Free Market Pays for Tuition

More students than ever are attending the nation’s colleges and universities, but we nevertheless hear a lot about how terribly expensive it is. Even with the very low in-state tuition charged by UNC schools, the cost of a year in college, including housing and living expenses, can be a strain on the budget for low-income families. It can be a strain for not-so-poor families too, if they haven’t saved enough money.

People who complain about the high cost of college often look to the government to ease the burden. The obvious problem with further governmental subsidies is that the money for it has to come from the taxpayers. Demanding that government take care of our personal desires with money forcibly taken from others is our worst national habit. We ought to look instead to the voluntary processes of the free market. It’s surprising how many of our problems can be solved if we let freedom work.

Could students obtain money for college by entering into contracts with investors? That is precisely the idea behind a New York company named My Rich Uncle. Formed in early 2000, the firm pools money from investors and gives it to students (both undergraduates and grad students) who need additional funding for college or grad school costs. The money is not a loan. In order to get the funds they need, applicants must enter into a contract which obligates them to repay a certain percentage of their earnings once they are working full time. Here is how it works.

Let’s say that Bill Smith wants to study engineering at N.C. State, but his family doesn’t have the money to afford putting him through school. Fortunately, the family hears about My Rich Uncle. Instead of delaying college or enrolling in a school close enough to home that Bill could eliminate the cost of living on campus, the Smiths get the additional $20,000 they figure they will need from MRU. Bill signs a contract obligating him to pay MRU 4 percent of his taxable earnings for 15 years after he graduates.

Bill earns his degree and gets a job with an engineering firm. In his first year of work, he has taxable income of $40,000, and writes a check to MRU for $1600. As his income rises for the next 15 years, so does the amount he pays under the contract. But if, for some reason, his income should decline, he pays less. That’s the risk the investors take.

Human capital contracts like this are very appealing, for several reasons.

First, they don’t depend on the government. No tax dollars are involved. The risks are borne entirely by parties willing to bear them.

Second, they are not an entitlement. Students can apply for educational funding through MRU, but the company can and indeed must be selective.

If a student with a mediocre academic record wants a lot of money to pursue studies in a field that has bleak economic prospects, MRU would probably decline to offer a contract. So if Wanda asks for funding to major in Women’s Studies, she would have to pay a higher rate, if she were given money at all.

But that’s discrimination! Yes, and we should stop regarding that word as a pejorative. Discrimination means making choices and not all choices are equally sensible. If investors are willing to put their money behind students who want to go into engineering, but not behind students who want to go into Women’s Studies, that is a perfectly reasonable discrimination based on economic realities. There is a far greater demand for people who’ve been taught to build things than for people who’ve been taught to complain about the supposed unfairness toward women in society.

In other words, the more we fund higher education through equity contracts, the stronger is the market’s feedback loop as to the viability of different courses of study.

And that leads to a third benefit. Not all colleges are equally good at imparting useful skills to their students. As information accumulates on the success of graduates of different schools, the tendency will be to favor those whose graduates tend to do the best in the marketplace. That would help to steer students away from colleges that are just selling credentials without imparting much knowledge.

The concept of equity contracts to finance college is still quite new, but an indication of its viability is the fact that My Rich Uncle just went public.

George Leef (georgeleef@popecenter.org) is the executive director of the John William Pope Center for Higher Education Policy in Raleigh. For more information on the Pope Center visit our Web site at www.popecenter.org.