Over the last thirty-two years, the "real" cost of university education has more than doubled after allowing for general price inflation of all goods in the economy. Many prospective students have been priced out of higher education, even though they realize that without a college or graduate degree their career opportunities and their projected lifetime income are severely restricted. Others have chosen to take on massive amounts of debt to try to finance their education, which in itself can be crippling to those students that have to pay it back, especially to those students who choose careers that are incredibly important to society like teaching, government work or social work but do not pay as high a salary as jobs in banking or private enterprise.
But, worldwide, the entire system of funding student tuition expense with debt is not working and is unsustainable. Why? Because the default rates are so high that no lender would lend to these students without enormous subsidies and guarantees from government. Of course default rates are high. Who ever heard of lending hundreds of thousands of dollars to a kid with no income, no collateral to pledge, no assets, no job, no house and no permanent ties to the community?
So, lenders do participate in the government guaranteed programs, but this also increases the default rate because, like Fannie Mae guaranteeing home mortgages in the states before the housing crisis, the lenders no longer care about credit analysis or collection efforts because they always have the government backstopping them.
What is the solution? Let's get rid of student debt. Let's replace it with a system where investors fund students' full tuition in exchange for a piece of the students' future earnings for some defined time period, say the next ten years. Here in Dubai at the S P Jain School of Global Management our graduates' incomes triple on average as a result of our MBA program, so I doubt any would object to sharing, say 15% of their annual income with someone who paid for their tuition.
Investors should love this product. Now if one student fails to get a job after graduation, he still has a large pool of income coming from the successfully placed students. And, it addresses the one big problem all investors have, they have no way to hedge their exposure to rising human capital costs. It is the basis of almost all their non-diversifiable risk in their stock portfolio as almost every company in the world they invest in has significant employee costs. With this type of student equity investment product, investors for the first time have a way to hedge against rising labor costs in their portfolio by owning a small piece of a college grad's earning capacity.
I think the program would have enormous appeal to prospective students. If you are a prospective student thinking about attending college or business school, write to us at firstname.lastname@example.org so we can gauge your interest and begin developing a real financing program like this to offer you.
The article first appeared on Khaleej Times UAE, Business & Finance Education Report on 26 February, 2014.
John R. Talbott is a best selling author and economic consultant to families whose books predicted the housing crash and the economic crisis. You can read more about his books, the accuracy of his predictions and his financial consulting activities at www.stopthelying.com
Average tuition and fees for in-state student: $9,022 in 2011-12 Increased: 20.5% from a year prior and 98.3% from five years prior The worst could be yet to come for students in California's public universities. If California residents vote against state tax increases in the November elections, the school system will have to come up with money fast to fill the $375 million budget gap that would ensue, says Dianne Klein, a spokeswoman for the University of California's Office of the President, which is the headquarters for the 10 UC campuses. Under that scenario, tuition could rise 20.3% for the second semester of the upcoming academic year. Much of California's growing college-cost burden has been placed on out-of-state students. The 10 most expensive campuses for out-of-state students in the U.S. are all in California, where tuition, fees, room and board in total ran up to roughly $51,000 last year, according to the Chronicle for Higher Education. Klein says that despite the rising costs, overall applications to the UC system are going up; she also says that because of the system's financial aid programs, about half of all UC undergrads pay no tuition.
Average tuition and fees for in-state student: $9,428 in 2011-12 Increased: 16.8% from a year prior and 101.7% from five years prior Since 2008, Arizona's public universities have laid off faculty and staff and eliminated academic programs in order to make ends meet. This year, state funding will total $708 million, compared with nearly $1.1 billion for the 2007-08 academic year, says Katie Paquet, spokeswoman for the Arizona Board of Regents. As tuition costs have risen, the largest universities in the state have rolled out lower-cost ways that students can attain a Bachelor's degree. This fall, Arizona State University will open a new campus in Lake Havasu City, where annual tuition for state residents will cost $6,000, nearly 40% less than at its campus in Tempe. Also, Arizona's largest universities -- ASU, University of Arizona and Northern Arizona University -- are offering students who transfer from community colleges a lower-cost way to complete their Bachelor's degree; in some cases, students will be charged the cost of tuition during their freshman year in community college rather than the tuition the four-year school charges when they enter it. "Our goal is to provide more options to students across the state at varying price points," says Paquet. Separately, for the first time in two decades, Arizona State University and the University of Arizona have frozen tuition for in-state undergraduate students for the upcoming academic year. Tuition for out-of-state students will rise by roughly 3%.
Average tuition and fees for in-state student: $6,808 in 2011-12 Increased: 15.9% from a year prior and 74.2% from five years prior Beyond tuition hikes, Georgia college students are also facing cutbacks to a popular state scholarship program. Last year, the state reduced the amount of money it doled out to students through its merit-based Hope Scholarship, amid concerns that the program was underfunded. The program, which used to cover 100% of tuition costs at the state's public colleges for qualifying students, covered roughly 87% last year; this year, as tuition continues to rise, the scholarship will cover 81% to 85% of costs in the university system. The state is also looking at cutting direct funding to higher education. Georgia Governor Nathan Deal recently proposed a $54 million cut through June 2014, which if enacted would reduce spending over that period to roughly $1.7 billion. A decision is expected early next year. John Millsaps, spokesman for the University System of Georgia, says public institutions have had to shift much of the cost burden onto students as state funding dwindles. Over the past seven years, state funding went from covering 75% of the cost of educating students to 50%, he says.
Average tuition and fees for in-state student: $9,484 in 2011-12 Increased: 15.7% from a year prior and 67.3% from five years prior Unlike most states, Washington doesn't have an individual income tax; instead, it relies on sales taxes for much of its revenue. Income from that source slumped during the recession, leaving the state with less money to go around. To make up for the shortfall, the state granted permissions to its public universities to raise tuition, and students have felt the impact: Six years ago, it cost roughly $5,700 on average for an in-state student to attend a public college in Washington. That's hovering around $10,000 this year. In June, the University of Washington announced a 16% increase in tuition and fees for the upcoming year, following a 20% increase last year. The state is covering just 30% of the cost of educating its students, the lowest share ever, says Norm Arkans, a spokesman for the University of Washington. He says the institution's relatively low tuition and fees provided some leeway to raise costs, but adds that the strategy isn't sustainable in the long term.
Average tuition and fees for in-state student: $6,044 in 2011-12 Increased: 13.7% from a year prior and 65.8% from five years prior Few students have been immune to tuition spikes in Nevada. During the five academic years ending this past spring, Nevada raised tuition and fees at its community colleges by 48% on average, one of the highest increases in the country, according to the College Board. Costs at four-year public colleges rose 66% over the same period. And midway through the last academic year, the state approved an 8% tuition increase for all undergrads, which will kick in this fall. Still, despite the increases, the cost to attend a public college in Nevada remains lower than the national average, says Dan Klaich, chancellor of the Nevada System of Higher Education.