
The College Graduate as Collateral - paulgerhardt
http://www.nytimes.com/2012/06/14/opinion/the-college-graduate-as-collateral.html?_r=1
======
abrimo
I grew up in the US however I'm Australian and attended university in
Australia.

The Australian system (HECS
[http://en.wikipedia.org/wiki/Tertiary_education_fees_in_Aust...](http://en.wikipedia.org/wiki/Tertiary_education_fees_in_Australia))
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/...](http://www.ato.gov.au/individuals/content.aspx?doc=/content/8356.htm)),
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.

~~~
sliverstorm
So if the debt is interest-free, who foots the missed opportunities for
capitol gains?

(The school has to pay its operating costs, so these are at least partly real
expenses, not numbers in a ledger.)

~~~
Retric
The 10-20% discount is just another way of saying the loans have a direct cost
of 10-20% and then get indexed to inflation. With that 10-20% upfront cost
plus inflation adjustments work out close to the same net cost as my 3.2%
student loans in the US assuming you pay them back in a 10-20 year time frame.

~~~
jessriedel
In other words, the government is subsidizing the loan just like in the US.

------
mc32
I don't understand this:

>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.

~~~
qq66
Also, about 1 in 400 companies that seek venture capital end up raising a VC
round. The country will be in severe trouble if only 1 in 400 people who seeks
a student loan receives one.

~~~
mc32
Good point.

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?

------
kevinpet
It started out so promising, with good observations that more people need to
hear, then degenerated into indentured servitude.

If all else fails, how about we try the market? Make student loans
dischargeable in bankruptcy and let the banks figure it out.

~~~
pjscott
It's equivalent to giving students entering college a choice of three ways to
pay for it:

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.

~~~
kevinpet
It is fractional indentured servitude. Or if you prefer, a privately collected
income tax. Indentured servitude is not and never was slavery. It was a
voluntary contract entered into by people who thought it was their best
option. I think it is somewhat incumbent upon those suggesting this as an
option to show why avoids the problems that came about with the historical
versions of it.

------
ecmendenhall
I like this idea, but adverse selection is a huge unsolved problem and heavily
subsidized loans crowd out the alternatives. If you're a talented student with
reason to expect high future income (and your education isn't already paid for
with merit aid), why would you choose equity over very cheap debt?

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.

~~~
pjscott
> If you're a talented student with reason to expect high future income (and
> your education isn't already paid for with merit aid), why would you choose
> equity over very cheap debt?

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.

------
krschultz
Tieing the cost of the tuition to your future income probably won't work.

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?

~~~
_delirium
> 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.

------
LyleKop
Sounds like a nice idea, but has the author actually run any numbers on this?
I have doubts that some fraction of the excess income of a few standouts is
going to foot the entire tuition bill for everyone else. It doesn't work at
Harvard.

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.

~~~
_delirium
Harvard already has an interesting system, a pretty large expansion of the
traditional need-based aid, where students from families making <$50k income
pay _no_ tuition at all in the first place, so the only loans they need are
for living expenses and books.

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.

~~~
krschultz
I think this is the solution for the top schools that have very rich people
willing to pay full boat tuition and/or donate to the endowment.

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.

------
ckluis
I saw someone on ebay offer 10% of all future earnings for XXX some years ago.
I immediately liked the idea because it could really help some smart,
motivated, & broke students take risks (college, startup, w/e) and not worry
about money immediately.

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.

------
xiaoma
> _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.)_

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.

------
eli_gottlieb
Yes, structuring personal finance around equity rather than debt is a great
idea.

 _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.

------
GFischer
In my country, Uruguay, college education used to be completely free.

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.

~~~
pjscott
That system sounds similar to the one proposed in the article, with a few
differences in the way the incentives are structured:

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.)

------
cmcewen
Might as well have VCs looking at 5th graders instead of NBA scouts.
[http://articles.chicagotribune.com/2010-03-30/sports/ct-
spt-...](http://articles.chicagotribune.com/2010-03-30/sports/ct-spt-0331-boy-
basketball-star--20100330_1_high-schools-and-colleges-gene-pingatore-kid)

