A ‘free market’ solution to college debt?


In order to address the problem of many students graduating from college with huge debts, Bernie Sanders has proposed that all state universities provide free education as an investment in the nation’s future by enabling the creation of a more educated work force. The idea is that freed from such debt, graduates will be able to choose worthwhile careers rather than ones that pay a lot so that they can retire their debt. Sanders points out that many developed countries provide free higher education to their students. Even some developing countries do so. For example, my own university education in Sri Lanka was completely free.

Of course the idea of providing anything free, however worthwhile it may be (such as health care), is anathema to our ruling oligarchs, and free-market devotees have come up with their own capitalist solution to college debt, one that has been seized on by New Jersey governor Chris Christie as his presidential campaign flounders.

The idea is that students incorporate themselves somehow into a kind of company and sell stock in themselves to investors in return for giving them a portion of their future earnings. While on the surface this has disturbing similarities to the practice of sharecropping, with education replacing land, with all the problems that can happen in such a system, its supporters say that it is not that different from the student loan systems we currently have.

Economist Richard Vedder explains how the system would work:

Students currently do the equivalent of selling bonds – they borrow money with the promise to repay the funds. Why not issue stock (equity) in themselves – give investors partial, temporary ownership of a college graduate’s “human capital,” in return for a share of his or her earnings. Call these contracts between investors and future students “income share agreements” or “human capital contracts.”

There are lots of advantages to having voluntary arrangements made between individual students and financial service companies financing human capital construction. A contract might go like this: “if you pay one-half of my tuition to go four years to XYZ University, I will give you 15 percent of my earnings beyond $15,000 a year for the next 18 years.” Sometimes the investor will hit a jackpot: the college student becomes highly successful, making a big six digit income. In other instances, the student either flounders in college or secures a low paying job after graduation and, on net, the investor loses. The trick is to have a pool of contracts that collectively provide a good return. The risk, however, passes from a young student with no experience in financial markets to a savvy investor.

One problem with this system can be seen immediately. Investors are more likely to back students who go into areas that promise high earnings (like investment banking, medicine, engineering) and avoid careers that serve the needs of people (like teaching and social work and other forms of public service oriented jobs). But Vedder see no problem with this. In his eyes, the reason some jobs pay poorly is because those jobs have no value in the eyes of society.

Isn’t this “unfair” to those wanting to be librarians, teachers, social workers, etc., since they would have to forego more of their incomes to satisfy the human capital contract? Not really. Society puts a relatively low value on those jobs. If a market-based financing system is in place and, say, fewer kids want to be teachers, in time salaries of teachers would rise to eliminate potential shortages. If lots of kids flee to high paying STEM [Science, Technology, Engineering, Mathematics] disciplines to lower the proportion of equity that has to be paid to human capital investors, in time this will lead to some flattening of salaries in those disciplines – supply will rise to meet high demand.

But this misses the point that there already exists a scarcity of teachers as can be seen in the increasingly large class sizes they are called upon to teach and yet their salaries and benefits are being cut, not raised. This is because schools (and libraries and social service agencies) are funded by taxpayers, and states are cutting those budgets in order to give tax cuts for the wealthy. Furthermore, the number of teachers the nation requires is vastly greater than the number of investment bankers and engineers. There is no way that the salaries of all or nearly all of these teachers will ever approach that of the currently high-paying occupations.

The logical end point of this free-market model for teachers (and one that is ardently sought by conservatives) is for publicly funded schools to disappear and be replaced by entirely private schools that would then compete for teachers and students. But that does not mean that the salaries of all teachers would rise. What would be the more likely result is a further separation of rich and poor, with a few schools catering to the elite and paying higher salaries to their teachers and attracting the children of the wealthy who will then go to elite universities and jobs in high-paying fields, while the majority of people will have to send their students to schools that pay their teachers much less because they cannot afford more. Teachers will take low-paying jobs in such schools simply because they need to earn a living.

This system already partially exists in the US where schools are largely funded by local property taxes. People who can afford to, live in school districts that have high property values that generate higher taxes that can support schools that provide excellent resources. But these are relatively few. In Vedder’s proposed system, the current inequality will likely accelerate.

Comments

  1. smrnda says

    “Isn’t this “unfair” to those wanting to be librarians, teachers, social workers, etc., since they would have to forego more of their incomes to satisfy the human capital contract? Not really. Society puts a relatively low value on those jobs.”

    This is actually factually false, or maybe meaningless. These jobs have tremendous value for society, but they don’t have a value to oligarchs. Their pay is low since it’s derived from public funding which has been under assault as *any* sort of government spending has been declared ‘waste’ by the ruling class. Other jobs may have better returns for investors, but that’s only because it has value to them – it’s no sort of measure of objective value to society.

    When value is market value, it’s not one person one vote but one dollar one vote. The millions of people who would benefit from public school teachers, social workers don’t have any means of voting with $ for their needs. The needs of people without money *don’t count* to people like Vedder.

  2. Holms says

    I think a much worse problem with this scheme is that by treating funding for education as a private (i.e. non-government regulated) investment, is that it leaves it up to the potential investor whether they take a chance on a particular person or not. Even if we pretend for a moment that all people are capable of setting aside all personal bias in making this decision, there is still the matter that some students represent a higher risk than others. Specifically, students from marginalised populations and/or poor circumstances are well known to have a harder time graduating, and are subject to prejudice in secuding a job / promotion / etc. The investors will know this because they aren’t idiots, and will be less willing to take the risk; thus, poor people will be denied funding proportionally more frequently than the wealthy, compounding the problems they already face. As you note, this will tend to accelerate wealth disparity.

  3. atheistblog says

    It’s mid june, as far as I know you are the only one in Freethoughtblogs supporting Bernie.
    And there is this guy called PZ Myers, he declared his support to Wall Street Insider Hillary, and gave a Politician Speech like how he had no choice, how Hillary is inevitable, how she is the only woman, blah, blah, blah,…
    This is June 2015, not Sep 2016. You stand for what you believe in and tell the truth, you don’t have to be always on the winner side.
    I appreciate your honesty, Singham. On this I really despise this guy PZ Meyers, what a establishment crony supporter.

  4. daved says

    Not really. Society puts a relatively low value on those jobs. If a market-based financing system is in place and, say, fewer kids want to be teachers, in time salaries of teachers would rise to eliminate potential shortages.

    This is such a steaming pile of horseshit that I have trouble believing anyone wrote it with the intention of being taken seriously. It’s also just another example of my contention that libertarianism is a religion, rather than a political philosophy. They simply set up “the market” as their deity, and announce it will solve all the world’s problems, in the face of mountains of evidence to the contrary.

  5. OlliP says

    The fundamental problem with treating education as a good that can be bought and sold in the marketplace like tomatoes or cars is that education is not like them. To name just one big difference, externalities: most things that I am taught make your skills more valuable. Look at this blog. Dr Singham writes in the same alphabet and same language that the people here know to read. His knowing English and the same alphabet makes my English skills more valuable, since I can read his writings. And my English skills make his more valuable since he can reach more people. Doesn’t happen that way when I buy tomatoes.

  6. Mano Singham says

    atheistblog,

    Actually Myers has expressed his support for Sanders.

    As for the others on FtB, not everyone is as absorbed in politics as I am. We each choose where to expend our writing energies and so silence on a topic should not be used to infer political positions.

  7. Dunc says

    They simply set up “the market” as their deity, and announce it will solve all the world’s problems, in the face of mountains of evidence to the contrary.

    It’s pretty good at solving all of the “problems” they actually care about…

  8. lorn says

    Dunc @7:
    “It’s pretty good at solving all of the “problems” they actually care about…”

    Exactly right.

    The question is not ‘Is there a free market approach to the issue’ the question is: Is the free market approach the best solution to this issue.

    This varied according to your definition of “best”. If you define “best” as promoting the sort of society and societal dynamic that the nation as a collective and whole needs and wants, and then you define the need as having a sufficiency of well trained graduates in ‘soft’ field such as education and social work you get one answer.

    If you define “best” as maximizing profits and/or promoting the concentration of power and wealth and moving it upward the answer is going to be significantly different.

    The mythology is that the “free-market” is a divine creation and it should not be messed with. The fact is that all markets are entirely human creations. Markets can be designed and created by humans, or spontaneously emerge as a property of human interaction but none are natural, or unregulated. All markets are regulated. If not by laws and rules, then by societal norms, expectations. There is nothing in free markets that has to favor one end rather than another. The work product and side effects of any market can be altered by buyers, sellers, regulators, taxation, law, changing expectations and alterations in social norms. Look up economist Arthur Pigou for ideas as to how taxation, and/or subsidies, might be used to groom markets for outcomes more favorable to the wider society.

    Those promoting the idea that free markets are sacrosanct. blessed be to the market, are merely showing their approval of the present form the system has taken. It more or less takes care of problems they are concerned with, It works for them.

    Of course market worshipers claim that any objection to an ‘unregulated’ free markets is a demand to create a rigid command-control economy. Never mind the whole Madonna – Whore parallel. The fact is that there is a huge amount of distance between this mythical free market that is both entirely natural and completely unregulated, never mind that such a thing has never existed, and a command economy.

  9. lanir says

    Ah, I see. So now as a student your money wouldn’t be good enough to pay for an education loan, you’d have a bunch of money shufflers evaluating your worth, lowballing it and then doing their level best to rip you off one on one in a new, unregulated way. I’m not sure what effect this would have on colleges and universities but I suspect it would not be a healthy one.

    In the 80’s management was sometimes seen as some sort of universal magic quality that could be applied anywhere, suggesting that someone could go from managing fry cooks in a fast food restaurant to managing a car manufacturing plant and it would work out just fine. This sounds like an updated version of it replacing magical management with magical investment.

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