Friday, June 15, 2012

Wacky: A University of Chicago Professor Says Investors Should Finance Students' College Costs for Cut of Future Income

Luigi Zingales,an economics professor at the University of Chicago, recently proposed an innovative way to finance students' college education costs: allow the venture-capital industry to finance students' college education in return for a share of the students' future income. 

This is how Zingales explained his proposal in a recent New York Times essay: "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."

Zingales insists that his plan is not a new form of indentured servitude but a way of having the beneficiaries of a college education pay for it--not the taxpayers.

Only an economist from the University of Chicago could come up with such a wacky idea.

A few comments:

First, contrary to Professor Zingales's assertion, the plan is indeed a modern form of indentured servitude, whereby the rich finance the education of  the poor for a share of the poor person's future wages. 

Second, until recently, most Americans considered a college education as a benefit not only for the degree holder but for society at large. We all grow richer when we enable people to become more productive through becoming better educated.  Thus, it makes sense for our society to invest in higher education and to broaden opportunities for people to earn college degrees. To suggest that venture capitalists--not the taxpayers--should finance students' college costs negates the American philosophy of public education, which is to make it available to everyone and to at least partially subsidize it so that no one is excluded based on poverty.

The federal student loan program is indeed in crisis, but we won't end the crisis with oddball ways to finance it cooked up by economics professors. We saw what happened to the housing market when the venture capitalists got involved with it.  Why would we want venture capitalists mucking up higher education?

Friday, June 8, 2012

Thanks, NY Times, for Another Tepid Editorial About the Student Loan Crisis

In The Big Lebowski, Bunny Lebowski tells the Dude that her boyfriend is a nihilist. "He doesn't care about anything," she explains.

The Dude, Donny and Walter:
"That must be exhausting," the Dude replies sympathetically.

This scene reminds me of the New York Times editorial writers. Every day, they go to work and pen editorials opining on all the world's problems: global warming, the crisis in the Middle East, the European Debt crisis, obsesity--it must be exhausting!

Of course, not all of the Times' editorial advice is useful.  Earlier this week, a Times editorial, entitled "College's True Cost," commended the Obama administration's efforts to get colleges to communicate more clearly with students about the cost of attending college. As the Times reported approvingly, "[t]he Obama administration is developing a standardized form" that all colleges can use to report on how much a year of college costs and estimating the monthly payments students will owe when paying off their student loans.

"Unfortunately," the Times concluded, "colleges are unlikely to embrace this forthright approach unless the federal government makes it mandatory." Right. More government regulations will solve all our problems.

Obviously, givng students more information about their student-loan obligations is a good thing. But giving students clearer information about their student-loan debt burden is not going to solve the student-loan crisis any more than telling people how many calories are in a Big Mac will solve the nation's obesity crisis. People are still going to buy those Big Macs and students are still going to take out college loans because most of them can't afford to attend college without borrowing a lot of money.

Solving the student-loan debt crisis is going to take more than the creation of a standardized form for colleges to give students when they dole out student-loan money. As I've said before, these things must be done:
  • The Department of Education must stop hiding the true student-loan default rate and give the public more accurate reports on how many people have stopped paying on their student loans.
  • Insolvent student-loan debtors must be given reasonable access to the bankruptcy courts.
  • The Federal government must stop financing the for-profit schools and colleges, which have extraordinarily high student-loan default rates.
  • Colleges must operate more efficiently and rein in their costs.
Unless these things are done, other reform tactics are just a cosmetic approach to a very serious national problem.


Editorial (2012, June 7). College's true cost. New York Times, p. A24.

Thursday, June 7, 2012

The Federal Government Should Stop Bankrolling the For-Profit College Industry

Floyd Norris recently wrote a mild but provocative article in the New York Times that focused on ITT Educational Services, a for-profit corporation that offers post-secondary education programs in 48 states. Norris reported that ITT students pay an average cost of $48,000 in tuition and fees to receive a two-year associate's degree in business administration.

Of course students can obtain a two-year associate's degree from a public community college for a fraction of that cost. One would think the federal government would develop policies to encourage students to attend reasonably priced community colleges instead of supporting the for-profit college industry.

As has been widely reported, for-profit colleges enroll about 10 percent of all post-secondary students but get about 25 percent of the federal student-aid money. According to Norris, the federal government guaranteed nearly $24 billion in loans for students attending for-profit schools in 2010-2011 and  distributed nearly $9 billion in grants that went to for-profit institutions.

Without question, most of the for-profit colleges could not exist without federal student-aid money.  For example, in 2011, ITT received 89 percent of its revenues from the federal government in the form of student loans and grants. (Norris, 2012, p. B7)  Meanwhile, state and local-government are drastically cutting their financial support for public colleges and universities.

In my opinion, the federal government should stop funding the for-profit colleges altogether and redirect the money toward public community colleges.  Unfortunately, such a reform is not coming any time soon.  The for-profits pay highly effective lobbyists to protect their interests (Kirkham, 2012), and they make strategic political contributions to key legislators in Washington (Kirkham, 2011).

So this is the situation. Billions of federal dollars flow each year into the coffers of for-profit schools and colleges that educate about 10 percent of the nation's post-secondary students and account for about half of all the student-loan defaults (Kirkham, 2012). Until Congress stops subsidizing the for-profit colleges industry, we will never solve the student-loan crisis, which is growing worse with each passing year.

Kirkham, C. (2012, February 3). Auction 2012: For-profit colleges win when lobbying blitz weakens regs. Huffington Post.

Kirkham, C. (2011, July 29). John Boehner backed deregulation of online learning, leading to explosive growth at for-profit colleges. Huffington Post.

Norris, F. (2012, May 25). Colleges for profit are growing, with U.S. aid. New York Times, p. B1.