Investing in students instead of student loans

The site of my own education, back when tuition fees were $1200/year

Student loan debt has become a hot election issue. It's immense, has ruined some lives (but also vastly improved others) and is connected to (and possibly even the cause of) the cost of education growing much faster than inflation.

A good education is one of the best investments many people can make in their future, and the ability to borrow money for it allows a lot more people to access it. If it doesn't pan out, it can leave a crippling debt.

There are different types of educations. Some are aimed at increasing your earning power in the future. These are investments and worth borrowing against. Others are not this way, and lead to no career at all, a career in academia, or the more modest benefits that come from the general rather than specific fruits of education. It may not be worth borrowing huge amounts to pay for those. There should, perhaps, be a cap on borrowing for education programs not shown or expected to pay off financially, and instead those programs might be subsidized to permit their continuation as a contribution to our culture.

(Obviously, another common solution to this problem is to have taxpayer funded education, but this is not about that.)

Here is an old but not widely exploited idea for the more lucrative educations. Instead of using loans to pay for tuition fees, such programs should be offered at very modest fees, well below cost. In exchange, the student pledges a small fraction of their future income, and a larger fraction of their future income above a certain amount in the field for which they were educated. The student also pledges to not spend much time in deliberate unemployment until a threshold is paid. They may elect to work in another field. A bankruptcy would probably dissolve the obligation.

This idea isn't entirely new. Variations of this approach, often called "Income Share Agreements" are being used by some for-profit colleges and even established institutions like Purdue. Towns and even nations have paid for overseas education for their students with the agreement they will come back home to use their skills. What would be new would be regulations capping student loans and encouraging this approach. ISAs are not without controversy and it's certainly possible for them to be abused, but I think the core idea has value.

To make this acceptable to the schools, it would be calculated so that the expected average return is higher than the present value of their costs. They will get more revenue, even with interest, but get it later. For younger schools without endowments and wealth, this may mean that the school borrows money, rather than the student. If there are to be government loan programs, they would be to the students, but in theory private loans should do the job here.

Schools would be highly motivated -- perhaps too motivated -- to design their programs to generate career success. If they don't give the students the right training, the school suffers (though the students lose as well.) If they don't pick the right students, and the students either don't do well, or don't pursue a career in the field, or don't do well in that field, the school loses out as well. Schools know their past track records and can calculate what rates of return they are likely to get, and set rates as they need.

When students compare universities, instead of comparing tuition fees, they might compare that one school wants 10% of their income for 10 years, while another wants only 5% for 7 years. The latter school might be lower-end -- or it might be higher end and betting that its education is so valuable that it will do well on a smaller chunk of its students' income.

The incentives of the school align with a successful career for the student, which is good if that's all one wants. Of course, it isn't, so work must be taken to balance against the negatives of this. Those could include:

  • Schools and students putting focus only on the financially lucrative subjects and classes. This could add disincentives for taking electives that round out an education.
  • Schools being less welcoming of students likely to take non-traditional career paths. including the eccentric but brilliant
  • Over emphasis on entrepreneurship. After all, just one Mark Zuckerberg or Larry Page type graduate who makes billions in their early life could endow the school for a long time.
  • Possible incentive to drop out before the deadline. (Normally, the obligation would not kick in until second year or later.)
  • Relative discouragement of those likely to take academic careers even in the lucrative fields. (Today, it is the reverse, with scholarships offered to such students, though this could continue.)
  • Many others not foreseen at first

Plans could be put in place to counter these negatives, including rules enforced by laws and government grant conditions. The most lucrative programs -- computing, engineering, business, the law, medicine, sciences etc. might overtly subsidize the others. With no tuition fees for anybody, students who used to get scholarships might be offered waivers or reductions in the obligation. Students who continue on in academia could get their obligation reduced for each year they continue in academia or certain types of public service.

Wealthy parents and students could perhaps still pay ordinary tuition fees and avoid the obligation. Or take out student loans and pay the ordinary fees, as now -- if that is what they want, but this should only be done if it's clear it won't put the student at high financial risk.

There are some colleges who only teach the less remunerative subjects. They can't subsidize poetry with engineering. Some solution is needed for them, though it should be understood that it is not expected that students in those fields would attend for free, nor that students in lucrative fields should pay for the education of all those who are not. Any subsidies would be small enough to be affordable, and many might come from other places, like donors and government. No quality college education should be so worthless as to not boost a person's income enough to pay some decent portion of it back.


A lot of people compare this to indentured servitude, and that has become at the top of FAQs about ISAs. It clearly isn't legally indentured servitude, but one may debate the moral issues. In general, it contains a mix of elements from loans, investments and taxes. Investments and taxes increase payout with greater income, while loans have a fixed payment schedule. Debts last forever and must be paid regardless of the debtor's income, and can be escaped only through bankruptcy or forgiveness. Compared to a loan, the main downside is for those who are very successful, who pay more than they would have on a loan, subsidizing those who do not succeed, akin to progressive taxation. (Indeed, it could be that some schools who graduate future multibillionaires might pay for everything just from that.)


I still remember hearing a carrying voice saying "Choo choo choo choo" and a line of students in rolling office chairs being pushed across the hallway ahead of me by the little Brad who could.

I'm not sure what advantage this would have over the current system, at least for people with direct student loans. If you have a direct student loan, your payments are capped at 10% of the amount that your income exceeds 150% of the poverty line. And then after 20-25 years, any remaining balance is forgiven. People whose lives are ruined by student loans either don't know about these programs or have gotten private loans rather than direct ones.

I guess the one arguable advantage is that your idea seems to be that the schools themselves would underwrite what is essentially a loan with an income-dependent payback schedule. But I think the effect of this would be that a lot fewer people would go to liberal arts colleges. And if that's acceptable, a better plan would be to just do away with government guaranteed student loans altogether.

Allowing the obligation to be discharged in bankruptcy, without a lot of restrictions, would be unlikely to work. The vast majority of people who get student loans are insolvent by the time they graduate, and would have little reason (other than moral scruples) not to immediately file for bankruptcy upon graduation. Maybe if you had a waiting period, say 10 years (or 20-25, to make it more like the current federal programs), it could work.

You don't want to declare bankruptcy. Forget about getting credit cards, a mortgage or even renting a place for many years after your bankruptcy. It's not to be done lightly. Also, to declare bankruptcy I think you do need to have actual debts and no means to pay them (including on a payment plan.) This is not an easy way out.

The point is not simply that the schools underwrite the loan. It is that the school is now motivated to make sure your education improves your income later in life. It is sort of a "money back guarantee" on vocational education, you don't pay unless it works. The very fact that it is on offer is a strong declaration that the school is sure what they do is effective.

And the fact that it's not offered when you get a degree in 17th century French literature is a strong signal that such a degree is not likely to boost your earnings. Something else has to pay for such programs.

You can get a credit card the day after filing for bankruptcy. You can get a mortgage and a good credit card deal within a few years after filing. Getting out of an egregious executory contract is a perfectly acceptable reason to file for bankruptcy (and even if it weren't, all you'd have to do is breach the contract to turn it into a debt; efficient breach is perfectly legally acceptable in the US). It might go against people's morals, but it'd make economic sense for most college graduates.

A compromise that might work would be to allow discharge in bankruptcy only after a certain number of years, say, the earlier of 5 years after graduation or 10 years after receiving the education. That'd limit the incentive to mostly only those for whom college really didn't pay off. It'd be a good idea to allow this for student loans in general, though it'd probably need to be limited to new student loans, at least for loans not held by the government.

Yes, the point is that it gives incentives for schools to focus on money instead of education. I'm not sure that's what most voters want, particularly the ones that like to whine about student loans. But if it's what you want, simply eliminating government guarantees and regulations on student loans and making them dischargeable in bankruptcy would accomplish it.

On the question of slavery, it'd be slavery if the government could force specific performance on the contract. If the government just treats a breach of contract like any other breach of contract and awards money damages, then it's not slavery.

Usually that has to be a secured card, not a credit card. And there are systems in place to attach wages from people getting their income from regular employment, so you can't turn it into a debt. Though I don't think that's a problem.

Schools are currently focused on money rather than education, and easy loans to pay for it has caused the cost to skyrocket.

Immediately after bankruptcy you might only be able to get a secured credit card, which is a type of credit card. Depending on your income you might be able to get a regular credit card immediately, though. Once you file, if you have an okay job, you're actually less of a risk than before you file, because you can't file again for several years. Within 2-3 years after filing your credit score could easily be in the 700s and you should have no more trouble getting a credit card than anyone else. For a mortgage it might take longer before you can get the best deals.

Also consider that a newly graduated student probably won't get a very good credit card deal anyway.

I'm not sure what you're talking about when you say there's a system in place to attach wages. You mean after the creditor wins a lawsuit for breach of contract and is awarded a judgment (which is a debt)?

The vast majority of schools are non-profit organizations or run by a government.

Today ISAs are privately run. I am talking about changing the governments providing of student loans to the government facilitating ISAs, including legal facilitation.

I don't see how that could work.

How would the employer know to withhold money if there isn't a court order and the employee doesn't tell them?

The employee would be obligated to tell them. If that's not enough, there could be a database of SSNs which are under the obligation and employers could be obligated to check it. (Obligated in that they are liable for the fees if they forget to check and to withhold and remit them.)

The employee would be obligated to tell them. And if they don't, then they'd be in breach of contract. And the school could sue, and obtain a judgment, which is a debt.

So no, that's not enough.

Requiring employers to check SSNs might work, though it'd be a big expense and it'd require Congress to mandate that employers verify social security numbers when hiring, something that mostly Democrats have been fighting against since 1996 (see E-Verify).

What is the up-side for the school? They are assuming a lot of additional risk, and now have to make very long term calculations regarding the earning potential of a yet untrained student, and the job market for a given major. The earning potential for some majors can vary widely depending on the ambitions and capabilities of the student. A computer science major could find themselves working the floor of a data center or working as a data scientist starting with a much higher salary, and lucrative pay if they produce good results. A biology major could work as a high school teacher or go into pharmaceutical research vastly more, especially 5-10 post graduation. Now the school needs to motivate the student to do better, with few ways to incentivize the behavior they want. Additionally, what if the student has an altruistic desire to take their new skills and work as teacher in a 3rd world country, or as a lawyer/doctor serving the poor. These are wonderful (extreme) examples that should be celebrated, but the school now needs to make a long term business decision, and that really isn't in their wheelhouse of expertise, nor should it be. Just wait until the first class of rejected applicants are on TV shouting that the school couldn't take any more people into their dream program. It will also be worse the second year when some students realize they hate their major, and are stuck with worse terms because they switched to programs with lower earning potential.

First of all, they only need to evaluate the individual student and the major if they want to optimize. They can, most simple, look at the aggregate numbers of all their students, and the trends, and charge that. Or the aggregate numbers for the whole field if they are comfortable they are at or above average in the field. They already do evaluate students, they can use what they know from that, or they can try to improve their ranking. The goal is that they not try to do too much individual ranking, as I think that can result in a negative.

As to why they would do it, the answers are:

  • They can charge at a rate that makes them more than they make now, if they so wish, because people are more willing to spend future money than present money.
  • They might make a lot more if only a few students go on to unicorn level business success. Currently they exploit that by begging for donations.
  • This would replace the subsidized student loan programs, which have been a goldmine for the schools, and if the students can't get easy loans, the schools need something like this to keep the students coming.

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