Somehow, our elected officials in Washington have managed to agree on the issue of student loan interest rates. It’s a cause for celebration. Federal student loan rates are set to double soon if new legislation doesn’t get signed. Everyone agrees, and yet they’ve still made it political.

In Washington the only currency is political capital. It benefits a politician’s career more to get in the way of legislation than it does to actually work towards getting something passed. I’m not a huge fan of student loans, and only consider them a last resort option. Nowadays they’re the only option for many. That’s because schools continue to jack up tuition and they don’t bear any the risk if their students can’t afford to pay back those loans.

Perhaps they should be responsible in some way for students being able to pay their bills. Colleges don’t have to compete on price because each one offers such a different experience. They’re able to charge what they want because the people borrowing the money aren’t thinking about a return on the investment. Economists might see this as a broken market. I agree. So here a few ways to pay for college that could help balance this out a bit more:

  • Equity Stakes: This is a brilliant idea that encourages entrepreneurship. Clarkson University is holding competitions among potential students to pitch business ideas. The best ideas get full rides to the school and in return Clarkson gets a 10% stake in the company. If Harvard had done this with students like Mark Zuckerberg and Bill Gates they’d have an endowment so big half their students could go to school for free. This is a bit risky, but it’s a great way to align incentives. Everyone wants these kids to succeed. And universities have the resources to incubate ideas.
  • School Financed: If schools think their product (education) is so valuable, perhaps they’re willing to provide the loans for you. Given the appropriate interest rate they could recover a few losses and even make a profit. You’ve seen this with vehicles; GM and Honda both have/had in house financial services companies that provide the lending for their products. The parent company bears the risk. There’s no reason a school couldn’t do this too.
  • Income Based: Like the equity stakes, this option forces the school to make sure their students are successful. Instead of taking a stake in a company, you get a cut of that student’s future income. Maybe it’s 5% of pre-tax income for 20 years, or 10% for 10 years. The student could be given options just like they have for student loans. The school would do everything to get the student into a good paying job. Perhaps alums could cut their obligation short by hiring new grads from their school too.

Every one of these options puts some of the risk on the school itself. Right now they don’t have any risk. Successful schools will thrive in this environment. Crappy ones won’t. There’s no reason why the school shouldn’t have skin in the game. And there’s really no reason for the government to have so much in it either.

categories: business, education, government, loans