Why does college cost so much? And where can I get some money to help pay for it? Those two questions turn out to be intimately and perversely related.

College is expensive because we are willing to pay for it. This is true for first-generation college students struggling through state universities and for status-obsessed children of Upper Suburbia burdening themselves and their fami­lies with serious debt as they press onward and upward through Princeton (school motto: “You would not believe how much this costs!”) or Haverford (school motto: “No, not Harvard — Haverford!”).

College education is one of those touchy products whose price increases far faster than the rate of general inflation. Another such product is health care. And that’s no surprise, because education and health care have something in common: Consumers don’t usually pay for them directly. In economics this is called a third-party-payer problem. When a health-care consumer considers a procedure, he doesn’t ask: How much does it cost? He asks: Does my insurance cover this? Likewise, a would-be Ivy Leaguer doesn’t ask, “Can I afford this tuition?” but “Can I get financial aid for this?”

But in higher education there’s a big difference between the price tag and the price. Big Ivy may be asking $50,000 a year, but that rate is paid by a relatively small number of chumps. (What did you think legacy admissions were for, gen­etic continuity?) You wouldn’t know it from reading the course catalogues, but the people who run these universities are not fools. They know that most people can’t lay down a quarter-million dollars over the course of four years. But they also know that Uncle Sam, who has a soft spot for college students and a ter­rible fear of their taxpaying parents, is in the loan business. The government hasn’t acquitted itself all that brilliantly in its involvement in other kinds of loan operations (Fannie? Freddie? Who?), but the college-loan racket is hugely popular, as free money usually is. “It’s not free money!” students will protest. “We have to pay it back!” That is true. But the interest on these loans is heavily subsidized, both during studies and after graduation. Recent graduates who doubt that should see if they can finance a $50,000 car at the same interest rate, on the same terms, as they financed $50,000 worth of learning.

College administrators know that they can ask much more than people are willing or able to pay because Uncle Sam will step in and bridge the difference between what families have and what colleges are asking. They also know that many of the popular magazine rankings are based on educational inputs, not educational outputs, so spending an extra $1,000 per student each year can send a college up the charts, even if that money is heaped up on the quad and set on fire — or put into undergraduate diversity seminars, which amounts to the same thing.

Contrary to Michelle Obama, who talks as though it had been some kind of hardship to repay money that people lent her to better her life, a subsidized loan is a gift — free money. Considering the payoffs of a college education, this is a wonderful gift indeed. Even if it comes from Humble U, a college degree (as distinct from a college education) is a magical door-opener; there are many jobs and benefits in this world that are for most purposes off-limits to those without a bachelor’s degree. As there are basically no substitute goods in this market, it’s no surprise that demand for education is relatively inelastic.

But the more money that is available for financial-aid grants and loans, the more colleges will charge. In this sense, financial aid isn’t really aid to students but aid to university administrators, who are ingenious in devising new ways to increase their burn rates. Some of the better public universities don’t even need tuition revenue at all. Hans Mark, when he was the chancellor of the University of Texas system in the 1990s, caused an uproar by letting it slip that Texas uses tuition mostly as an enrollment-control mechanism. As a percentage of the cost of educating an undergraduate, tuition is pretty small beer. But by charging tuition, and by charging higher tuition at the flagship schools and lower tuition at the satellite campuses, state schools create a modest market mechanism to manage enrollment. The alternative, of course, is rationing, which is essentially what the elite private schools do.

The economics of undergraduate education are not going to change. Too many politically powerful interests have too much at stake in the status quo. Undergraduates are revenue sources, and much of the money that they bring to school with them gets siphoned off for things that have nothing to do with undergraduate education but everything to do with the interests of college ad­ministrators and faculty: funding new programs and, more important, underwriting the costs of career-making research for faculty who may never teach an undergraduate class. Whether the money is coming from tuition, financial aid, or direct government support of universities, undergraduates are cash cows — but there may be a better way to milk them.

In life, as on Wall Street, there are different ways to finance an endeavor. One is to leverage one’s assets — which is to say, debt. The other option is equity. You can buy an interest in a company. Why not buy an interest in somebody’s career?

There is some precedent for this in the securitization of intellectual capital, what are known as “Pullman bonds,” after financier David Pullman, who engineered the sale of bonds based on the royalty earnings of singer David Bowie. The “Bowie bonds,” purchased by Prudential, allowed the singer to raise $55 million for future endeavors in ex­change for giving up ten years’ worth of royalties. A similar model for financial aid would allow students to enter into contracts in which they swap the cost of college for a fixed percentage of their income for a period of time. A student might get the equivalent of a free ride at Yale in exchange for 2 percent of his income for the next 30 years. He might end up paying more than if he had simply borrowed the money — especially if he becomes a hedge-fund manager or a class-action lawyer — but he’d be spared the burden of debt and the risks associated with borrowing. And if he decides to become an inner-city schoolteacher instead of a Wall Street tycoon, he’s not going to have crushing loan payments hanging over his head.

MyRichUncle is an education-finance company that originally offered an equity model. Their operations, based in the World Trade Center, were disrupted by 9/11, and like many other innovative start-ups they found it difficult to raise capital as they rebuilt. Still, the firm managed to write nearly $1 million in equity-style products, which they call “education investments.” Raza Khan, co-founder of the company, believes in the equity model and hopes to begin offering income-based financing again when cap­ital becomes available.

“We were surprised not only by how much demand we saw, but at the quality of the demand,” Khan says. “We had people going to great institutions, with strong income prospects. The attraction is in the flexibility — when your payment is a small percentage of your income, your payment is always affordable.” Conversely, student loans can be oppressive in the first years after graduation, when students are generally earning the lowest incomes of their careers.

These equity-like arrangements are known as “human-capital contracts,” and their benefits aren’t limited to helping young people avoid graduating with enormous debts. The investors who are paying the college costs up front on these deals, whether they are profit-driven enterprises or charities, would have a real economic incentive to help keep the costs of undergraduate education down. This would have beneficial effects on the overall education market, creating incentives for efficiency.

Yale experimented with a similar system in the 1970s. The Tuition Post­ponement Option was built on a good model but, in a collectivist blunder that could be committed only by college administrators, it bundled the students into “cohorts” who were jointly responsible for any defaults among their classmates. Conscientious graduates found themselves making payments far longer than expected in order to make good on the abandoned obligations of Ivy League bums and dropouts. One hybrid option would be to allow students to forgo a percentage of their future earnings in exchange for funding, with repayment capped at, say, 150 percent of the aid received. This would probably be structured as an income-contingent loan.

Ideally, these programs would be offered by the colleges themselves rather than through the government — tuition would simply be forgone in exchange for future payments. It is imaginable that some graduates would opt to continue giving 1 or 2 percent of their income to their alma maters even after their obli­gations were paid off, especially if those payments were made tax-deductible. Universities sustained in large part by a body of graduates would have incentives to rein in the worst sort of shenanigans that currently deface campus life, and the arrangement would encourage a sense of community and joint ownership, rather than a sense of entitlement.

We fund education because we believe that it brings social benefits. Education does benefit society, but not nearly so much as it benefits its recipient — and that’s who should pay for it. Restructuring the way we finance higher education would empower students and their families to make smarter choices about college and would ameliorate the perverse incentives that deform the education market, inflating tuition bills and saddling graduates with heavy debts. You don’t need a Ph.D. to see that’s smart.