Monday, July 16, 2007

EduCap --Saint or Sinner?

By Richard Vedder

The Washington Post this morning has a huge story about Catherine Reynolds and her non-profit company EduCap. Full disclosure: I served on the Spellings Commission on the Future of Higher Education with Catherine, with whom I got along quite well. Also, she once bought me a nice dinner at a Commission meeting in Nashville, along with several others, including former Astronaut Sally Ride.

The Post story is filled with some interesting tidbits, which may be hard to explain given the nonprofit nature of EduCap. How can a head of a non-profit company have command over a $30 million Gulfstream jet, and be able to give $100 million away from the "Catherine Reynolds Foundation", which, in fact, is a division of EduCap? Why does EduCap not pay taxes when, say, Citibank, JP Morgan Chase, or other big lenders have to pay them? These are questions raised in the story, and I must say they are legitimate questions to ask.

At the same time, there appears to be some bashing going on that I think is based on the fact that some individuals do not believe the private sector should be giving out loans. Loans are good, have integrity, etc., if granted by governments or are least guaranteed by governments, but they are bad and dangerous if granted by private lenders without federal participation. That is a sweeping and unfair generalization. Are there loaning abuses going on? Absolutely. Are there college officials wined and dined by loan companies with whom they do business? Every day. Is the solution to ban private loans? No. No. No. The solution is to get college costs under control, to reduce massive payments by governments to individuals that accelerate the cost explosion (and hence the need for loans), and to let markets work. And get universities out of the loan business except with their own money (if they wish).

Rich schools like Harvard, Yale and Princeton should let students in for free in exchange for a share of student earnings beyond subsistence for X number of years after graduation. In other words, Harvard should buy equity in the "human capital" that it allegedly creates, include it as an asset in its endowment, and there should be no student loans. Alternatively, students should be given the option of paying tuition now with no future obligation. However, I see no reason why Harvard, Yale and Princeton charge any tuition at all given that they earn at the minimum $75,000 per student in sustainable endowment income annually. There is a fairly decent case that can be made that, given the huge value of tax exempt status to them, these should not be allowed to charge tuition, although I would not go that far. There are other variants on this equity scheme that are possible. Poorer schools should simply point students in the direction of loan providers but have no other connection whatsoever with them -- no preferred provider lists, no sharing of FAFSA information with them, etc., etc.

1 comment:

Alphonso Quashie said...

Now that is a heady idea I must admit, having Ivy League schools take a share of the graduates salaries in lieu of tuition! I guess it wouldn't work for the art majors but for most everybody else. You have some novel ideas. Not too many people could make EduCap seem more saint than sinner. I guess there are non-profits that generate well, if not profit, then a great deal of revenue. Does that make them bad, not sure, should they pay taxes on it, I wonder. The officers who pull down the salaries pay taxes on those, so maybe its okay. Loaning money to students at 18%, hmmmm, not sure that's a non-profit endeavor.