Sunday, July 21, 2013

Maybe There is a Solution to Crushing Student Debt – Students as Human Capital, Not As Victims of Lending Practices

You Mean We Don’t Have to Send Students to Debtors Prison?

This Forum has long railed against the  practice of forcing college students who are not the kin of Mitt Romney to incur horrendous amounts of debt in order to get a college education.  No decent or humane society does that.  The United States does. 

Now there is a possible solution, one being explored by both the private sector and government.  The private sector solution is to let investors invest in the post graduate earnings of the students whose education they support.

If they invest, the backers receive a percentage of the person’s pre-tax income over a number of years. Pave and Upstart allow youngsters to choose the percentage of their income to share with investors. 

In return, the matchmakers pocket a sliver of the money raised, as well as a management fee from investors. Pave lets its “prospects” share up to 10% of their future earnings. Upstarts can offer up to 7% of their income. Upstart also caps total payback at five times the amount raised, so that if someone creates the next Google they don’t have to hand over Croesus-like sums of money to their investors.

The public sector solution is being explored by the state of Oregon, which will ‘tax’ future earnings to pay for a person’s college education.

The Oregon state legislature dramatized this issue with its decision to develop a pilot program to eliminate tuition and fees for students in the state university system who agree to pay about 3 percent of their income for the next 20 years to help finance the education of future students.

The “pay it forward” scheme, proposed by students at Portland State University and building on a model developed by the Economic Opportunity Institute, has re-energized debate over ways of alleviating the burden of student debt. As it happens, the Oregon legislature voted to pursue it on the same day that federal student loan interest rates doubled to 6.8 percent from 3.4 percent.

Detractors (yes there are always detractors) correctly point out that some students may make bad decisions, and some investors and the state of Oregon may make bad investments, but has anyone come up with anything better?

Not everyone is impressed. Jonathan Frutkin, a lawyer in Arizona who has studied crowdfunding, worries that young people lack the nous to make wise financial decisions. “The penalty for being younger, more desperate for money and less experienced is that the average prospect is going to get a bum deal,” he wrote in an April blog post about Pave and Upstart.

As though being mired deeply in debt is a good alternative.

This is a market solution even Conservatives should love.  So where are they?  Oh, they are on the side of privatizing student loans and letting financial institutions make huge amount of money off of onerous interest costs of student loans, with the risk being absorbed by the Feds in the form of loan guarantees.  

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