Purdue President explains new student loan proposal

[Politically_Incorrect12]

 Purdue President Mitch Daniels explains new student loan program to members of Congress


WASHINGTON – Members of Congress had multiple questions Wednesday about the income share agreements Purdue University President Mitch Daniels hopes to offer as an alternative to traditional student loans.

Would students from disadvantaged backgrounds be able to attract the investors who will pay for their degree in exchange for a share of future income?

Why should students with income share agreements be able to discharge them by filing for bankruptcy when they can't do that with traditional student loans?

Could the program serve as a guide to students about what degrees are most in demand in the marketplace?

"It's refreshing to talk about some new ideas, some new solutions," Rep. Erik Paulsen, R-Minn., told Daniels at a hearing of the Joint Economic Committee.

Sen. Dan Coats, the Indiana Republican who chairs the committee, had invited Daniels to testify about the challenges of paying for higher education and about potential alternatives.

Read more at:  www.indystar.com/story/news/education/2015/09/30/mitch-daniels-purdue-university-senate-student-debt-income-share-agreement/73099482/

[Politically_Incorrect12]

I posted a similar idea a few years ago and still think it has merit, but I don't know about investors.  I'd prefer it stay with the colleges, so that they have a vested interest in helping those who go there to succeed.  Basically the idea I posted back then was to allow colleges to offer the current system with loans or offer to allow students to go there for a percentage of their incomes for "X" number of years.  Colleges and universities could decide what they feel would be a fair market percentage and timeframe (i.e. Harvard would charge a higher percentage for a longer period of time than a CC).  There would need to be some stipulations, such as X% with full time employment or while making at least $X because if a person goes to grad school, you don't really want to count that time again the time negotiated in the first place.  Grad schools could even get into the setup as well...this way, college cost isn't preventing people from going.  Colleges could even do it based on number of years, per class, etc so that those who don't graduate, don't get off free.  I also think the idea has merit because it makes colleges have some interest in what happens after students graduate as well...so the more successful your graduates, the more more money the college makes.

[Politically_Incorrect12]

Any thoughts on the idea, or just not really sure what to think yet until more details come out?

[mollyanna58]

Sounds kind of like indentured servitude to me.  

[Politically_Incorrect12]

Oct 4, 2015 10:38:59 GMT -5 mollyanna58 said:

Sounds kind of like indentured servitude to me.  

I guess it depends on the percentage of pay and time frame; but I'm not sure it's so different than coming out with an average of $30,000 (plus interest) in student loan debt to be paid over a specific period of time.  Certain colleges and universities could charge a higher/lower percentage and a longer/shorter time frame to try and compete that way in addition to the current system.  For instance, somebody might be willing to pay 10% to Harvard for 7 years, while only be willing to pay 7% to a state school for the same period (or paying 10% to a state school for 5 years) 

[djAdvocate]

it is a shame that we view education as a profit center for outside investors.

[Deleted]

I think we should get government out of higher education and let the free market work.  We do not need one centrally planned system that all must follow or a centrally planned system that is so large it overwhelms other ideas.

[fishy999]

Oct 4, 2015 11:51:44 GMT -5 djAdvocate said:

it is a shame that we view education as a profit center for outside investors.

Not just a profit center- but an investment that cannot lose due to bankruptcy laws.   That's almost like getting free money from the government at 0%

[Virgil Showlion]

Just to play devil's advocate:

What is a commercial bank or lending institution? Fundamentally, a business where consumers deposit money for a safe, low-interest return on their money, i.e. an investment. Those monies are leveraged and then lent out to bank customers, which include banks' portfolios of student loans. The loans are paid back over time with interest, the banks profit, investors (lending customers) get their cut of the profit proportionally to the size of their investment.

Hence what we ought to be evaluating here isn't the concept of investment in students generally, but the differences between this new investment model and the traditional banking investment model.

I see three major differences:

1. The profit/shortfall distribution is different. Specifically, in the banking model, investors are never exposed to losses and the bank reaps the lion's share of the profits. In this new model it would seem that investors are partly or fully exposed to any losses, but the broker (either a college itself or an affiliated bank) is entitled to only a modest commission. The bottom line: the new model trades off low risk for greater potential reward.
   
   
2. The ROI isn't fixed. Of course we should bear in mind that the ROI on student loans isn't fixed either. The more successful students tend to pay them off earlier, while others are content to hold onto them for a lifetime, paying out modest interest in perpetuity. Having said this, payback based on a percentage of employment income (rather than a percentage of the face value of the loan) is a significant departure from the traditional student investment model.
   
   We might consider it a shift from a "career-backed" bond (a student loan) to a career-backed equity holding. I expect it will shift investment towards students expected to earn larger post-degree incomes. However, universities may see this as an opportunity to hike tuition until the amount of a loan needed to complete a degree is roughly proportional to the earnings potential for that degree, bringing the market back into equilibrium so to speak. Whether or not this is a good thing is perhaps the most debatable issue in this thread.
   
   
3. Responsibility for wise investing theoretically shifts from the broker (e.g. bank) to the investor. Having said this, I highly doubt potential investors will ever be given access to information such as the creditworthiness of loan applicants. If such an option does exist, it will almost certainly be facilitated through the broker. Investors will almost certainly delegate responsibility for selecting a good loan portfolio to the broker. A "good portfolio" implies many loans to hedge against risk. "Many loans" implies many investors. "Many investors" is basically just a mutual fund, hence a slightly-higher-risk, slightly-higher-reward version of the traditional banking model already discussed. In short: if responsibility does shift, it won't be by much.
   

So: Do we think that "career-backed" mutual funds will lead to a wiser allocation of capital than the traditional career-backed bonds?

Is it a boon to the judicious investor, or just another bubble in waiting?

[Politically_Incorrect12]

Oct 5, 2015 8:48:58 GMT -5 Virgil Showlion said:

1. 
   

So: Do we think that "career-backed" mutual funds will lead to a wiser allocation of capital than the traditional career-backed bonds?

Is it a boon to the judicious investor, or just another bubble in waiting?

It depends...if the schools make the deals and sell them off (like home loan derivatives), then I can easily see it being another bubble.  However, if colleges and universities are made to keep them (i.e. they take the risk and reward of the students graduating and succeeding), then I see it as another potential alternative to help pay for school in addition to the traditional form we use now.  Where I see the potential in this type of set-up is the cost of the school no longer being such a determining factor in where the student chooses to go (although it always will be to an extent).  For example, as student who is able to get accepted into a higher ranked school (i.e. Harvard, Yale, etc), but can't afford the tuition, he or she will still be able to attend that school if they agree to the accepted percentage of income over X number of years.  The schools can determine what they feel to be a fair percentage over a specific amount of time.  Graduate level schools (i.e. law, MBA, medical, etc) could use the same formulas as well.

Now it is possible that a student could still end up with a significant part of the their income going toward school loans if they choose top schools for undergrad and graduate degrees (i.e. choosing Harvard for undergraduate and graduate would cost more than choosing a state school for both).  I do think certain stipulations would need to be put in place to protect colleges though so that the timeline doesn't count against them when people are still full time students (i.e. going straight to grad school).  It would also need to be set up to be tax-deductible and probably taken straight out of paychecks, as opposed to payments.  The schools could even make agreements like "pay half the traditional tuition and only pay half the % or timeline" (basically the equivalent of a buy-down).  There are options, but obviously other issues could easily pop up as well.  

You would also have to figure out how to charge people who didn't graduate, transferred schools, failed classes, etc.  So there would be a need to figure out if you charge a percentage per class to equal the total amount after graduation, per semester, etc.  If you really wanted to put it on the schools, you could say if students fail the class, then the school couldn't charge them (but that puts no responsibility on the students for failing the class while at the same time making sure the colleges aren't just accepting anybody and everybody for sheer numbers).