Idea which came to my while jogging (it can’t be that good, or I would do it instead of posting to my blog!):
Similar to a reverse mortgage, the concept is to provide cash upfront for qualifying students to enable them to attend higher education.
But I’ve heard of that. Student loans are for that very purpose.
What if there was no loan. No schedule of payments. Instead, the borrower signed a contract guaranteeing the payment of a certain percentage of their post-graduation income. This percentage could be relatively low in the early years, increasing to 1-2% in later years.
Basically, it’s securitizing the future earnings of graduates.
Some additional thoughts:
- While you’ve got them on the hook, why not ask for an additional percentage guarantee to go to charity.
- Like student loans offered through private banks, the offers could differ based on school quality and prestige
- Programs for advanced degrees would also have different (lower) payback percentages
- This could actually be a program offered in conjunction with the school itself, since they ultimately want to have the long-term relationship with the borrower
Potential drawbacks:
- Perception issues
- Unpredictable default rates and cost of defaults (e.g. how hard is it to track people down and find out their income).
- Selection bias of borrowers — only those expecting to have a low income may apply
What do you think?
ANP, are you in?
Comments from the Old Blog
Drawback: Less incentive to graduate on time.
There’d have to be some kind of performance metrics along the way. Maybe the person has to make a minimum amt of cash when they graduate. And maybe they’d have to keep a certain GPA. And graduate within a certain time frame.
Posted by: Peter Caputa on November 28, 2006 06:29 PM
This is very similar to what we have here in Australia. HECS (Higher Education Contribution Scheme) is a system whereby the Government both contributes to your course fees and gives you a deferred loan for the remainder. At present, the government pays 2/3’s of your course fees, the remainder is deferred to be paid through the tax system.
So if my course fees are AU$24,000 per year, the government pays $16,000 to the Uni and loans me $8,000. The interesting bit is how the loan gets paid back – through the taxation system, and only once your taxable (post-deduction) income is above a certain level. It’s currently approx AU$30,000 (or well below the mean income of approx $50K).
Amounts that acrue from year to year are indexed along with the CPI (inflation), or approx 2.4%
So in Australia, this would not work. Firstly, the government is assuming all default risk (which brings up an interesting point – it would be in the country’s economic interest only to charge those who DIDN’T meet earnings expectations, as these are the people who have not contributed economically and taxationally as a consequence of their degree). Secondly, the government’s required rate of return is only inflation. No opportunity cost, administration costs or profit required.
Such an idea may work elsewhere, in the absence of a system such as above, but I suspect (as you’ve identified), rational profit-maximising actors would result in a selection bias which would be difficult to avoid.
Posted by: David Kellam on November 29, 2006 10:21 AM
I remember you talking about this idea before, years ago. But GetYourHandsOffMyPaycheck.com!
I do think this would work in certain communities, a la microlending. And I was toying about blogging about the fact that while tuition has continued to climb, the maximum amount that students can take out in federally subsidized loans has stayed the same, meaning that students are forced to take out more of the private, higher-interest loans. Which kinda bites.
Posted by: ANP on December 3, 2006 06:16 PM