Speaking at the nation’s largest community college (Miami Dade), Senator Marco Rubio proposed some very specific ideas on higher education that deserve serious consideration.
Rubio recognizes that our federal student financial assistance program has enabled colleges to raise fees: “these hiked tuition rates….form a free subsidy for colleges…which use the funds to finance a myriad of non-academic pursuits.” Rubio proposes to simplify the process of obtaining aid, getting rid of some of the Byzantine complexity and moving to allowing income tax deductibility for college expenses. Good, but pretty routine.
But Rubio then makes four specific proposals. First, dramatically improve information students receive about the likely costs and benefits of various majors at different colleges. He and Senator Ron Wyden proposed this a year ago, but nothing has happened. Why not? President Obama proposed something similar several years ago. Why shouldn’t college graduates be given information such as “the average earnings of a graduate of the University of Illinois majoring in sociology is $41,000 five years after graduation, but those earnings average $74,000 for electrical engineering majors” (I made up those numbers for illustrative purposes).
Second, Rubio proposes making loan repayment automatically a fixed percent of one’s income. If you have a $40,000 loan and make $35,000 a year, perhaps you will repay $3,500 a year, but if you make $50,000 a year, your payments will be $5,000 (and you get out of debt sooner). While income contingent loans are not a new idea (and quite common in other nations), Rubio wants to make it the standard mode of repayment. Again, this is not too different from some Obama ideas.
I have somewhat mixed views on this proposal. On the one hand, some flexibility in loan repayment is highly desirable. But there is a political temptation to enact a maximum repayment time limit, effectively leading to loan defaults for those taking low paying jobs after graduation. Unless carefully done, income contingent loans implicitly subsidize resources going into areas of study with little economic utility as measured by labor markets. The fact that we charge the same interest rate on all student loans, regardless of the income repayment probabilities of the student, shows federal lending programs violate good financial practices -contributing to high default rates. The loan program really needs more radical revision -and probably in the long term privatization. As Rubio himself notes, it is a prime culprit in the tuition inflation which is the root cause of the rising burden of attending college.
But Rubio hits a home run with his third new proposal. He wants to create a framework where investors can buy equity in students as opposed to lending to them. In effect, students sell stock instead of bonds in themselves. Under these Income Share Agreements (ISAs), a student agrees to pay the investor a certain percent of his or her income for a fixed number of years -say five percent for 10 years in return for a $15,000 investment in college costs. If the student ends up making $125,000 a year well before 10 years are up, the investor makes a huge profit; if the student makes only $30,000 a year, the investor likely loses on the student. The risks of borrowing move to the investor away from the student.
For ISAs to work, they need to be free of federal regulation. The only role I see for the Feds is to assure that legal impediments such as tax discrimination are removed. Already several entrepreneurs have experimented in limited ways with them. While no panacea, ISAs are a financially responsible approach that imposes no burden on taxpayers and reduces anxieties to students needing financial support.
Finally, Rubio notes that “we have a broken accreditation system that favors established institutions while blocking out new, innovative and more affordable competitors.” He wants to promote on-line education, the use of standardized tests to demonstrate competency, and a new, competing on-line accrediting agency approved by Congress. While I worry about the federal role, the concept on the whole is highly appealing.