A better way to invest

Reforming how students pay for college is necessary to correct the loan crisis.

Editorial board

 

When government considers spending money on education, it justifies the expense as an investment in human capital. However, when students pay for higher education, they pay tuition — a fee for a service. In turn, colleges and universities operate in a marketplace to recruit college students — the consumer, on whom the risk in the investment ultimately rests, not the state that claims to be making an investment.

Every freshman economics student learns that when more money is available for consumers to spend on a product, the higher the cost will be. Reform is necessary to correct the coming student loan crisis that may soon precipitate economic catastrophe much like the housing crisis. Student loans are widely available because very little calculable risk lies on the lender, akin to banks that failed to properly account for the risk on home loans should the market experience a contraction. No matter a student’s actual success, there is very little they can do to avoid the loan obligation — student loans are ineligible for discharge via bankruptcy. Because such loans are so easily available, the costs of education in the marketplace rise the same way the price of homes rose during the housing bubble.

Instead of the students-as-consumers model, a model focused on transferring broad investments to individual students may correct the problem. Instead of a flat tuition rate, colleges and universities could instead recover their costs over the long term through a percentage of students’ eventual earnings. Such a model would provide the benefits of the income-based repayment loan programs without the economic forces causing excessive cost increases.