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Monetizing Higher Education: Can Investors Replace Government Lenders?
Can investors replace government lender?
By THOMAS G. DONLAN
September 12, 2015
In a mythical country church a long time ago, the minister preached a sermon every year on the subject of coeducation. He was horrified, because, “They take decent boys and girls and make them matriculate together. They even have to use the same curriculum.”
Nowadays matriculation is far more shocking than the fictional minister could have imagined, and not just because coeducation with all of its benefits is nearly universal. Starting college signals the beginning of four years of wretchedly excessive tuition payments for many parents and a decade or more of burdensome loan payments for many students.
Published prices for tuition at private, four-year, nonprofit colleges and universities have more than tripled in real terms, adjusted for inflation, in the past 40 years. The College Board’s annual report on “Trends in Higher Education” says the sticker prices at government-supported four-year colleges have risen almost as fast.
Compare the inflation-adjusted price of room and board—the other main product produced at institutions of higher education. It hasn’t quite doubled in the same period. That doubling would be outrageous if it were not overshadowed by the price of tuition.
Sticker Shock
Confronted with what seems to be evidence of nonprofit greed, administrators and apologists say that the sticker price is a form of involuntary altruism. Most students receive discounts—known in academia as scholarships and financial aid. Only those students with wealthy parents pay full freight, and those parents in effect are buying one education for the price of two.
Some counselors say a child of poverty can get a better financial package in the Ivy League than at a local community college, if the student is highly qualified and socially courageous. That doesn’t mean it’s easy.
The trend toward unrealistic sticker prices has gone furthest at some of the most prestigious and highly competitive colleges. Last year, the U.S. Education Department found 35 four-year, nonprofit colleges and universities with annual tuition surpassing $46,000, which is nearly twice the national average for such institutions.
Unfortunately for most of the not-wealthy but not-poor students and their parents, the discounts offered to students of limited means come with a catch: student loans that will be a burden after graduation—and a bigger burden if they never graduate.
The size and burden of student loans has become a powerful political issue, and the federal government has responded by increasing grants. Loans, which accounted for 55% of student aid in 2007-08, declined to 43% of student aid in 2013-14. But the volume of loans is still rising, and the indebtedness of students and former students last year was more than $1.2 trillion.
So the candidates for the Democratic presidential nomination are responding. Former Maryland Gov. Martin O’Malley moved to regulate the supply side with a proposal for state-by-state federal caps on public college tuition in proportion to each state’s median income. And Sen. Bernie Sanders of Vermont wants to end the burden of student debt by eliminating tuition at government colleges and universities. The federal government would pay two-thirds of the bill, and the feds would raise the money by taxing financial transactions.
With Sanders moving ahead in Iowa and New Hampshire polls, Hillary Clinton has begun to sell her own plan to spend federal dollars to reduce tuition at state schools and also cap loan payments at 10% of borrowers’ income. Details, however, are scarce.
Educational Speculation
There might be a better way to ease the financial burden of college tuition on students and families, not just those of the poverty class but also on middle-class and even upper-class people.
It would build on the existing income-based repayment plans for federal student loans, with a venture-investment twist and an equity kicker.
Instead of making students and their families solely responsible for college tuition, we might make it possible for others to share the burden. Instead of being responsible to the government to pay back loans, students might sell a percentage of their lifetime future earnings to investors for cash up front that they would use to pay tuition.
High-school students would monetize their SAT scores, academic grades, community service, extracurricular activities and special abilities, submitting them to the value judgments of their potential investors.
Investors would probably insist on some special protections from youthful irresponsibility, such as standards for grades and focus on remunerative careers, but that would be a helpful feature strengthening student efforts. We can see little economic or cultural harm if the system produces a few more chemical engineers and not as many unemployed art-history majors.
If the idea took off, it would be an easy second step for investment bankers to create portfolios of fund-seeking students, diversified by region, expected college major, professional goal, and other characteristics. Shares in the portfolios would be sold like shares in a mutual fund. With long-tailed returns, the students’ economic futures could be attractive investments for pension funds benefitting the older generation.
The Indiana Experiment
The idea is not new. Economist Milton Friedman came up with it a half-century ago. Now, Purdue University’s research foundation is looking for partners to help set up a system for what some call income-share agreements, and Rep. Todd Young (R., Ind.) has introduced a bill that would set rules to protect students and their investors from financial miscues.
Purdue President Mitchell Daniels, a former governor of Indiana, calls the idea a path to truly debt-free college, to “allow ambitious young people to work their way through college once they have completed college.” He denounces greater borrowing and greater taxation to support student debt—“a hair of the dog policy if ever there was one.”
As of now, however, there’s too much easy federal money floating through the education economy to tempt many students.
Editorial page editor Thomas G. Donlan receives e-mail at tg.donlan@barrons.com
Can investors replace government lender?
By THOMAS G. DONLAN
September 12, 2015
In a mythical country church a long time ago, the minister preached a sermon every year on the subject of coeducation. He was horrified, because, “They take decent boys and girls and make them matriculate together. They even have to use the same curriculum.”
Nowadays matriculation is far more shocking than the fictional minister could have imagined, and not just because coeducation with all of its benefits is nearly universal. Starting college signals the beginning of four years of wretchedly excessive tuition payments for many parents and a decade or more of burdensome loan payments for many students.
Published prices for tuition at private, four-year, nonprofit colleges and universities have more than tripled in real terms, adjusted for inflation, in the past 40 years. The College Board’s annual report on “Trends in Higher Education” says the sticker prices at government-supported four-year colleges have risen almost as fast.
Compare the inflation-adjusted price of room and board—the other main product produced at institutions of higher education. It hasn’t quite doubled in the same period. That doubling would be outrageous if it were not overshadowed by the price of tuition.
Sticker Shock
Confronted with what seems to be evidence of nonprofit greed, administrators and apologists say that the sticker price is a form of involuntary altruism. Most students receive discounts—known in academia as scholarships and financial aid. Only those students with wealthy parents pay full freight, and those parents in effect are buying one education for the price of two.
Some counselors say a child of poverty can get a better financial package in the Ivy League than at a local community college, if the student is highly qualified and socially courageous. That doesn’t mean it’s easy.
The trend toward unrealistic sticker prices has gone furthest at some of the most prestigious and highly competitive colleges. Last year, the U.S. Education Department found 35 four-year, nonprofit colleges and universities with annual tuition surpassing $46,000, which is nearly twice the national average for such institutions.
Unfortunately for most of the not-wealthy but not-poor students and their parents, the discounts offered to students of limited means come with a catch: student loans that will be a burden after graduation—and a bigger burden if they never graduate.
The size and burden of student loans has become a powerful political issue, and the federal government has responded by increasing grants. Loans, which accounted for 55% of student aid in 2007-08, declined to 43% of student aid in 2013-14. But the volume of loans is still rising, and the indebtedness of students and former students last year was more than $1.2 trillion.
So the candidates for the Democratic presidential nomination are responding. Former Maryland Gov. Martin O’Malley moved to regulate the supply side with a proposal for state-by-state federal caps on public college tuition in proportion to each state’s median income. And Sen. Bernie Sanders of Vermont wants to end the burden of student debt by eliminating tuition at government colleges and universities. The federal government would pay two-thirds of the bill, and the feds would raise the money by taxing financial transactions.
With Sanders moving ahead in Iowa and New Hampshire polls, Hillary Clinton has begun to sell her own plan to spend federal dollars to reduce tuition at state schools and also cap loan payments at 10% of borrowers’ income. Details, however, are scarce.
Educational Speculation
There might be a better way to ease the financial burden of college tuition on students and families, not just those of the poverty class but also on middle-class and even upper-class people.
It would build on the existing income-based repayment plans for federal student loans, with a venture-investment twist and an equity kicker.
Instead of making students and their families solely responsible for college tuition, we might make it possible for others to share the burden. Instead of being responsible to the government to pay back loans, students might sell a percentage of their lifetime future earnings to investors for cash up front that they would use to pay tuition.
High-school students would monetize their SAT scores, academic grades, community service, extracurricular activities and special abilities, submitting them to the value judgments of their potential investors.
Investors would probably insist on some special protections from youthful irresponsibility, such as standards for grades and focus on remunerative careers, but that would be a helpful feature strengthening student efforts. We can see little economic or cultural harm if the system produces a few more chemical engineers and not as many unemployed art-history majors.
If the idea took off, it would be an easy second step for investment bankers to create portfolios of fund-seeking students, diversified by region, expected college major, professional goal, and other characteristics. Shares in the portfolios would be sold like shares in a mutual fund. With long-tailed returns, the students’ economic futures could be attractive investments for pension funds benefitting the older generation.
The Indiana Experiment
The idea is not new. Economist Milton Friedman came up with it a half-century ago. Now, Purdue University’s research foundation is looking for partners to help set up a system for what some call income-share agreements, and Rep. Todd Young (R., Ind.) has introduced a bill that would set rules to protect students and their investors from financial miscues.
Purdue President Mitchell Daniels, a former governor of Indiana, calls the idea a path to truly debt-free college, to “allow ambitious young people to work their way through college once they have completed college.” He denounces greater borrowing and greater taxation to support student debt—“a hair of the dog policy if ever there was one.”
As of now, however, there’s too much easy federal money floating through the education economy to tempt many students.
Editorial page editor Thomas G. Donlan receives e-mail at tg.donlan@barrons.com