Time was, and not so long ago, that most Americans believed that a college degree was necessarily a good investment. Getting a degree — any degree! — would put you on the path to success. That badly mistaken idea led us to a bloated higher-education sector and large numbers of graduates struggling to repay loans they took out to pay for degrees of minimal value.
In today’s Martin Center article, economics professor Roger Meiners looks at this problem.
He writes, “When we invest in a retirement fund, we see lots of data about rates of return. There is no guarantee about the future, but you can see the returns on various funds and stocks from previous years. No one buys expected losers. Colleges, however, generally avoid providing information about their return on investment. Instead, there is happy talk about how ‘rewarding’ college is, though the truth is that some degrees are almost sure losers.”
Meiners points to two factors that will help to alleviate the bad-college-choice problem. One of them is the proliferation of data on degree returns. We now have good numbers on how well the average student does with his or her degree in X, Y, or Z. Some generally lead to pleasing outcomes while others are almost certain to leave the student in the red. With better data, fewer students will blunder into low-value programs.
The other factor is the rise of a new financing mechanism, the Income Share Agreement. Meiners explains:
A loan program that implements an Income Share Agreement (ISA) would help impose degree discipline. ISAs would impose market-like discipline on the student loan system. An investor pays the student’s college costs, and the student agrees to pay back a set percentage of his or her income for a fixed time after graduation. This percentage differs based on what students want to study and what the investor expects their future earnings to be. Just as with down payments on houses, students who contribute a larger portion of their college costs up front are likely to get a better deal, as they have more skin in the game, a good signal to investors.
We’ve had tremendous waste in higher education, thanks to easy government money and a clever sales pitch. But if Meiners is right, we might be in the recovery phase.