The topic of student debt has garnered quite a bit of attention in recent months, particularly on college campuses and on the campaign trail. With continually rising tuitions and a wobbly economy, the question of how students should pay for college is increasingly pertinent. Should the government foot some (or all) of the bill? Is it right that many students graduate drowning in debt? Is there a better way?
One rather provocative solution has made its way into the debate over the last few months, thanks to former Republican Presidential candidate Marco Rubio. The idea is that, rather than loading up on debt, students could sell a slice of their future earn- ings to investors who in turn would fund their education. In finance jargon, this is transforming student debt into ‘student equity,’ or ‘graduate stock,’ as described in the Economist.
Personally, I am extremely intrigued by the innovation of this sort of arrangement, which was origi- nally proposed by economist Milton Friedman in the 1950s. However, it is certainly not a universal cure and would likely not be a widely-implemented solution for various reasons.
For one, investors would be extremely reluctant to fund the edu- cations of students who didn’t show- clear signs of future financial success. However, if a free-market arrange- ment such as this could get more qualified students the education they deserve but lack the ability to pay for, then it has merit and should be welcomed by all, even if it doesn’t solve the entire problem.
Some have characterized the idea of student equity as “indentured servitude.” Personally, I disagree and think that selling portions of future earn- ings is an innovative solution to the problem as it stands now. In fact, a central benefit of the arrangement is that it gives students greater freedom in choosing a profession, because they would not feel as obliged to shoot for the highest salary possible straight out of college in order to pay off a mountain of debt. Whether they become a banker or a teacher, they would pay the same portion of their income.
Of course, this is precisely why the investors would have incentive to find students who are motivated, diligent, smart and show signs of future mon- etary success. Here lies another reason why the plan is brilliant: it efficiently allocates the funding from investors o students who would otherwise take out a loan, but show signs of making significant contributions to society.
For example, in today’s economy and job market, it is likely that the majority of these funds would flow from investors to students studying and showing great aptitude in highly technical fields, such as science, tech- nology, engineering and math because workers in these fields are some of the most highly valued workers today.
These places are exactly where funds for education should be flow- ing. In a hyper-competitive global economy and an age of phenomenal technological progress, any student who shows the motivation, work ethic and aptitude to get a degree in the STEM fields should be able to, regard- less of whether they can pay. The student equity solution will help us to reach that ideal.
Many would say that any student in the U.S. who shows the motivation, work ethic and aptitude in any academic field should be able to receive an education, regardless of whether they can pay. I agree, but our society is clearly not yet at that point.
Until then, I think any free-market solution that gets deserving students a college education should be welcomed. Converting student debt into equity is, undoubtedly, an innovative solution that could achieve this end.
Owen Sandercox ’19 (sander2@stolaf. edu) is from Sandy Hook, Conn. He majors in economics and statistics.
