Equity Is Better Than Debt In Financing Higher Education

Forbes ^ | March 26, 2014 | George Leef

[reaganaut1]

Sometimes it makes sense to borrow to finance an investment; sometimes equity is a better choice. When it comes to college education, however, borrowing (especially through the government) is usually a mistake. If we could catalyze a system of equity financing for higher education, that would be a great improvement over the status quo.

In his 1955 paper “The Role of Government in Education,” Milton Friedman suggested the idea of equity contracts to finance college education. Friedman thought that loans were not the appropriate means of financing education and argued that the better way was to advance the needed funds for college to qualified students, who would repay a percentage of their earnings for an agreed-upon number of years.

That is, instead of students borrowing money for college that must be repaid with interest, investors cover the cost of their education and later recoup their investment (perhaps making a profit but nothing would be guaranteed) as the student makes contractual payments based on his or her earnings.

Unfortunately, the concept of equity investment in students’ education has never caught on. The main reason is that the federal government began student loan programs back in the early 1970s and those programs mushroomed. With student loans easy and affordable, there was little chance for alternative finance systems to develop.

Friedman’s aversion to student loans has proven to be entirely justified by events. Politicians, eager to project a “pro-education” image, kept making college loans (as well as grants) more appealing. As the notion that college was a sure-fire investment worth borrowing great amounts for became widespread, the number of students taking out college loans grew enormously, as did their average level of debt.

[cynwoody]

Sounds vaguely Islamic.

Like, how do you have a loan and pay interest without having a loan and paying interest?

[mistfree]

I like the concept, it puts the colleges in the position of trying to get their students the best paying jobs they can because their revenue depends on it. Sounds like a win for the students. Probably put an end to “womens studies”.

[Old North State]

It sounds like having students finance their education by selling ‘shares’ in their future income, like common stock shares in corporation. Raising money by selling stock is a viable alternative to taking out loans for companies for a host of reasons, but to attract investors it usually requires an independent market for the shares(like the NYSE, etc.) I’m not sure shares in an individual would ever attract a market. It would be all to easy down the road for an activist judge or a left wing administration, to declare such a market a form of indentured servitude and all ‘income share’ contracts null and void.

[Dilbert San Diego]

I’ve seen reports which say that colleges have raised tuition and fees precisely due to the fact that there is so much loan money available.

College costs have risen far higher than the rate of inflation in recent decades. So one does wonder, if the knowledge that ever increasing tuition will be paid by loan funds, caused college administrators to keep raising tuition.

[KarlInOhio]

Probably put an end to “womens studies”.

On the other hand it removes from the student the economic disincentive of getting such a degree. If I were in one of the sciences, engineering or finance, I would be looking for a fixed dollar loan and leave the indentured servitude to the lower paying degrees. Maybe in a free market students aiming for a high paying career would be able to negotiate a lower indenture rate than art (you want fries with that) history.

[VanShuyten]

” advance the needed funds for college to qualified students”

I cannot see where a liberal academic would not find a Women’s Studies student unqualified. There’s no incentive for the administrator to discriminate based on future earnings even though the college as a whole would lose money.

[grania]

It might have worked back when this idea was first proposed. Jobs were plentiful and people had confidence in the future.

But today? Being unemployed has become quite lucrative. If a person went to work and part of their salary would go to that college debt, it might be another reason to become a taker instead of a contributer.