Saturday, April 15, 2006

A radical new idea to fund students

Now this is genuinely radical. And it might just work.

Students currently fund their University educations with a mixture of parental cash and unsecured loans made by the government. However, this still leaves problems. Rather than restrict themselves to debt funding, why not use equity and sell a stake in their future earnings asks Joseph Clark, a PhD student at the University of Queensland, in the latest edition of Policy (subscription only).

The problems are;
i) Universities are poorly funded leading to low quality teaching. But why should the working class foot the bill for the education of middle class kids.
ii) Students need to take on ever larger amounts of debt to enter University. That those who benefit should have to pay seems fair but scary to those assuming large debts, especially from poor backgrounds.
iii) The vast increase in student participation in higher education has lead to a proliferation of degree courses which do not equip students for good, well-paid jobs. Students expectations are unfairly raised and money is squandered on 'useless' degrees.

Equity funding gets around all of these issues.
This is how it would work; Jack Smith needs $50,000 to fund him through a four year Law degree. He expects to earn an average of $100,000 over his first twenty working years. He offers the market 5% of his earnings over this period in exchange for $50,000 upfront. If he earns above $50,000 then the investor makes a profit; if he earns less, for whatever reason (death, change of career, etc), the investor books a loss. This contract can then be traded on the open market.

The benefits would be;
i) the value of a degree would then be reflected in the value of the contract. For example, those wishing to obtain funding for a Media Studies degree would find that they could only raise around half the amount of someone wanting to study, say, Medicine. This would provide students with some indication of their likely future earnings from following a particular degree.

ii) skill shortages would be easier to predict in advance and prevent. If, say, Dentists were in short supply, the price of a Dental contract would rise and more students would choose to study this option.

iii) if these contracts were pooled, they could be listed on an exchange and purchased by pension funds. Hence retirement income would be invested in training the young.

It might just work.