THE BLOG
07/29/2013 11:03 am ET Updated Sep 28, 2013

A New Way to Finance College

We need a fundamentally new approach to financing college education. Tuition price resistance and frequent over-reliance on student loans are not going away. What about income-contingent loans that rely on private capital rather than government funding? All the pieces fit together in ways that would be good for students, their parents, colleges and universities, state governments, and the federal government.

As with cell phones, the value of a college education is not in the thing itself (whether a mobile phone or a wonderful four-year experience). The real value of college comes after graduation--in addition to a more meaningful life, the unemployment rate for college grads is half what it is for those without degrees and the average college graduate's lifetime income doubles that of high school grads.

The years after graduation are also where the money is. Before or during college, it's hard to scrape together the money to pay for those great four years. But in the years after graduation, it's much more likely that there is additional money and there is probably twice as much of it. So let's pay for it then.

Everyone should pay something--perhaps $5,000--per year for college. The federal and/or state government would advance an additional amount--perhaps $20,000--for students who maintain satisfactory progress toward graduating on time from a college or university where at least half of new students graduate in four years. Individuals could pay their own way at any school they wish to attend, but students could use public funding only at schools where they have at least half a chance of graduating.

The funds for the contribution from the state or federal government would come from higher education bonds sold to large, long-term investors. Three or four percent of each graduate's annual income would be collected by the state or federal government through the collection of individual income taxes, until the individual college graduate's obligation was met. Do the math: after twelve or fifteen years of such a program, the government would be collecting enough money to begin paying handsome dividends on the bonds.

Under this system, everyone who is admitted to a qualifying institution receives a college education for $5,000 per year, making college no longer dependent on socio-economic standing. Forgiving a portion of the repayment that is due can encourage employment in selected professions. The funds that generate the dividends for investors are collected through income tax returns--which, unlike student loans, have an extremely low default rate.

The government gets completely out of the business of grants and loans to students, as well as being out of the loan collection business--with corresponding reductions or re-allocations in state and federal budgets. Holders of the long-term higher education bonds reap good dividends. And our well-educated workforce enhances state and national competitiveness in the knowledge-based economy of the future.

No doubt this idea needs refinement and improvement, but it looks like a win for everyone and therefore merits broad discussion. Instead of tinkering, let's change the game plan.