True Investment in Education

Our President regularly speaks from the idea that we should be investing in education. Invariably, his definition of investment requires that massive tax monies be redistributed to people who are told they should attend university but lack the financial wherewithal to do so.

I think we should be investing in education, but we should do so more intelligently than throwing public money at academia for dubious results. Professor Zingales brings a needed perspective to the matter:

[M]ost bright students do not have any collateral and cannot easily pledge their future income. Yet the venture-capital industry has shown that the private sector can do a good job at financing new ventures with no collateral. So why can’t they finance bright students?

Investors could finance students’ education with equity rather than debt. In exchange for their capital, the investors would receive a fraction of a student’s future income — or, even better, a fraction of the increase in her income that derives from college attendance. (This increase can be easily calculated as the difference between the actual income and the average income of high school graduates in the same area.)

This idea has been floating around for a while but has yet to see strong backing–in part because the government’s subsidies for students and schools continue unabated. That is, private industry will not find this type of investment profitable until the government quits artificially inflating the costs of education and otherwise artificially constraining the system.

As the article notes, the real dollar cost of a college education continues to rise at the same time the value of that education decreases. If we are to see a proper balance (risk v reward) with regard to higher education, then the higher education market must be permitted to find its level.

The current model for higher education funding is well and truly broken. If we don’t set about thoughtfully implementing a new model, it is hard to see how the current model will be able to limp along for very long.