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Pablo Triana

Pablo Triana

Posted: July 15, 2009 10:13 AM

Apply Debt-For-Equity To Business Schools


Prominent commentators have proposed that the solution to our current economic and financial predicaments lies in going through a huge debt-for-equity swap whereby creditors become equityholders and debtors are thus relieved of their (mostly, unmeetable) obligations. Cleanse the system from debt, the thinking goes, and all will go well. Would debtors like to relinquish their equity in exchange for becoming debt-free? Most likely, yes. Would creditors want to give up their debt assets in return for equity stakes? Possibly, too. And, should governments step in and make things happen, even if some private participants may not be mesmerized by the prospect?

The typical debt-for-equity situation refers to the housing market, but I can think of at least another arena where such arrangement may not be entirely nonsensical. What if business schools stopped charging tuition to their MBA and Masters students and instead were granted equity stakes on the students future earnings in return for a free campus ride? Obviously, this would eliminate the need for students to burden themselves with hefty loans in order to attend school. Thus, a debt-for-equity pact with the devil: no debt today in exchange for a piece of their future action.

B-schools could demand that all admitted students agree to apportion to the institutions, say, 10% of their work-related earnings for the next, say, ten years following graduation. You could spend two years at Harvard Business School entirely gratis (board and room included, why not?) provided that you send HBS a check every year for ten years equal to 10% of the money you've made at your job. Both parties could gain: it is obviously nice to be able to join the workforce debt-free (b-school is a six-figure price tag remember); schools could end up making a lot more money than with the traditional tuition-based structure (many HBS graduates make $1 million annually a few years following graduation, and 10% of $1 million is $100,000). The new arrangement would also save schools and students from the embarrasment of having to deal with defaults (a lot of the times, the bank loan is guaranteed by the school; other times, the loan comes directly from the school).

Needless to say, the current environment would make the new proposal utterly timely. A lot of MBAs are not getting highly-paid jobs, or any job at all. A lot of MBAs are (and will be for the foreseeable future) saddled with huge obligations while receiving little in the way of monthly paychecks. This is nasty for morale inside schools and potentially deters many future applicants.

Crucially, the revolutionary debt-for-equity deal could go a long way towards ridding the b-school market of perennial underachievers and, Darwinistically, guarantee that only top (and true) performers remain alive. Clearly, only those schools who can successfully place their students year in and year out could survive under such an arrangement; if your students can't find good jobs, you won't get paid and recoup the (sizable) investment of educating them. HBS and its true peers (MIT, Stanford, Wharton, etc) would probably not be too worried. But what about those schools that, notwithstanding their rankings, can't really place their graduates decently? Those institutions would predictably resist this new proposal like mad dogs. They have been making too good of a living charging students big bucks and then not being able to deliver that which any MBA looks for: a lucrative high-profile job. Those underperforming schools are more than happy to see students overload on debt, as that's the only venue through which their coffers get replenished. So what if students don't get placed afterwards. The world is full of desperate youngsters willing to borrow any amounts to buy into the illusion of a better future that you so eagerly peddle.

Just like there are too many irresponsible and reckless debtors out there, there are too many nonperforming b-schools and too many mediocre MBAs out there. A sweeping debt-for-equity swap would help bring both sets of dangerous inefficiencies to an end.