One of America’s best young economists, Luigi Zingales, has some smart things to say about fixing the problems with financing American higher education:
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.)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.The cost of enforcing contracts contingent on future income is very large, but there is an effective solution: piggybacking on the tax collection system. The Internal Revenue Service could perform collection services on behalf of private lenders, and at no cost to taxpayers. (In Australia, such a system has been in place since the 1980s. The national tax agency enforces repayment of loans contingent on income, though the payments of the wealthiest graduates are capped, and therefore less affluent graduates need to be charged more to make the program viable than in the system I am proposing.)
It might only require a bit of a nudge for important schools to adopt this kind of innovative solution. As Zingales points out, many of the country’s top schools already operate on a similar model:
In fact, top colleges like Yale are already — implicitly — using a form of equity contract. They charge the average student less than the average cost of educating each student, while financing the shortfall with donations from the wealthiest alumni. It is tantamount to an implicit stake on the wealthiest alumni’s income. This system works very well for the top schools, which produce at least a few multibillionaires. It is much less effective for normal, middle-of-the-road colleges. It is precisely for these colleges that a formal equity contract would work best.
Although many would balk at a system that brings to mind indentured servitude (despite the author’s statements to the contrary) the current system of non-dischargable student loans has essentially the same effect at much greater cost to the taxpayer.While it is unlikely that this plan will ever be broadly implemented, it points to a potential transformation in America’s approach to higher education. This kind of radical thinking is what we need more of when examining how to reform our often dysfunctional higher education system.