April 10, 20112
The topic of the student loan bubble (and even its popping) has been digested to death on Zero Hedge. One topic that has been avoided however, is that of the student equity bubble, for the simple reason that until now the concept did not exist. That may change soon: as the Economist reports, some California students have a modest proposal to the symbiotic University-Banker net worth extraction mechanism – shove your debt. Instead, they will pay for their unaffordable education (except when funded with copious amounts of unserviceable and non-dischargable debt) with equity.
From the Economist:
Rather than charging tuition, they’d like public universities in California to take 5% of their salary for the first twenty years following graduation (for incomes between $30,000 and $200,000). Essentially, rather than taking on debt students would like to sell equity in their future earnings. This means students who make more money after graduation will subsidise lower-earning peers.
It only makes sense – with every firm now scrambling to go public, no matter how worthless, and take advantage of the latest raging excess liquidity bubble, even at the risk of flash crashing before the first trade is executed, why should individuals not be treated like corporations? And, taking it further, why not have the option of what capital structure one would grow into? Simple – because equity is associated with upside appreciation, while debt is much more focused on capital preservation. And while the American Dream teaches everyone, students especially, to believe they can achieve everything and anything in the USSA, but only if they get $100,000 in student debt first, everyone knows this isn’t happening. Which is why there just happens to be a double standard when it comes to reinvesting other people’s money. In essence: both university and bank would be exposed to unlimited downside, which as we all know, is a viable option only if the banks know they will be bailed out should things turn sour.
It is not clear if this will provide adequate revenue for the university. It also means the university bears more risk, because the tuition it will ultimately receive is uncertain. But the proposal will benefit some students and the principle is not so ridiculous. American universities already practice price discrimination based on parental income. The more money your parents have the larger your tuition bill; richer families already subsidise poorer ones. Why not price discriminate based on future income of the student rather than the current income of the parent?
It also means, in many cases, that degrees that command a higher value in the labour market, like engineering or computer science, will cost more than other degrees, like theatre arts. But if an engineering degree is worth more shouldn’t it cost more? If you think of a degree as an asset which pays dividends in future wages, the asset with a bigger expected pay-out should cost more. Faculty in high-value fields tend to get paid more. Perhaps some of that cost should be passed along to the students.
But think of the arbitrage over majors? One could have an equity funded double major in medicine and accounting, while taking out debt for those blue light special minors in sociology, psychology, English, and everything else actually taught in liberal universities.
Incentives would also change; maybe university departments would become more invested in producing sucessful graduates. But might this undermine the mission of American universities, which is (or is often assumed to be) to provide a well-rounded liberal arts education? If universities become more income focused, will low-yielding, but socially valuable fields like philosophy wind up short of resources? To some degree, the university-for-all model already undermines our idyllic version of university. As more of the population goes to university, and must pay for it, more esoteric subjects naturally become less popular.
A trickier concern may be what happens if this approach is not implemented everywhere? If you know you will study engineering and earn a high salary wouldn’t you then opt for a school with a fixed, up-front cost—assuming that means you’ll come out ahead? Then would all the talented engineers go to other universities and potentially undermine California schools?
So unfortunately, while this is a creative idea, its chance of success is zero. Especially since not only the student “equity” market is dead, but now JPMorgan, as we first noted 3 days ago, isquietly getting the hell out of Dodge University. Ironically, the best option for everyone involved is for the student loan bubble to pop and for college to be equitably priced. Alas, that will never happen as long as the Fed and the government are actively engaged in defining the price of money and the opportunity cost of declining to become a 22 year old debt mule encumbered with enough debt to last a lifetime.