By: Matthew Denhart
A growing movement in international development is the continued development of the microfinance sector. Microfinance attempts to overcome market failure in lending to the poor, who often do not have the means to post collateral to help offset a bank's risk of lending. To manage risk, microfinance institutions insist that borrowers arrange themselves into peer groups, and that the entire group guarantee repayment of the loan. This allows people with very local knowledge of the credit worthiness of their peers to provide information on potential borrowers that would have been extremely costly for the microfinance institution to obtain for itself. Although microfinance seems to work better in some countries than others, and microfinance institutions have varying levels of success, overall this system of personalized lending appears to be a promising way to help finance the productive activities of the poor.
Earlier this week, a few of my colleagues and I had lunch with a bright young lawyer, Tonio DeSorrento. Tonio has a number of clients who are trying to develop another innovative financial product, namely human capital contracts (HCCs) to finance higher education. CCAP has discussed this equity-like concept in a number of places (see here, here, and here).
At lunch I was intrigued to learn from Tonio that a few HCC arrangements currently exist, and that they operate in a similar way as microfinance arrangements (see this article in The Economist). Perhaps the greatest challenge facing HCCs is the question of whether contracts can be enforceable. An investor agreeing to pay college costs up front for a percentage of a student's future income must know that the student will be good for the money. This can be very difficult to discern since there are a number of ways one could evade future repayment.
Two organizations, Lumni and Enzi, have largely taken the microfinance model and applied it to HCCs. Lumni seeks donations from individuals that go into a fund they manage and then use to invest in equity contracts with students. Enzi operates by connecting individual investors to individual borrowers through the internet in a fashion similar to the popular online microfinance organization, Kiva.org. These peer-to-peer arrangements attempt to overcome the enforceability issue by personalizing the loans, similar to microfinance.
As Tonio related to me, most HCCs are currently being originated with below market-rate capital. Can the idea be translated into a successful for-profit financial product? Microfinance has had some major successes.
HCCs have other significant challenges too though. As Andy Gillen points out, probably the most significant is that readily available and cheap government loans pose very stiff competition since they offer interest rates that fall well below the market rate. This creates an adverse selection problem for HCC providers. Only those students who believe they would have a lower repayment obligation by agreeing to pay a portion of future income would prefer HCCs to subsidized loans. The students finding themselves in this predicament are those who are likely to not have high incomes upon graduation, and thus are generally a losing financial proposition for HCC providers.
However, Tonio informs us that there are several start-ups who are trying to overcome these, and other challenges. This is an encouraging sign. I will be following the development of this industry closely.
Showing posts with label College Finance. Show all posts
Showing posts with label College Finance. Show all posts
Friday, September 10, 2010
Monday, August 09, 2010
Student Fees and the Regressive Athletics Tax
By: Matthew Denhart and Andrew Cadamagnani
A few weeks ago, Steve Burkowitz from USA Today pointed us to a great Master's thesis written by Katherine Ott. Ms. Ott's thesis explores the interesting, and often overlooked, topic of student fees. She rightly notes that even amidst tuition freezes, schools have often turned to fee increases as a type of "backdoor" tuition increase.
Using U.S. Department of Education data for 2000 and 2008, we examined the growth in student fees relative to tuition at four-year public research institutions (165 in total). The numbers show that average real inflation adjusted tuition increased almost 53 percent from $3,480 to $5,320. Meanwhile, over this same period, required fees rose 36.5 percent from $1,261 to $1,721.
Although the fee increase was somewhat less severe, student fees as a percentage of tuition increased. In 2000, the ratio of fees to tuition was around 35 percent, but by 2008, this had jumped to almost 43 percent.
However, the most interesting dimension of the thesis involves students' knowledge of fees and whether fees are allocated according to students' preferences. To analyze these questions, Ms. Ott surveyed students at the University of Toledo (a four-year public school in northwestern Ohio).
Her research found that roughly 91% of respondents knew they paid a student fee, but only 43% could correctly identify the amount. Furthermore, 43% believed the fee was less than it actually was, while only 14% thought it was more, meaning that as a whole these students underestimated the fee amount.
As their three most important uses of student fee dollars, the students listed: (1) the student recreation center, (2) the student medical center and (3) the student union.
Yet, in 2008, intercollegiate athletics (ICA) and cheerleading received nearly $10 million in student fees, more than any other unit. Interestingly, only 25% of surveyed students believed athletics and cheerleading received any general fee funding and 39% responded that ICA and cheerleading were not important to them.
Ott's thesis does much to shed light on this growing scandal. Students are increasingly being charged in back-handed ways to fund the ICA "Arms Race." In 2007-08, the 101 public FBS institutions for which we have data, reported spending $338.9 million dollars of student fees to subsidize athletics, or an average of about $3.4 million each.
However, ICA subsidization, even when not directly funded through student fees, also affects students. Money is fungible, meaning that every dollar spent on ICA, is a dollar that cannot be spent elsewhere (or used to reduce tuition/fees). The graph below shows the sources of funding for the ICA sports subsidy.
We have been arguing that the ICA subsidy is a regressive tax on precious resources. Students and taxpayers are increasingly footing the bill of an athletics complex. Ott's thesis shows that at least at Toledo (which is among the leaders in the largest ICA subsidies), students often do not support their fees going primarily to ICA. Does this hold true at other institutions? CCAP hopes to explore this question very seriously within the next year.
A few weeks ago, Steve Burkowitz from USA Today pointed us to a great Master's thesis written by Katherine Ott. Ms. Ott's thesis explores the interesting, and often overlooked, topic of student fees. She rightly notes that even amidst tuition freezes, schools have often turned to fee increases as a type of "backdoor" tuition increase.
Using U.S. Department of Education data for 2000 and 2008, we examined the growth in student fees relative to tuition at four-year public research institutions (165 in total). The numbers show that average real inflation adjusted tuition increased almost 53 percent from $3,480 to $5,320. Meanwhile, over this same period, required fees rose 36.5 percent from $1,261 to $1,721.
Although the fee increase was somewhat less severe, student fees as a percentage of tuition increased. In 2000, the ratio of fees to tuition was around 35 percent, but by 2008, this had jumped to almost 43 percent.
However, the most interesting dimension of the thesis involves students' knowledge of fees and whether fees are allocated according to students' preferences. To analyze these questions, Ms. Ott surveyed students at the University of Toledo (a four-year public school in northwestern Ohio).
Her research found that roughly 91% of respondents knew they paid a student fee, but only 43% could correctly identify the amount. Furthermore, 43% believed the fee was less than it actually was, while only 14% thought it was more, meaning that as a whole these students underestimated the fee amount.
As their three most important uses of student fee dollars, the students listed: (1) the student recreation center, (2) the student medical center and (3) the student union.
Yet, in 2008, intercollegiate athletics (ICA) and cheerleading received nearly $10 million in student fees, more than any other unit. Interestingly, only 25% of surveyed students believed athletics and cheerleading received any general fee funding and 39% responded that ICA and cheerleading were not important to them.
Ott's thesis does much to shed light on this growing scandal. Students are increasingly being charged in back-handed ways to fund the ICA "Arms Race." In 2007-08, the 101 public FBS institutions for which we have data, reported spending $338.9 million dollars of student fees to subsidize athletics, or an average of about $3.4 million each.
However, ICA subsidization, even when not directly funded through student fees, also affects students. Money is fungible, meaning that every dollar spent on ICA, is a dollar that cannot be spent elsewhere (or used to reduce tuition/fees). The graph below shows the sources of funding for the ICA sports subsidy.
We have been arguing that the ICA subsidy is a regressive tax on precious resources. Students and taxpayers are increasingly footing the bill of an athletics complex. Ott's thesis shows that at least at Toledo (which is among the leaders in the largest ICA subsidies), students often do not support their fees going primarily to ICA. Does this hold true at other institutions? CCAP hopes to explore this question very seriously within the next year.
Friday, July 30, 2010
Faculty Salaries as a Percentage of Tuition Revenues
By: Ryan Brady
The CCAP has recently begun to take a close look at the relationship between tuition paid by students and the percentage of this tuition that ends up in the pockets of their Instructors. What we have found is that, unlike the days of Socrates, much of this money is quickly absorbed by universities to support non-instructional spending.
Using data provided by the Delta Cost Project, I calculated the instructional salaries as a percentage of tuition for the 610 schools included in the 2010 Forbes ranking of American colleges and universities. Public and private universities were considered separately. The average ratio of tuition payments to faculty salaries for public universities was 71%. As expected, since private universities receive very little state support, and rather rely on much higher tuition charges for their funding, the average ratio for private universities was a much lower 29%.
It is important to note that there is some variation within both categories. Some schools do a much better job than the rest at directing tuition dollars to instruction. For the public schools, UCLA, University of Alabama at Birmingham and UNC at Chapel Hill perform the best with ratios of 158%, 157% and 154% respectively. Within the private school category, Yale University is at the top with a ratio of 159%. Behind Yale are the California Institute of Technology and Washington University in St. Louis at 145% and 135%.
On the flip side, within each category, some do very poorly. Here is a list of the 5 public and private universities with the lowest ratio of tuition payments to faculty salaries:
Public Universities:
Miami University- Oxford (24.26%)
Coastal Carolina University (33.14%)
University of Vermont (33.53%)
Fort Lewis College (33.73%)
Troy University (35.12%)
Private Universities:
Emerson College (13.25%)
College of the Atlantic (13.65%)
Colby-Sawyer College (13.67%)
Carroll College (14.09%)
Elmira College (14.50%)
With schools such as Miami using less than 25% of their tuition payments on instruction, it becomes apparent how much money is diverted from the primary mission of our universities—student instruction. As tuition and fees continue to climb, the ideal of a college education is beyond the reach of many American families. It is important that we reform higher education to reduce excessive spending on non-instructional dimensions of higher education in an effort to reduce costs to students and taxpayers.
The CCAP has recently begun to take a close look at the relationship between tuition paid by students and the percentage of this tuition that ends up in the pockets of their Instructors. What we have found is that, unlike the days of Socrates, much of this money is quickly absorbed by universities to support non-instructional spending.
Using data provided by the Delta Cost Project, I calculated the instructional salaries as a percentage of tuition for the 610 schools included in the 2010 Forbes ranking of American colleges and universities. Public and private universities were considered separately. The average ratio of tuition payments to faculty salaries for public universities was 71%. As expected, since private universities receive very little state support, and rather rely on much higher tuition charges for their funding, the average ratio for private universities was a much lower 29%.
It is important to note that there is some variation within both categories. Some schools do a much better job than the rest at directing tuition dollars to instruction. For the public schools, UCLA, University of Alabama at Birmingham and UNC at Chapel Hill perform the best with ratios of 158%, 157% and 154% respectively. Within the private school category, Yale University is at the top with a ratio of 159%. Behind Yale are the California Institute of Technology and Washington University in St. Louis at 145% and 135%.
On the flip side, within each category, some do very poorly. Here is a list of the 5 public and private universities with the lowest ratio of tuition payments to faculty salaries:
Public Universities:
Miami University- Oxford (24.26%)
Coastal Carolina University (33.14%)
University of Vermont (33.53%)
Fort Lewis College (33.73%)
Troy University (35.12%)
Private Universities:
Emerson College (13.25%)
College of the Atlantic (13.65%)
Colby-Sawyer College (13.67%)
Carroll College (14.09%)
Elmira College (14.50%)
With schools such as Miami using less than 25% of their tuition payments on instruction, it becomes apparent how much money is diverted from the primary mission of our universities—student instruction. As tuition and fees continue to climb, the ideal of a college education is beyond the reach of many American families. It is important that we reform higher education to reduce excessive spending on non-instructional dimensions of higher education in an effort to reduce costs to students and taxpayers.
Monday, July 26, 2010
The Real ICA Scandal
By: Matthew Denhart & Michael Malesick
As the college football season is getting underway, all the talk recently has focused on reports that college players attended a Miami Beach party thrown by 49ers running back Frank Gore at which professional agents were present (and perhaps helped fund). If true, this of course would be a violation of sacrosanct NCCA policies that forbid amateur college athletes from financially benefiting from their sports participation. But who cares? We have argued that by-and-large, major college athletics have greatly deviated from their "amateur" ideal and that players should be paid for their services anyway.
Data provided by USA Today and the U.S. Department of Education suggest that the real intercollegiate athletics (ICA) scandal is the amount of money used to subsidize sports in the first place. CCAP has argued this subsidy acts as a tax on scarce educational resources and that serious reform is needed.
Increasing college access to lower income groups through Pell grant assistance is a major national objective. Yet, how serious is this commitment relative to subsidizing ICA? We have explored this question, and our findings are not very encouraging.
Dividing ICA subsidy outlays by Pell grant outlays for 2008 (the most recent year data are available) shows that at the 99 public FBS schools, the average ratio was 59 percent. This means that, on average, more than half as many resources are devoted to ICA than to funding Pell grants for students. In a sample 108 schools from the FCS and "No Football" divisions, the ratio is even worse at 108 percent, meaning that at these schools, on average, more money is devoted to subsidizing athletics than to Pell grants.
Some schools are worse than others. Listed below are the top 10 most egregious offenders in the FBS and FCS/No Football:
FBS
1. U of Virginia (289%)
2. U of Wyoming (240%)
3. U of Nevada-Reno (186%)
4. Miami U (OH) (161%)
5. Louisiana Tech U. (146%)
6. U of Alabama-Birmingham (138%)
7. Eastern Michigan U. (127%)
8. U of Maryland (124%)
9. U of Connecticut (123%)
10. Ball State U (122%)
FCS/No Football
1. Citadel (667%)
2. U of Delaware (564%)
3. College of William & Mary (490%)
4. James Madison U (486%)
5. Manhattan College (415%)
6. VMI (386%)
7. Longwood U (325%)
8. U of New Hampshire (268%)
9. Delaware State U (251%)
10. Coastal Carolina U (244%)
Topping the FBS list is the University of Virginia, where Pell grant outlays were only $4.1 million compared to ICA subsidies close to $11.9 million. At the nation's oldest public institution, William and Mary, ICA subsidies were over $9.5 million while Pell grant outlays were much lower at around $1.95 million.
While America's political and academic leaders espouse the noble goal of increased access, their funding priorities do not match the rhetoric. As college tuition continues to climb, funding for athletics has likewise grown. Perhaps the NCAA should be investigating this scandal rather than fretting over the partying habits of college athletes.
As the college football season is getting underway, all the talk recently has focused on reports that college players attended a Miami Beach party thrown by 49ers running back Frank Gore at which professional agents were present (and perhaps helped fund). If true, this of course would be a violation of sacrosanct NCCA policies that forbid amateur college athletes from financially benefiting from their sports participation. But who cares? We have argued that by-and-large, major college athletics have greatly deviated from their "amateur" ideal and that players should be paid for their services anyway.
Data provided by USA Today and the U.S. Department of Education suggest that the real intercollegiate athletics (ICA) scandal is the amount of money used to subsidize sports in the first place. CCAP has argued this subsidy acts as a tax on scarce educational resources and that serious reform is needed.
Increasing college access to lower income groups through Pell grant assistance is a major national objective. Yet, how serious is this commitment relative to subsidizing ICA? We have explored this question, and our findings are not very encouraging.
Dividing ICA subsidy outlays by Pell grant outlays for 2008 (the most recent year data are available) shows that at the 99 public FBS schools, the average ratio was 59 percent. This means that, on average, more than half as many resources are devoted to ICA than to funding Pell grants for students. In a sample 108 schools from the FCS and "No Football" divisions, the ratio is even worse at 108 percent, meaning that at these schools, on average, more money is devoted to subsidizing athletics than to Pell grants.
Some schools are worse than others. Listed below are the top 10 most egregious offenders in the FBS and FCS/No Football:
FBS
1. U of Virginia (289%)
2. U of Wyoming (240%)
3. U of Nevada-Reno (186%)
4. Miami U (OH) (161%)
5. Louisiana Tech U. (146%)
6. U of Alabama-Birmingham (138%)
7. Eastern Michigan U. (127%)
8. U of Maryland (124%)
9. U of Connecticut (123%)
10. Ball State U (122%)
FCS/No Football
1. Citadel (667%)
2. U of Delaware (564%)
3. College of William & Mary (490%)
4. James Madison U (486%)
5. Manhattan College (415%)
6. VMI (386%)
7. Longwood U (325%)
8. U of New Hampshire (268%)
9. Delaware State U (251%)
10. Coastal Carolina U (244%)
Topping the FBS list is the University of Virginia, where Pell grant outlays were only $4.1 million compared to ICA subsidies close to $11.9 million. At the nation's oldest public institution, William and Mary, ICA subsidies were over $9.5 million while Pell grant outlays were much lower at around $1.95 million.
While America's political and academic leaders espouse the noble goal of increased access, their funding priorities do not match the rhetoric. As college tuition continues to climb, funding for athletics has likewise grown. Perhaps the NCAA should be investigating this scandal rather than fretting over the partying habits of college athletes.
Thursday, July 15, 2010
A Graduation Tax in the UK?
by Daniel L. Bennett
The distressed UK government is considering imposing a so-called graduation tax rather than asking students to pay a higher tuition, as Business Secretary Vince Cable describes in the video below.
According to Cable:
A “graduation tax” is in theory, similar to the concept of a human capital contract. One argument against such a tax would be that it is similar to indentured servitude –we provide you with this service (education) and in return you agree to provide us with X amount of your earnings for Y number of years. After that, you are free to do as you please. Framing the tax in these terms would likely draw strong political opposition.
Perhaps a stronger argument against it would be that any such financial arrangement should not be a function of an inefficient bureaucratic government that forces all students into a contract that many would not likely voluntarily enter into.
Such a “tax” is also likely to be highly progressive in that it benefits those students who will go into low-paying careers, while it punishes those who go on to high paying ones. In the case of the latter and those in middle and upper middle-income tracks, they would likely have preferred to take out a fixed-repayment debt (bond) to pay higher tuition than to sell equity in themselves. I think that most students are aware of their earnings potential while in college and it likely shows by what fields they choose to study (e.g. – business and engineering majors are likely to earn more than humanities majors).
As Cable indicated, the UK tax would be highly progressive. One possible unintended consequence of this could be that those with the greatest potential will opt out of college altogether, or drop out early in favor of entering the workforce (or starting up a company). This strategy worked quite well for folks like Bill Gates, Michael Dell and Mark Zuckerberg. It may also create a disincentive for graduates to work more or take promotion, as the tax burden will rise with earnings.
The highly progressive tax will also make it less likely that wealthy graduates will extend their philanthropic gifts to universities if they are already paying significant taxes to cover the costs of their education, which may or may not have contributed to their success. I think this may be the biggest unintended consequence of the tax, as private philanthropy is a significant source of finance in the U.S. and most of the rest of the world is trying to figure out how to tap such resources. The answer to this isn’t all that complicated – it is all in the incentives. Lower tax rates and/or provide an incentive for individuals to donate to private, non-profit causes, including universities, and people will be more likely to do so. Imposing a mandatory graduation tax that is highly progressive will all but kill philanthropy as a source of finance for colleges.
The distressed UK government is considering imposing a so-called graduation tax rather than asking students to pay a higher tuition, as Business Secretary Vince Cable describes in the video below.
According to Cable:
students would "almost certainly" have to pay more, and called for a "radical re-think" of how universities are funded.The proposed tax is a deferred payment (student loan) imposed at the point of payroll when a student has entered the labor force, and not a tax on all taxpayers. A graduation tax is theoretically similar to an idea that CCAP has been giving some thought to recently. Milton Friedman and Simon Kuznets originally proposed that college students be allowed to enter human capital contracts, or sell equity in themselves. Essentially, students would agree to repay a certain portion of his/her income for X number of years in exchange for the opportunity to attend college and hopefully, receive a degree and improve his career prospects. Dr. Vedder wrote a piece for the Chronicle of Higher Education recently discussing the idea. I’m not sure if we are for them or against them, but it is certainly an intriguing idea.
This would mean students repaying their tuition costs through taxation, once they started working, with higher earners paying more.
By linking the graduate repayment mechanism to earnings, it may be possible to establish a system where low earners would pay the same or less than they do now, and high earners would pay more.
There was a need to develop a university funding model based on the idea of less public support and greater contribution from those who benefit the most from it.
A “graduation tax” is in theory, similar to the concept of a human capital contract. One argument against such a tax would be that it is similar to indentured servitude –we provide you with this service (education) and in return you agree to provide us with X amount of your earnings for Y number of years. After that, you are free to do as you please. Framing the tax in these terms would likely draw strong political opposition.
Perhaps a stronger argument against it would be that any such financial arrangement should not be a function of an inefficient bureaucratic government that forces all students into a contract that many would not likely voluntarily enter into.
Such a “tax” is also likely to be highly progressive in that it benefits those students who will go into low-paying careers, while it punishes those who go on to high paying ones. In the case of the latter and those in middle and upper middle-income tracks, they would likely have preferred to take out a fixed-repayment debt (bond) to pay higher tuition than to sell equity in themselves. I think that most students are aware of their earnings potential while in college and it likely shows by what fields they choose to study (e.g. – business and engineering majors are likely to earn more than humanities majors).
As Cable indicated, the UK tax would be highly progressive. One possible unintended consequence of this could be that those with the greatest potential will opt out of college altogether, or drop out early in favor of entering the workforce (or starting up a company). This strategy worked quite well for folks like Bill Gates, Michael Dell and Mark Zuckerberg. It may also create a disincentive for graduates to work more or take promotion, as the tax burden will rise with earnings.
The highly progressive tax will also make it less likely that wealthy graduates will extend their philanthropic gifts to universities if they are already paying significant taxes to cover the costs of their education, which may or may not have contributed to their success. I think this may be the biggest unintended consequence of the tax, as private philanthropy is a significant source of finance in the U.S. and most of the rest of the world is trying to figure out how to tap such resources. The answer to this isn’t all that complicated – it is all in the incentives. Lower tax rates and/or provide an incentive for individuals to donate to private, non-profit causes, including universities, and people will be more likely to do so. Imposing a mandatory graduation tax that is highly progressive will all but kill philanthropy as a source of finance for colleges.
Monday, January 04, 2010
Equity Not Debt: New Approaches to College Financing
By Richard Vedder
Reading the transcript of an appearance by Warren Buffet and Bill Gates before students at Columbia University's Business School, I was delighted to hear Buffet say he would buy a 10 percent interest in any of the students in the room for $100,000. Buffet was showing an investor's interest in an idea I have long advocated, one whose time has definitely come: financing college more through the use of equity than of debt.
Currently, students often graduate college with vast amounts of debt. They have to almost immediately start paying off loans that exceed their expected annual income, meaning it takes 10 percent or more of that income to service the debt. For persons with $50,000 in debt taking a $30,000 teaching or social work job, the burden is especially onerous. Take home pay is probably about %25,000 a year, and debt service almost certainly is $4,000 to $5,000 annually --16 to 20 percent of a very low income.
If students sold, either as individuals or as part of a group, a right to 10 percent of their income for X number of years for an amount covering college costs, the students would not have a larger post-graduate burden than now --but would have no debt and certainty about their future finances. This would reduce the number of lower income students scared to go to colleges for financial reasons and would provide new ways of financing higher education.
As indicated earlier, this idea is really stolen from earlier historical examples. In the 17th and 18th centuries, migrants to the American colonies often financed their trip by accepting indentured servitude. They agreed to work for subsistence wages for a period of, say, seven years, in return for the money to pay for their American passage. Indentured servitude has been given a bad rap, often associated with slavery, but in reality it is a voluntary financial arrangement that enables low income persons to make what is essentially a human capital investment.
Groups of, say, 500 students of XYZ University can collectively sign an agreement selling 10 percent interest in their post-graduate earnings for, say, 10 years. Pooling individuals reduces investor risks and may allow for some reduction in administrative and enforcement costs.
Now, none of this would be needed if college and universities had been run with a modicum of efficiency over the past half century. If productivity among university employees, for example, had risen at the average rate for the population as a whole, college costs today would be far less --at least 50 percent --than they actually are, and many persons could finance much of their education from savings, parental contributions, and work during college. Finding new ways of financing college in what respect simply aggravates the fundamental problem, namely that colleges are not cost conscious, and, indeed, spend whatever resources they can get their hands on. Indeed, new financing methods might merely prolong the inevitable day when colleges are forced to become more efficient or face extinction.
Nonetheless, I am willing to work with venture capitalists and entrepreneurs like Michael Clifford or Randy Best on devising a company specializing in buying pieces of human capital --college students needing financial help. I think I would even invest in such a venture.
Reading the transcript of an appearance by Warren Buffet and Bill Gates before students at Columbia University's Business School, I was delighted to hear Buffet say he would buy a 10 percent interest in any of the students in the room for $100,000. Buffet was showing an investor's interest in an idea I have long advocated, one whose time has definitely come: financing college more through the use of equity than of debt.
Currently, students often graduate college with vast amounts of debt. They have to almost immediately start paying off loans that exceed their expected annual income, meaning it takes 10 percent or more of that income to service the debt. For persons with $50,000 in debt taking a $30,000 teaching or social work job, the burden is especially onerous. Take home pay is probably about %25,000 a year, and debt service almost certainly is $4,000 to $5,000 annually --16 to 20 percent of a very low income.
If students sold, either as individuals or as part of a group, a right to 10 percent of their income for X number of years for an amount covering college costs, the students would not have a larger post-graduate burden than now --but would have no debt and certainty about their future finances. This would reduce the number of lower income students scared to go to colleges for financial reasons and would provide new ways of financing higher education.
As indicated earlier, this idea is really stolen from earlier historical examples. In the 17th and 18th centuries, migrants to the American colonies often financed their trip by accepting indentured servitude. They agreed to work for subsistence wages for a period of, say, seven years, in return for the money to pay for their American passage. Indentured servitude has been given a bad rap, often associated with slavery, but in reality it is a voluntary financial arrangement that enables low income persons to make what is essentially a human capital investment.
Groups of, say, 500 students of XYZ University can collectively sign an agreement selling 10 percent interest in their post-graduate earnings for, say, 10 years. Pooling individuals reduces investor risks and may allow for some reduction in administrative and enforcement costs.
Now, none of this would be needed if college and universities had been run with a modicum of efficiency over the past half century. If productivity among university employees, for example, had risen at the average rate for the population as a whole, college costs today would be far less --at least 50 percent --than they actually are, and many persons could finance much of their education from savings, parental contributions, and work during college. Finding new ways of financing college in what respect simply aggravates the fundamental problem, namely that colleges are not cost conscious, and, indeed, spend whatever resources they can get their hands on. Indeed, new financing methods might merely prolong the inevitable day when colleges are forced to become more efficient or face extinction.
Nonetheless, I am willing to work with venture capitalists and entrepreneurs like Michael Clifford or Randy Best on devising a company specializing in buying pieces of human capital --college students needing financial help. I think I would even invest in such a venture.
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