Investing in students instead of student loans
Student loan debt has become a hot election issue. It's immense, has ruined some lives (but also vastly improved others) and is connected to (and possibly even the cause of) the cost of education growing much faster than inflation.
A good education is one of the best investments many people can make in their future, and the ability to borrow money for it allows a lot more people to access it. If it doesn't pan out, it can leave a crippling debt.
There are different types of educations. Some are aimed at increasing your earning power in the future. These are investments and worth borrowing against. Others are not this way, and lead to no career at all, a career in academia, or the more modest benefits that come from the general rather than specific fruits of education. It may not be worth borrowing huge amounts to pay for those. There should, perhaps, be a cap on borrowing for education programs not shown or expected to pay off financially, and instead those programs might be subsidized to permit their continuation as a contribution to our culture.
(Obviously, another common solution to this problem is to have taxpayer funded education, but this is not about that.)
Here is an old but not widely exploited idea for the more lucrative educations. Instead of using loans to pay for tuition fees, such programs should be offered at very modest fees, well below cost. In exchange, the student pledges a small fraction of their future income, and a larger fraction of their future income above a certain amount in the field for which they were educated. The student also pledges to not spend much time in deliberate unemployment until a threshold is paid. They may elect to work in another field. A bankruptcy would probably dissolve the obligation.
This idea isn't entirely new. Variations of this approach, often called "Income Share Agreements" are being used by some for-profit colleges and even established institutions like Purdue. Towns and even nations have paid for overseas education for their students with the agreement they will come back home to use their skills. What would be new would be regulations capping student loans and encouraging this approach. ISAs are not without controversy and it's certainly possible for them to be abused, but I think the core idea has value.
To make this acceptable to the schools, it would be calculated so that the expected average return is higher than the present value of their costs. They will get more revenue, even with interest, but get it later. For younger schools without endowments and wealth, this may mean that the school borrows money, rather than the student. If there are to be government loan programs, they would be to the students, but in theory private loans should do the job here.
Schools would be highly motivated -- perhaps too motivated -- to design their programs to generate career success. If they don't give the students the right training, the school suffers (though the students lose as well.) If they don't pick the right students, and the students either don't do well, or don't pursue a career in the field, or don't do well in that field, the school loses out as well. Schools know their past track records and can calculate what rates of return they are likely to get, and set rates as they need.
When students compare universities, instead of comparing tuition fees, they might compare that one school wants 10% of their income for 10 years, while another wants only 5% for 7 years. The latter school might be lower-end -- or it might be higher end and betting that its education is so valuable that it will do well on a smaller chunk of its students' income.
The incentives of the school align with a successful career for the student, which is good if that's all one wants. Of course, it isn't, so work must be taken to balance against the negatives of this. Those could include:
- Schools and students putting focus only on the financially lucrative subjects and classes. This could add disincentives for taking electives that round out an education.
- Schools being less welcoming of students likely to take non-traditional career paths. including the eccentric but brilliant
- Over emphasis on entrepreneurship. After all, just one Mark Zuckerberg or Larry Page type graduate who makes billions in their early life could endow the school for a long time.
- Possible incentive to drop out before the deadline. (Normally, the obligation would not kick in until second year or later.)
- Relative discouragement of those likely to take academic careers even in the lucrative fields. (Today, it is the reverse, with scholarships offered to such students, though this could continue.)
- Many others not foreseen at first
Plans could be put in place to counter these negatives, including rules enforced by laws and government grant conditions. The most lucrative programs -- computing, engineering, business, the law, medicine, sciences etc. might overtly subsidize the others. With no tuition fees for anybody, students who used to get scholarships might be offered waivers or reductions in the obligation. Students who continue on in academia could get their obligation reduced for each year they continue in academia or certain types of public service.
Wealthy parents and students could perhaps still pay ordinary tuition fees and avoid the obligation. Or take out student loans and pay the ordinary fees, as now -- if that is what they want, but this should only be done if it's clear it won't put the student at high financial risk.
There are some colleges who only teach the less remunerative subjects. They can't subsidize poetry with engineering. Some solution is needed for them, though it should be understood that it is not expected that students in those fields would attend for free, nor that students in lucrative fields should pay for the education of all those who are not. Any subsidies would be small enough to be affordable, and many might come from other places, like donors and government. No quality college education should be so worthless as to not boost a person's income enough to pay some decent portion of it back.
A lot of people compare this to indentured servitude, and that has become at the top of FAQs about ISAs. It clearly isn't legally indentured servitude, but one may debate the moral issues. In general, it contains a mix of elements from loans, investments and taxes. Investments and taxes increase payout with greater income, while loans have a fixed payment schedule. Debts last forever and must be paid regardless of the debtor's income, and can be escaped only through bankruptcy or forgiveness. Compared to a loan, the main downside is for those who are very successful, who pay more than they would have on a loan, subsidizing those who do not succeed, akin to progressive taxation. (Indeed, it could be that some schools who graduate future multibillionaires might pay for everything just from that.)