George Leef’s latest Forbes column ponders an alternative to the current funding scheme that leaves too many college students with tens of thousands of dollars of debt.
Sometimes it makes sense to borrow to finance an investment; sometimes equity is a better choice. When it comes to college education, however, borrowing (especially through the government) is usually a mistake. If we could catalyze a system of equity financing for higher education, that would be a great improvement over the status quo.
In his 1955 paper “The Role of Government in Education,” Milton Friedman suggested the idea of equity contracts to finance college education. Friedman thought that loans were not the appropriate means of financing education and argued that the better way was to advance the needed funds for college to qualified students, who would repay a percentage of their earnings for an agreed-upon number of years.
That is, instead of students borrowing money for college that must be repaid with interest, investors cover the cost of their education and later recoup their investment (perhaps making a profit but nothing would be guaranteed) as the student makes contractual payments based on his or her earnings.
Unfortunately, the concept of equity investment in students’ education has never caught on. The main reason is that the federal government began student loan programs back in the early 1970s and those programs mushroomed. With student loans easy and affordable, there was little chance for alternative finance systems to develop.
Friedman’s aversion to student loans has proven to be entirely justified by events. Politicians, eager to project a “pro-education” image, kept making college loans (as well as grants) more appealing. As the notion that college was a sure-fire investment worth borrowing great amounts for became widespread, the number of students taking out college loans grew enormously, as did their average level of debt.
