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