James C. Banks

Treat Students as Stocks, Not Bonds

In Uncategorized on August 4, 2011 at 3:28 am

Along with healthcare, higher education is one of the sectors of the economy that probably isn’t getting any cheaper.  This statement is almost a cliché, but the fact that it has been said for so long demonstrates the failure of anyone to come up with a workable solution.  Frequently, I hear youngs idealists say things like “The government could cover all of it.”  This idealism is sounding increasingly displaced as the deficit grows and the government seems less capable of addressing the issue.

Reducing prices for higher education is possible, but can only be achieved through entrepreneurial market solutions rather than through government subsidies.  Typically, when commentators claim this, they are referring to for-profit education providers.  But it is possible to build a marketplace around the borders the non-profit sector.  This is possible because human capital is the most valuable, though least valued, resource.

Human capital is what makes otherwise dead matter into resources in the first place, but, for as valuable as this resource is, few people invest in it directly.  Employers pay employee education debts and state governments and national foundations allocate money to universities, but hardly anyone invests in human capital for the purpose of capitalizing on their investments; there is no reason why this should be.  The lack of it helps neither the rich nor the poor.

The concept of investing in people to earn economic dividends is perhaps slightly taboo, not only in America but in the rest of the world, but this does not prevent it from happening in non-intellectual industries.  Talent agents invest in musicians and actors who they believe can be made into potential stars and boxing managers pay for their fighters’ training and sometimes their rent to earn a profit on the championship title.

These models could be extended to higher education.  An MBA from one of the nation’s leading business schools might cost as much as $80,000-$100,000, but the private industry could save a graduate of Harvard Business School from the stress of uncertainty by taking on her debt before compounded interest set in, requiring in return the contractual right to draw on 10% of the graduate’s wages for her first twenty-five working years. A finance industry specifically designed to assume the risk associated with college debt could fill the same role that such speculation plays for wheat farmers who otherwise work in fear of falling grain prices.

Naturally, this industry would favor students whose majors were likely to win for them high salaries—economics in, art history out.  But, ideally, it would also lead to higher education reforms to offset these effects.  It makes no practical sense to charge the same base tuition rate to a history major as aerospace engineering major.  While the first course of study requires only a room, desks, chairs, notes and a chalkboard, the second requires all of the above and a laboratory facility with a compliance stamp of approval on it as well as computing and gauging equipment.  Hence, if industry were to finance humanities students, their potential capital gains would decrease, so would its risk as they would take on less debt.

These reforms are within the realm of the possible and no unbridgeable legal barriers run contrary to their implementation, but so entrenched is the status quo that the higher education bubble would have to burst before anyone ventured toward this approach.  It is not only the present that favors the status quo.  Throughout its entire history, the university has been thought of much as Jonathan Swift’s Island of Laputa, floating above the base and mundane universe of profits and capital.  Perhaps this is the way that it should be; the world would probably be a better place if individuals still wished to study the artes liberales rather than the artes serviles.  But the modern university must meet individuals as they are, not as they ought to be.  For the good of all who may otherwise condemn themselves to lives as debtors, it is time to make higher education into a profit-generating industry.


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