The best way to fix this inefficiency is to address the root of the problem: most bright students do not have any collateral and cannot easily pledge their future income. 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?This proposal is in the finest tradition of financial innovation on Wall Street, where product specialists try to securitize anything that's not nailed down in order to make a buck.
Investors could finance students’ education with equity rather than debt. In exchange for their capital, the investors would receive a fraction of a student’s future income — or, even better, a fraction of the increase in her income that derives from college attendance. (This increase can be easily calculated as the difference between the actual income and the average income of high school graduates in the same area.)
Slavery by another name
Think for a minute what Zingales is proposing. In times past, people who were faced with crushing debt sold themselves, or their children, into slavery. How is this any different? The Zingales proposal asks a student to sell their future earnings, or equity if you will, in exchange for cash to finance their education. OK, it's not full slavery in that someone owns all of you, but it is a partial form of slavery. Zingales qualfiied his proposal to state that it is not "indentured servitude":
This is not a modern form of indentured servitude, but a voluntary form of taxation, one that would make only the beneficiaries of a college education — not all taxpayers — pay for the costs of it.
What would you call the transaction where someone, rather than face a mountain of debt, sells all or part of himself to a holder of capital for a lump sum of cash?
Taking personal responsibility
There are other ways of addressing the problem of student debt. When you have seniors retiring with student loans, there is no denying that there is an enormous problem with student loans and the cost of higher education. A better solution is to get the student to take some personal responsibility and make an adult decision about the value proposition in his own higher education.
True enough, higher education still pays, but at what cost? The Atlantic highlighted these issues in an article that showed the value of higher education. It's charts like the one below that prompt parents to push their kids into university at all costs.
The dirty little secret is that not all higher education is the same. The Atlantic article pointed to a Georgetown study that showed the earnings and unemployment rates of different majors. The disparities are striking.
So here's my message to students. Take personal responsibility for your own decisions about your life. If you want to specialize in Architecture, Journalism or the Liberal Arts because that's your passion, go for it! On the other hand, you need to manage your own expectations. If you graduate with a degree in Victorian literature or foreign affairs, don't complan when you get your dream job of working for an NGO that pays you 30K a years - because you made your own choice to go into the field of your own volition. There are tradeoffs in life and you made one.
On the other hand, proposals like Zingales' to equitize people's earnings amount to slavery. It is so wrong at so many levels that I don't know where to even begin.
Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.
None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.
9 comments:
Universities and their bloated budgets/professors are a defacto Cartel. Tuition inflation over the past decades has been nothing short of criminal. Much like health care in the U.S. the lack of control (and/or incentive to control) over the "costs" of "education" is the root of the problem.
There is one enormous upside in selling 'equity' in you. It all depends on who you sell it to. If the university that educates you own this equity, then it is in their incentive to actually educate you well, unlike today where it's just a degree mill in many respects. Majors that do not earn any money would not be competitive.
In schools like harvard and yale, this is already the norm. Students graduate from there with very little debt, and are basically financed by school endowments. In return, when they graduate, they donate a portion of their income to these school. It's voluntary, but if you see the amount of mail and messages from these schools, you'd had the impression that they are debt collectors.
It's time that the school and the student have a stake in the educational outcome. Indeed, I would advocate that this to be done at the secondary education level, where most of the very basic knowledge are instilled.
Maybe the "college graduate collateral" system wouldn't be so bad. The market would essentially facilitate which degrees it finds useful and allow more students to enter that field. That would mean students with a good chance of a well-paying job after graduation would achieve their potential. With the current loan system, all degrees are equally funded and backed by the taxpayers without discrimination to its future potential.
A critical examination of the expansion of university the average course and degree offerings of the university is something no one seems to address.
A higher education in economics, history, finance, biology, physics, philosophy or any of the classical disciplines is worth a high price. But the bloated over-head of universities that harbor esoteric and niche diciplines is a major problem.
Escalating tuition costs & student fees are not contributing to the support and advancement of traditional academic fields that benefit society, but rather subsidizing special interest fields that were long the domain of city colleges or private tutors and on a net basis, don't translate into tangible productive roles in any economy.
The fields of study eligible for university level 'degrees' has become laughable...and tragically expensive for not benefit.
Either the guy lending you money to go to college owns your future income you must pay him from borrowing the money. Or the guy who pays for your school up front owns your future income. Either way you are owned in my opinion.
This is already effectively an option. If you get federal student loans, there is an income based repayment option. You pay a percentage of your disposable income (income-2*poverty level) every year. This ends when either the debt and interest is fully paid or when you have been paying for 25 years (10 if you work for a nonprofit). The main difference is that the income-based loan repayment ends once you have paid off the debt, which makes it a better deal for the borrower.
I can't applaud you enough for asking graduates to take some responsibility for their choices.
I have this conversation with clients all day long and I can't tell you how much the whining bothers me.
I can't applaud you enough for pointing out how much college pays. Over a lifetime of earnings, average student loan debt is about one year's difference between a college degree and not.
Taking personal responsibility for choices is the key phrase in your post. Well said.
I have this conversation with clients day after day and can't tell you how much the whining offends me. Who do you think should pay for your college?
If I want to acquire an investment (in the form of stocks) which will provide me with future dividends, I buy them with my own money or I borrow money to buy them.
Conversely, some students feel that if they want to acquire an investment (in the form of higher education) which will pay them future dividends, the tax payers should buy it for them. Amazing sense of entitlement methinks.
Post a Comment