Funding students with equity rather than debt is appealing. But it is not a cure-all

21. August 2015

Date: 20-08-2015
Source: The Economist: Free exchange
Subject: Graduate stock

DEBATES over how to fund higher education never lie dormant for long. In Britain, recently, there have been reforms about twice a decade; the last one, which hiked tuition fees, all but killed off the Liberal Democrats, members of the previous coalition government. In America, concerns abound over soaring costs and towering student debts. As a result, presidential candidates have been weighing in with plans to overhaul the system.

Why should the state support students in the first place? One argument is that society benefits from educated citizens, who pay more taxes, generate more jobs and help to advance human knowledge. Typically, such social gains justify subsidies. But the private returns to many degrees are juicy enough to encourage would-be students without a subsidy. The New York Fed reckons that a bachelor’s degree provides a 15% return on investment.

A better argument is that a purely private market for funding college would probably struggle. Despite the rosy averages, not all graduates succeed, so borrowing to pay for college is a gamble. Students do not know what job opportunities they will have later on; lenders must guess whether a 20-year-old will become a banker or a busker. Asset-poor youngsters cannot post collateral to compensate lenders for the risk. Unable to raise cash, poor students would be locked out of education without state support. Read the rest of this entry »