Another way to fund higher education: stocks

The recent campus crisis shows that universities are not investing enough in our nation’s students.

This is not surprising. Incentive structures are like that. Universities are no longer nonprofit institutions focused on higher education, but businesses where presidents like Claudine Gay act as asset managers and students act like customers. While these once-respected institutions claim tax-exempt status and operate lucrative endowments rivaling those of some small countries, many of their graduates are left with no time to enter the job market. They are unprepared and left with a lifetime of debt.

The corporatization of academia is made possible by a massive federal student loan program. With a reliable flow of funds to fund a new generation of students, universities place little or no consideration on the quality of their product: a ticket to a stable job and the tools to succeed there. I am acting without any hesitation.

To bring about real change in academia, we need to remove the federal government from the equation.

As Milton Friedman predicted in 1955, the private sector does not agree to use traditional debt instruments to finance education. The outcome for the borrower is too uncertain and the loan is not secured by physical collateral. Instead of accepting this market failure, the federal government has put in place an expensive, taxpayer-supported band-aid. 93.1 percent of the $1.3 trillion in student loan debt is held by the government.

The ideal way to fund higher education, like any risky venture, is through equity.

Student loans should be similar to equity contracts, where students fund their higher education by selling shares of their future earnings. The investor’s return is tied to the student’s professional success, rather than a fixed principal tied to an interest rate. This is similar to owning stock in a private company that generates higher profits based on its success.

This agreement, known as an Income Share Arrangement (ISA), works as follows. Suppose the student agrees to contribute 7% of her income for 5 years after graduation. If the student performs well, they pay their full tuition fees and earn additional profits for the provider. If you do poorly, you may not be able to repay the entire cost. Cross-subsidization by high-income earners helps offset the losses of low-income earners.

Ideally, the ISA provider is the university itself. ISAs offered by universities are aligning financial incentives for students and institutions, dramatically changing campus culture, and forcing universities to combat tuition inflation and bureaucratic bloat.

Since 1980, even when adjusted for inflation, tuition and room and board costs have increased 180 percent, eight times faster than wages, virtually guaranteeing that your income will not cover tuition. has been done. By tying university revenue to students’ post-graduation earnings, institutions are encouraged to be leaner and deliver reliable products with employability in mind. American academia will inevitably spend less time bickering about trivial social issues and more time teaching concrete skills. Universities like Northeastern University and the University of Waterloo that offer co-op programs with nearly guaranteed employment after graduation may become the norm.

For those who shudder at the thought of a society made up entirely of engineers and lawyers, income-sharing agreements will still help those pursuing degrees without the guarantee of well-paying employment. With the right income share agreement model, smart investors can fund diverse students within their portfolio of income share agreements and leverage cross-subsidies from high-income earners to improve the safety of students pursuing liberal arts careers. It can function as a net.

Also important to note is that university-provided ISAs transfer some risk from students and taxpayers. Current models predict that as many students graduate, their loan balances will only increase due to high interest rates and poor employment conditions, with 40% of borrowers expected to default on their loans this year. ISAs will encourage students to consider future income before signing contracts and encourage investors to attend universities that offer real benefits for both parties: gainful employment upon graduation. .

ISAs serve both students and investors, but they also free the federal government, and more importantly American taxpayers, from cyclical subsidy of the student loan market. The federal student loan program, initially estimated to generate revenue, has cost the nation more than $197 billion since the program’s inception. It’s time to stop bailing out a broken system.

Improving higher education requires promoting a realignment of incentives for the people universities are supposed to serve: students.

Jill Jacobson is a third-year law student at Boston University School of Law, a visiting scholar at the Independent Women’s Law Center (iwlc.org), and a contributor to Young Voices.