Is There An Alternative to Student Loans?

You know we here at DQYDJ love to try to raise your hackles every once and a while, and there’s no surer way to offend a lot of people than talking about college.  The last time we visited the land of student loans, we asked you if Arts and Psychology Majors should pay higher rates on their student loans, to make up for diminished employment prospects.

We may have singled out those two subjects in jest, but the point remains… certain Majors have a higher payoff in career earnings than others.  Will a Communications Major out-earn a Pharmacist?  Perhaps – but, if so, it’s the exception that proves the rule.  Which is why we’ve got a few interesting developments to share with you on the student debt front.  Don’t say we didn’t warn you!

Making Some Majors Cost Less…

At the end of last year, Florida actually made some noise when it came to degree pricing at public schools.  The cheaper majors?  Science, Technology, Engineering, and Math, the unholy quadrality of “Major Categories” which so happen to be in greater demand today.  Florida’s plan wasn’t to increase tuition in aggregate while increasing STEM tuition at a slower rate, it was literally to give STEM a break.

Florida had an ulterior motive, of course.  More of those STEM Majors would stay in the state after graduation, and, by the way, they tend to pay more in taxes (Florida has no income tax, but that doesn’t make them ‘tax free’).  Some of the majors who would ‘suffer’, disproportionally?  “…those majoring in psychology, political science anthropology and performing arts.”  Indeed.

Revolutionary?  Of course – and at the margins, your would probably see more students attempting the harder majors.  Or, you know, going to school in another state.  Think varied pricing is a good idea?  You tell me.

IPOs Become SPOs?

In an Initial Public Offering, a previously private companies sells an ownership stake to an adoring public – common stock is, literally, a partial claim on future earnings.  So… why not Student Public Offerings?

The linked article explains the motivation behind the start-up Pave, a site where investors can literally invest in people instead of companies.  This is some early stage stuff, of course (and not really laser-focused on college) – but, conceptually, the process works just like the stock of a company.  You put money in people you believe in, and if they succeed… expect a huge payoff.  It sure beats that anachronistic ‘loan’ stuff, right?

Sound a bit like indentured servitude?  Well, you tell me – how would it be any worse than the system we have today? A system which the government slowly expanded access to creating the largest middle class entitlement not-called-housing.  A system the government threw ungodly amounts of money at, then scoffed when costs grew out of control (in a world where the number of people with degrees continues hitting new highs).  A system where the government removed the ability to discharge loans in bankruptcy, then seized almost the entire student loan lending industry in 2010.  And, of course, a system where the Government can successfully collect 80 cents on the dollar for bad debt, versus only 20 cents in the private sector.

You’re right.  this SPO plan is downright Dickensian!  But, then again, so is the current system, or so says Dick Durbin, anyway.

May you live in interesting times!

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Comments

  1. JT says

    The idea of lowering tuition for high-paying (and thus in demand) degrees is so obvious that I’m surprised it hasn’t been done in more places. I think one thing that’s missing is that the degrees that are not known necessarily for high pay or low unemployment are cash cows for universities.

    Tuition is the same (well, ex-Florida) for English majors and Engineering majors. However, Engineering professors cost several times more than an English professor. You can easily stuff a room full of English majors, and the marginal cost of one student is basically nothing. Grabbing another Engineering major isn’t as easy. Schools looking to maximize revenues and profits thus have little reason to turn students to STEM when the money is in liberal arts.

    • says

      I’d argue Engineering costs a bit more, actually – at least in my experience. Those lab fees add up (got to replace those 74LS04s that the Freshmen blow up). Same applies for Pre-Med, of course, or any lab-heavy Major – you’re going to get dinged on the lab fees. Whether you call that ‘tuition’ or not, that’s your call.

      Regardless, you’re totally right on the Liberal Arts. Cheaper to teach, and cheaper teachers as well. (And, to my Liberal Arts readers – that’s an observation, not a statement of derision)

    • freeby50 says

      ” However, Engineering professors cost several times more than an English professor.”

      Pay for professors isn’t that much different. Average wages for engineering professors is just about $97k and English professors is $68k. Thats about 40% more which is considerable but its definitely not “several times more”. Professors get good wages but relatively speaking its not high paid as you can generally do better in private industry. When I graduated with my BS my starting salary was more than most of the professors who taught me at the poorly funded state college and that was in computer science.

  2. freeby50 says

    I think I’d probably take a different tact on this. I’d make more of the grant and scholarship money available for the higher demand fields. Convert Pell grants to STEM grants. That will subsidize the demand majors for low income people which is where i think any subsidy ought to go. I don’t think we need to subsidize college for higher income people, regardless of degree choice. I also don’t think we really need to give people incentives to enter STEM careers. Theres already good incentive for people to go the STEM route : higher paying jobs.

  3. says

    I’ve heard of the Pave thing a few times before and I”m not convinced. For investors it seems like a bad deal because it’s very dependent on the commitment and motivation of the student in question. It could also be exposed to some ways for the student to bypass income that would have to be paid back to the investor. The incentives seem way too loose unless you can actually sign an indentured servitude contract (in other words, the investor needs to be a credit card company).

    On the other side this means that investors would need to demand a very high return which would make it a bad deal for the students with actual future potential. It looks like a classic “market for lemons” in economics terms.

    I actually do something similar to this since I hire inexperienced people and train them, hoping that overpaying them slightly at the start will be profitable later on. That still has to be a bit limited because they are free to leave at any time (I could use a vesting/bonus structure to get around this). If I could hire people early on and watch them work for a couple of years I would be happy to pay for further education for the good ones (if necessary, which isn’t a given) under a contract that says they have to work for x years after or pay it back. Lots of companies already do this for employees that want to get an MBA.

    So if you’re a bright student who can’t afford college, work a bit for a good employer and then you can do anything you need.

    • says

      I think investing in prospective college students is where Pave is headed, even if they are just doing a pilot program right now (without pre-college types – one of the requirements was to include your college transcripts).

      As for the “Market For Lemons”, that would apply to pretty much any voluntary program… but in this example, the best analog is probably (non-mandatory) insurance. Call it moral hazard, or call it information asymmetry, but in any self-selecting insurance market, people who will make more claims tend to sign up for insurance more than those who don’t. However, I don’t necessarily see people dumping on their commitments – note the success of sites like Lending Club and Prosper at letting people lend to other people. Now, of course, there are defaults – but the number of people who stay current has so far been pretty solid. I imagine Pave could find a similar balance, although probably not immediately.

      For most of the companies I have seen offering advanced education (mine included), the degree program usually comes with a caveat – if you leave within X years of the degree’s completion, you’re on the hook for the tuition. But, yes, I agree – if you can make it to a big firm with a lot of resources after undergrad, it’s better to do that than to try the whole “broke grad student” thing. There are only so many paid experiments in the Psychology Department.

      • says

        There’s just too many people who get a promising degree and then do nothing related to it, especially if they aren’t chained by a massive debt that forces them to take the highest paying job available regardless of the effect it has on them.

        Say I’m investing $20,000 in a student who will go to school for 6 years (masters and all). After that if I can get a payout of $20,000/decade, rising with inflation, that sounds like a reasonable investment (I have no idea what the effective rate of return would be so maybe not). That would be $2,000 per year when they’re working. If they got a great degree and they expect to earn $100,000/year + raises with inflation, that comes out to 2% of their income.

        That’s not too bad, but I would want to discount that further for the chance that they don’t end up getting a high salary, they go off and volunteer somewhere, they turn into a drug addict, etc. So let’s say I demand 6% of their income (even then you would need to make a large number of investments to be truly diversified). Is it worth it for them to pay $6,000+/year for life, instead of just borrowing $20,000?

        • says

          Or, perhaps the market becomes liquid and more like Prosper and Lending Club – ‘take it or leave it’ type contracts which swing based upon chosen career path, credit rating (if it exists), school chosen, etc, etc. So, maybe it isn’t you naming a price, but you entering into the market and seeing that some young Mechanical Engineer is offering 3.3% of his salary over a decade, and you wondering if the investment is worth it, with fully audit-able histories of similar ‘investments’ (other people) who had similar programs.

          However, your scenario would make me way too nervous, haha. I wouldn’t want to be the one who set the price on this new style of funding. It would be like being among the very first angel investors or VCs – how do you know how much to ask for? To give? Now you’ve got some decent methods that are well known, but it had to go through the tumult and chaos of those early days, haha.

          So, yeah, I wouldn’t be an early adopter. However, I would check it out after it was going on for a little while.

  4. Kevin Watts says

    Good post. I live in Florida and went to a Florida college on a STEM maojor and I remember when they tried implement common sense tuition rate. It got people in arms. A lot of these fluff majors aren’t really worth it for students who take huge amounts just study “communications” . Also I might a lot of people don’t like hearing the truth. It distorts their reality.

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