Investing in College Students

July 5th, 2012 by Andrea Bennett

What’s the solution for sky-high tuition?

Brought to you by Liberty Mutual's
The Responsibility Project

A recent New York Times story asks you to consider what’s behind the simultaneous increases in the cost of college tuition and taxes. 

First, the problem of rising college tuition: In 2010, nearly 8 million students received Pell grants – a total cost to taxpayers of $28 billion, according to Luigi Zingales, professor of entrepreneurship and finance at University of Chicago’s Booth School of Business. The federal direct loan program, which allows non-affluent students to get government-guaranteed loans at low interest rates, cost taxpayers $13 billion in 2010-11. Subsidies to university education amount to $43 billion a year, including $2 billion in congressional earmarks. “Just as subsidies for homeownership have increased the price of houses, so have education subsidies contributed to the soaring price of college,” Professor Zingales writes. “Between 1977 and 2009 the real average cost of university tuition more than doubled.”

Another problem with the current system, he asserts, is that the burden of taking out student loans currently falls on 18-year-old shoulders, since the government guarantees student loans and lenders have no incentive to lend wisely. This has left student loan debt at the $1 trillion mark, with an increasing number of borrowers in default.
So, how to solve the college debt crisis? Zingales has an alternative approach: He suggests that venture capitalists invest in promising students, as they would finance any other venture with no collateral. Students would graduate with no debt, paying back their investors based on their post-graduate earnings, “or, even better, a fraction of the increase in her income that derives from college attendance.” Further, the market "would create more informed demand for the schools, exerting pressure on them to contain costs and improve quality,” suggests Zingales.

But Kevin Drum, a writer who covers politics for Mother Jones, isn’t so sure Zingales’ proposal would work. “There might very well be plenty of investors willing to take a flyer on students at the top 40 or 50 universities, but I doubt there’d be many takers below that level,” he writes. Drum points out that, under the investment model, the problem of high college tuition is hardly solved. Instead, he proposes that public universities go back to providing a good education at a low cost, and that private universities fund their own students. “If you get accepted at Harvard, then it’s up to Harvard to provide grants or loans that make it possible for you to attend.” 

After all, he says, taxpayers don’t owe you an education “at whichever leafy liberal arts college stole your heart during a campus visit on your 17th birthday. They owe you a good education. Period.” 

Who bears the responsibility for a good – or Ivy League – education? Do you buy the idea of students as collateral or should we, as Drum suggests, “rededicate ourselves to having the finest and most accessible public universities in the world”?