The best way to fix this inefficiency is to address the root of the problem: most bright students do not have any collateral and cannot easily pledge their future income. Yet the venture-capital industry has shown that the private sector can do a good job at financing new ventures with no collateral. So why can’t they finance bright students?This proposal is in the finest tradition of financial innovation on Wall Street, where product specialists try to securitize anything that's not nailed down in order to make a buck.
Investors could finance students’ education with equity rather than debt. In exchange for their capital, the investors would receive a fraction of a student’s future income — or, even better, a fraction of the increase in her income that derives from college attendance. (This increase can be easily calculated as the difference between the actual income and the average income of high school graduates in the same area.)
Slavery by another name
Think for a minute what Zingales is proposing. In times past, people who were faced with crushing debt sold themselves, or their children, into slavery. How is this any different? The Zingales proposal asks a student to sell their future earnings, or equity if you will, in exchange for cash to finance their education. OK, it's not full slavery in that someone owns all of you, but it is a partial form of slavery. Zingales qualfiied his proposal to state that it is not "indentured servitude":
This is not a modern form of indentured servitude, but a voluntary form of taxation, one that would make only the beneficiaries of a college education — not all taxpayers — pay for the costs of it.
What would you call the transaction where someone, rather than face a mountain of debt, sells all or part of himself to a holder of capital for a lump sum of cash?
Taking personal responsibility
There are other ways of addressing the problem of student debt. When you have seniors retiring with student loans, there is no denying that there is an enormous problem with student loans and the cost of higher education. A better solution is to get the student to take some personal responsibility and make an adult decision about the value proposition in his own higher education.
True enough, higher education still pays, but at what cost? The Atlantic highlighted these issues in an article that showed the value of higher education. It's charts like the one below that prompt parents to push their kids into university at all costs.
The dirty little secret is that not all higher education is the same. The Atlantic article pointed to a Georgetown study that showed the earnings and unemployment rates of different majors. The disparities are striking.
So here's my message to students. Take personal responsibility for your own decisions about your life. If you want to specialize in Architecture, Journalism or the Liberal Arts because that's your passion, go for it! On the other hand, you need to manage your own expectations. If you graduate with a degree in Victorian literature or foreign affairs, don't complan when you get your dream job of working for an NGO that pays you 30K a years - because you made your own choice to go into the field of your own volition. There are tradeoffs in life and you made one.
On the other hand, proposals like Zingales' to equitize people's earnings amount to slavery. It is so wrong at so many levels that I don't know where to even begin.
Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.
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