Patel: It’s time to rethink the economics of higher education
The U.S. approach to funding higher education, which has piled $1.6 trillion in debt onto a generation that just wanted the same opportunities as their parents, is a massive, historical failure. Unfortunately for colleges, millions of American families are waking up to this fact at the very moment so many universities are struggling to survive a pandemic that is blasting the foundations of their high-cost, low-return models.
The root of the problem is the exorbitantly high cost of tuition at so many institutions where that price premium can’t be justified. So of course, we’re talking bailouts, both for the higher ed institutions that refuse to change and the borrowers who got suckered into the idea that debt didn’t matter as long as they got a degree — any degree.
It’s time for a new approach. Something that puts some skin in the game for educational organizations that are otherwise just happy collecting tuition dollars, while driving young people toward programs that will actually provide them a long-term benefit.
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It’s time to seriously consider a third option, one that cash-strapped students and institutions struggling with recruitment and retention can take advantage of immediately: Income share agreements (ISAs).
The idea isn’t new; economist Milton Friedman initially proposed investing in “human capital” to pay for education back in 1955, with colleges as the investors, “buying” a share of their earnings. These arrangements offer students funding directly from their learning institution, and in exchange students agree to pay it back as a percentage of future income. Some don’t kick in until students start making a set amount of money, and some put a cap on how many payments students will be required to make.
Considering there were more than 7.5 million student-loan borrowers in default and two million more behind on payments before the pandemic — and now, things are only likely to get worse — it’s evident we need some of the benefits that ISAs have to offer.
Students benefit by avoiding the burden of traditional loans with 20-year timelines, and for those who wouldn’t otherwise pursue a secondary degree or certificate, ISAs make that option much more attainable. Not only do they make the financials of continuing education more palatable, but they represent a measure of support from institutions betting on their success. At a time when so many are struggling to make ends meet, the economic and emotional factors of this option form a perfect synergy for students eager to learn.
Educational institutions can benefit as well. Those that utilize ISAs can use them to prove to students that they are willing to put their money where their mouth is, providing students with an extra incentive to attend and showing customers that they believe in their product. In this moment, when people of all ages are looking to take that next step in their career but are afraid to take on substantial debt, this tool will be particularly attractive.
Over time, we will see this kind of discipline dramatically reshape higher education. Universities using ISAs will be incentivized to provide students with better career services and put more of an emphasis on teaching practical skills to address workforce demands. With employers saying college students lack about one-quarter of important workplace skills, the changes wrought by utilizing ISAs will result in employees entering the workforce fully prepared to excel.
It’s impossible to say what America will look like in the aftermath of the coronavirus, from an economic, social or public health standpoint, but it’s a dangerous gamble to assume that the problems plaguing this country prior to its spread will have resolved themselves by its end. Student loan debt is a crisis as dire and invasive as the virus, and switching to a higher education model funded by ISAs is a good first step toward stopping it in its tracks. The rehabilitation of higher education is long overdue, but the solution is within reach.
Harsh Patel is CEO at Galvanize.
