POPPING THE TUITION BUBBLE
June 30, 2008
The rising cost of college tuition is a source of great concern for students, parents, and politicians. Between 1989 and 2005, college costs increased at double the rate of inflation. Kevin Carey, a research and policy manager at Education Sector, and Frederick M. Hess, the director of education policy studies at the American Enterprise Institute and editor of "Footing the Tuition Bill," imagine a situation in which instead of borrowing, students could arrange for investors to pay their college bills in exchange for a fixed percentage of their future income.
How would this work?
- Students would shift the financial risk to lenders who could pool that risk and then package their bonds into bundled securities that could be sold on the open market.
- Regulators and investors would set bond parameters --the period of repayment and percentage of earnings -- based on certain key criteria, such as grades, SAT scores, and personal attributes.
- For example: a student with a 2300 SAT score, straight A\'s, and an aptitude for computer programming could expect favorable terms, just as he or she would be more likely to receive a scholarship or merit aid today.
- Smart investors would pass on "blue-chip" universities such as Harvard and Stanford, and would go hunting for bigger returns at less expensive colleges that add great value.
- Investors who found the hidden gems early would be rewarded, creating incentives for private firms to seek out those institutions and alerting potential students to their value.
- Costs to new students would decline (since investors would ask for a smaller percentage of future earnings), effectively lowering prices.
Source: Kevin Carey and Frederick M. Hess, "Popping the Tuition Bubble," The American, June 12, 2008.
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