In-Ventured Servitude: A Potentially Horrifying Way to Pay for College

Willy Staley

By Willy Staley  Updated on Fri Jun 15, 2012

Willy Staley is a staff writer and columnist for MyBankTracker.com. His columns cover banking, policy, and culture. More Columns »

 

College tuition, student loan debt, and unemployment for young people are all at record highs in the United States. Most observers understand that this current paradigm cannot hold; we cannot continue to raise tuitions, making our graduates further indebted upon graduation, especially when our economy cannot provide jobs that can help them out of the debt trap. From the Opinion pages of The New York Times comes a strange solution that sounds incredibly similar to indentured servitude.

Luigi Zingales, a professor of entrepreneurship and finance at University of Chicago’s Booth School of Business, pens a provocative piece arguing that a venture capital mentality might be a better way to finance higher education, considering its current crisis. So, rather than allow lenders to put students in debt, Zingales proposes that investors buy equity in promising 18-year-olds’ future earnings. To wit:

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.

Very successful students who become venture capitalists themselves will make lots of money for their investors, thereby offsetting the losses associated with duds who do things like write for a living. Furthermore, investors would help push teenagers toward the right schools to maximize returns. But also, he notes, after graduation, students would not be forced into lucrative but soulless jobs just in order to repay their debts — they just need to pay back a percentage.

Where this scheme gets interesting is on the collection side. VCs investing in teenagers could partner with the IRS to collect the payments, says Zingales, because “the cost of enforcing contracts contingent on future income is very large.”

Putting students in debt that does not discharge, with a government guarantee behind it, is obviously a bad situation, and precisely what has led to record high student debts and tuitions. But using the federal government as a collector instead of a guarantor seems potentially hideous, and once again puts the federal government in the business of protecting investors rather than students. Tax cheats go to jail — would someone hiding her income from a venture capitalist go to jail, too?

May the odds be ever in your favor

The thought is sickening, in a way, but not as sickening as the idea of adding yet another stressful hurtle to the college admissions process for 18-year-olds. In addition to high school, admissions essays, SATs, interviews, school tours, and the terrifying social pressures of high school, Zingales would also like 17- and 18-year-olds to talk to smug, self-satisfied VC types who will assess whether they would like to invest in this child’s future. Perhaps Zingales pictures these VC firms as impersonal, and merely looking at board scores and grades and the like, but the system brings one pop cultural reference to mind: the sponsors from The Hunger Games, who pick their favorite, most entertaining and/or handsome competitors to give life-savings gifts to, when it counts.

What Zingales misses, when he laments that taxpayers need to pay into the costs of higher education even though they may not get an education themselves, is that higher education is about more than maximizing shareholder returns. There’s a reason our government guarantees loans: because it would like more Americans to seek higher education, and by making it easier to access money to do so, more Americans will get educated. What our government did not do is request that universities benefitting from this influx of money keep their prices low, in return. And so we have our current conundrum.

(A similar relationship has arisen in the health care industry, which is what has led to our out-of-control health care costs, according to some. Because people need health care at some point, it is a guaranteed source of revenue for health care providers. And so, they charge whatever they like, and so prices are inflated all around. In other countries where the government provides health insurance, they also regulate prices to prevent this sort of situation. We only pay more for health care because we have let the price go higher because the industry has a guaranteed source of revenue, and therefore the market cannot keep its price low; the same seems to be true for a college education.)

Zingales’ argument ignores the plain fact that the federal government, and all Americans, ought to care about higher education, but that higher education needs to be fixed. It needs to be cheaper, and it needs to help keep America competitive. Thinking of new (and icky!) financial products to keep our currently-broken system afloat is a dead-end. And it’s a creepy one at that.

 

Related
 
 

Post a Comment