wealthy enough to pay for college out of their pockets can't opt out of the tax. This would tend to subsidize poorer students. (I'm not unhappy about this last part.)