
Let Students Sell Equity in Their Higher-Education to Finance It - seibelj
http://www.economist.com/news/finance-and-economics/21661678-funding-students-equity-rather-debt-appealing-it-not
======
shoo
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...](https://en.wikipedia.org/wiki/Tertiary_education_fees_in_Australia#History)

~~~
animefan
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.

~~~
Asbostos
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.

~~~
shoo
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).

~~~
animefan
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.

------
morgante
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.

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

~~~
morgante
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.

------
Spooky23
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.

~~~
animefan
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.

~~~
Spooky23
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!

~~~
animefan
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.

------
thuuuomas
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."

~~~
animefan
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.

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

~~~
bpodgursky
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.

~~~
rayiner
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...](http://www.nytimes.com/2014/05/18/magazine/who-gets-to-
graduate.html) ("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?

~~~
bpodgursky
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.

~~~
TheCoelacanth
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.

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

------
bradleyjg
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.

~~~
mc32
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?

~~~
vasilipupkin
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.

------
theodorewiles
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?

------
clamprecht
And watch colleges raise their prices even more.

~~~
nsxwolf
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.

------
snomad
I believe it was tried already with My Rich Uncle
[https://en.wikipedia.org/wiki/MyRichUncle](https://en.wikipedia.org/wiki/MyRichUncle).
They folded in 2009.

~~~
theodorewiles
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.

------
InclinedPlane
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.

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

~~~
jschwartzi
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.

~~~
jmount
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).

------
Futurebot
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...](https://medium.com/@opirmusic/why-software-developers-should-still-
choose-to-go-to-university-if-someone-else-is-paying-45091d22acc1)) - 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.

------
bro-stick
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."

~~~
seanflyon
> Many countries already do this.

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

------
ctoscano
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.

------
traviagio
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.

------
superuser2
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](https://aims.uchicago.edu/page/2000-robert-pippin)

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

~~~
bradleyjg
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?

~~~
superuser2
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.

------
baristaGeek
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.

~~~
morgante
> 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.

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

~~~
morgante
> 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.

------
brudgers
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.

------
guard-of-terra
Let students study for free. Germany did this, why not your country?

~~~
krapp
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.

~~~
meric
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.

------
001sky
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.

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

~~~
animefan
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.

~~~
twblalock
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.

