Sunday, June 05, 2011

Financing College Education: Human Capital Contract

An important part of the recommendations by the Kakodkar Committee is about financing college education -- which we discussed here and here.

In the second post (and in the comments), I expressed my preference for a 'post-paid' model in which students repay the cost of education through a higher tax on their income. I like it especially because of the insurance component -- if you, somehow, end up with a low income, you are not burdened with a hefty repayment obligation.

This is a government-funded program in Australia, and a variant has just been introduced in the UK.

A couple of recent articles in NYTimes by David Bornstein talk about an essentially similar scheme, but implemented by the private sector:(a) Instead of Student Loans, Investing in Futures, and (b)A Way to Pay for College, With Dividends. Here's an excerpt from (b), where this scheme is given a nice name -- Human Capital Contract:

If you were a student looking for financing to pursue a degree in social science, would you accept an offer of $16,000, in exchange for paying 4.5 percent of your income for 10 years after you graduate?

... In exchange for the financing they receive, the students commit to repayment schemes along the lines of the one outlined above (the terms vary). After the time period elapses — it’s always 10 years or less — the obligation expires, no matter how much has been repaid. [...]

... [H]uman capital contracts are not a new idea. The Nobel-prize winning economist Milton Friedman proposed them in the 1950s. Decades ago, Yale University experimented with a program through which students could postpone tuition and repay it later as a fraction of their income. The idea was abandoned after the introduction of federally subsidized loans. Australia allows students to pay for college through a special tax after they graduate, which operates in a similar fashion. And in 2009, the U.S. government introduced income-based repayment for federal loans, which are available to students whose debt is high relative to their income. What’s common to these programs is that they all try to lessen the financial burden of a college education by shifting from fixed loan obligations to payments that fluctuate based on income.


  1. Suresh said...

    @Abi: The relevant question is not about the repayment method but whether universities have the freedom to set their own fees. So far as I understood it, the debate started with your opposing the Kakodkar committee's decision to hike the IIT tuition fees.

    If I understand you correctly then, you want both (i) a fairly rigid limit on the freedom to set fees by individual public institutions and (ii) post-payment meaning that only graduates earning above a minimum amount pay for the expenditure incurred in educating them.

    I would support (ii) but not (i). You might want to take a look at the writings of Nicholas Barr of the LSE. I would think that the Indian higher education system is closer to the UK than the US. (You will have to scroll down to reach a section called "Higher Education Finance.")

  2. Abi said...

    @Suresh: Yes, the debate did start that way, but this post is not to extend *that* debate. This is only about the innovative ways in which the 'post-paid' scheme has been implemented in other countries.

    Since you summarized your position on the fee hike issue, perhaps I can restate mine?

    A public institution that already receives public money does not (and should not) have an unfettered right to set the tuition fees. When the total (public money + fees collected from students) is not enough, one (or both) of them has to go up, and this is done through negotiation. [When neither does, there's a deficit. This is essentially the problem faced -- right now -- by most American state universities which, despite all their autonomy, don't have the right to hike fees (for in-state students) to any level.]

    Thanks for the link to Barr's articles.

  3. Suresh said...

    Since you summarized your position on the fee hike issue, perhaps I can restate mine?

    Surely, it's your blog? :-)

    Your point, though, is well taken. I will make two related points. First, universities do differ (teaching v/s research-oriented, areas of specialization etc.) so forcing a uniform fee on all may not be desirable. Second, having the fee for each university fixed through negotiation (every year?) will add a layer of bureaucracy which may not be desirable.

    I don't know how precisely the US state university systems operate; a brief web search suggests that at least some of them have a "Board of Regents" which sets fees for all the universities in that system.

    England (not the UK, just England) seems to operate by setting a maximum fee and allowing universities to set their fees anywhere in the range [0, max]. It was 3000 pounds thus far but it has been revised to 9000 pounds now. It is interesting that there is a significant clustering around 9000 pounds: see here.

    On a separate note, you may be interested in this piece of breaking news.

  4. Ankur Kulkarni said...

    I suspect these schemes leave students quite vulnerable if there is any foul-play. For eg, how do we make sure the company that provides the contract (in essence an entity that "invests" in the student) does not collude with the university to increase the repayment rates and fees? Careful regulation is need to make sure this does not occur. Apart from this it seems like a good idea.

  5. Abi said...

    @Suresh: Yes, universities come in all shapes and sizes. And I have not said the tuition fees should be the same everywhere. [I haven't checked, but I'm sure the University of California has a fee structure which is different from that of CalState. And I wouldn't be surprised if there's some variation within the UCal system itself.]

    @Ankur: The Australian version is a fully government funded program. And it has a near-universal coverage. I'm sure it has rules that protect students from being ripped off.