Tuesday, May 06, 2008

Instapundit on the student load bubble


A MARKET BUBBLE in student loans? I wonder if it's a student-loan bubble -- or a higher-education bubble? Bubbles are usually inflated by easy credit, and usually end when the credit market gets less generous. I suspect that runups in higher education costs have been underwritten by the availability of easy credit to students and parents, and I wonder if colleges and universities won't meet a lot more market resistance if that credit dries up even partially.

Universities have the wrong incentives.  They think it's the government's job to find a way to pay for students to get a good education as if the costs are out of their control.  Thomas Sowell has written several columns recently about the "Economics of College".  He's against government subsidies.  One novel idea is to make the education of students truly an investment on the part of the institution:

What will happen to the poor if there are no government subsidies for college?

If this argument is meant seriously, rather than being simply a political talking point, then there can always be some means test used to decide who qualifies as poor and then subsidize just those people -- rather than the vastly larger number of other claimants for government largesse who advance toward the national treasury, using the poor as human shields.

Another option would be to allow students to sign enforceable contracts by which lenders would pay their college or university expenses in exchange for a given percentage of their future earnings.

That way, students would be issuing stocks to raise capital, the way corporations do, instead of being limited to borrowing money to be paid back in fixed amounts -- the latter being equivalent to issuing corporate bonds.

Not only would this get the conscripted taxpayers out of the picture, it would also make it unnecessary for parents to go into hock to put their children through college.


I like this idea.  Maybe the colleges could even open up a market and let the public trade in the mutual funds based on their students.  I'll buy a 1000 shares of "The Stanford CompSci" fund!   Top professors could be granted options in the student mutual funds as an incentive to reward the good teaching.  The free market works if you let it.



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