Student financial aid: debt versus equity

Have been meaning to share this article from the Economist regarding how to best provide student financial aid.  In the US the dominant approach has been student loans.  But as any finance student knows, why can't equity be an option as well?  Why not let students sell shares of future earnings in return for up-front funding for college?

In pure financial terms, such loans would be viewed as very risky.  Would the student finish their undergraduate degree?  What earnings stream would the student generate once schooling is completed?  There is a company called Upstart that is doing this on a peer-to-peer platform; think crowdsourcing your degree!

There also would be a moral hazard problem.  Students receive the funds up front and then may choose to select a low income career or even have no career at all.  Funders would want some sort of collateral to offset this, but if you could post collateral you probably do not need a loan.

Income-based loan repayment plans are a variant on this theme.  When Yale experimented with this approach in the 1970s, it found that students who expected to have high earnings preferred traditional methods of loan repayment and those who expected no to low earnings took the "pay a percentage of earnings" repayment method.

What happened to construction workers

Today builders say they are facing a profound shortage of qualified, trained workers.  Yet construction employment dropped by 2.3m jobs between 2006 and 2011 and is still 1.3m below the 2006 peak.  So what happened to over one million workers?  Why aren't they coming back in the market?

WSJ's Real Time Economics blog has the answer: some have switched to other industries but many have dropped out of the labor force.  At the same time hiring of young workers has been slow, so now there are not enough trained workers to meet demand.

This evidence further supports the view that despite the lowest employment to population ratio we have seen in 40 years, the labor market is close to having a balance between supply and demand.  Those who have dropped out of the labor market after they lost their jobs in the Great Recession do not appear to be coming back.

An MBA for free

Arizona State recently announced that it would not charge tuition any more for its full-time MBA program.  In addition, ASU plans to expand the size of the program.  Right now ASU charges $54k to in-state students (over two years) and near $90k for out-of-state students.  The free tuition offer could cost ASU as much as $20m each year.

ASU is betting on a stronger applicant pool generating more employer interest and higher rankings, resulting in a rankings boost.  To their credit ASU is taking a big risk to better position its MBA program.  They are investing money from their own endowment.

What impact will this have on the MBA market?  The answer depends on how the offer changes the matching process between students and schools.  I doubt students originally bound for Stanford and Harvard will now go to ASU for free tuition.  Also, many schools in ASU's tier already give lots of financial aid to full-time students.  If ASU already was supporting half of its class, another 50 to 60 free rides will not have a dramatic effect on the entire market.

Most importantly, tuition costs are but one part of the MBA ROI calculation.  Lost earnings are a much larger component.  The earnings bump from the degree is also critical.   Arizona State does a good job in that regard (#41 in employer satisfaction in the latest Businessweek rankings), but I have to wonder whether ASU would have been better off spending less than $20m and focusing on the student experience (#62 in alumni and #61 in student satisfaction) and employer development.

At NC State, we provide full tuition graduate assistantships to a significant share of our full-time MBA students.  In exchange, these MBAs support faculty teaching and research.  Other students receive scholarships that offset some tuition costs.  Our key differentiator is not our tuition policy; it is the "think and do" spirit of NC State and the company-sponsored projects that are a key part of our classroom experience.

NC State MBA vaults to top 30 in Businessweek full-time rankings

The NC State Jenkins MBA program made a huge leap to #29 in the US in the prestigious Bloomberg Businessweek full-time rankings, up from #54 a year ago.  Harvard was #1, Duke was #8 and UNC-Chapel Hill was #17.  NC State was ranked ahead of many well-established MBA programs, including Michigan State, Maryland, Vanderbilt, Ohio State and Wisconsin.

Why did NC State jump so high, so quickly?  Just ask employers, which is exactly what Businessweek did.  NC State ranked #20 in employer satisfaction.  This reflects the "think and do" spirit our graduates bring to the workplace, especially the skills they develop in the company-sponsored projects that are a cornerstone of the program.  We also did very well in terms of alumni (#25) and student (#38) satisfaction.

The part-time program also received a solid ranking at #45.  This is down from two years ago, but we should be very proud to be one of just 26 schools that received top 50 recognition for both the full-time and part-time program.

Kudos to the alums, faculty, staff and students who have made the NC State Jenkins MBA such a special program.  This latest ranking, along with the #9 online ranking from US News earlier this year, shows that NC State's MBA program is on the move.

Will those who left the labor force ever come back?

Everyone who has been looking at labor markets over the last five years has been asking, "What is going to happen to labor force participation (LFPR)?"  We know unemployment is down to near normal levels, but LFPR remains at its lowest point in almost 40 years.  The question is important because it cuts to the heart of the issue of whether we are at or near full employment.  The unemployment numbers say yes; the LFPR numbers say no.  So what are the odds that those who have left the labor force will actually return?

Today a WSJ blog reported one relevant item of evidence, based on a sector of the economy that I have researched heavily in the past -- the construction industry.  We all know what happened to construction in 2007-08; it tanked.  That means there are a lot of former construction industry workers out there who have the skills to return.

But are they coming back?  So far the evidence is that they have found other things to do and that this has put construction contractors in a bidding war for scarce talent.  Employment is still well below 2007 levels, yet builders are having a hard time finding qualified help.  This would imply that we should take the unemployment numbers more seriously as an indicator of aggregate labor market conditions.

Inc. magazine lauds RTP as an entrepreneurial hot spot

Brian Hamilton, Chairman of the Board at Sageworks, has a nice piece in Inc. magazine about why the RTP area is an entrepreneurial hotbed.  Brian came here to get an MBA at Duke, which makes his comments about NC State even more compelling:

NC State is a true hidden gem that, to me, produces by far the strongest engineers and employees of the three.

One "tax" that makes economic sense

I ran across two pieces this week about the "Cadillac tax" on high-cost health insurance plans.  This tax, part of the Affordable Care Act, goes into effect in three years.  It will tax as ordinary income employer-provided health insurance premiums in excess of $10,200 for individuals and $27,500 for families.  It has been in the news because a number of politicians (including Hillary Clinton) have endorsed its repeal.

Ritu Agarwal, a b-school prof at the University of Maryland, argues the tax is an essential element of any policy that can successfully reform our health-care system.  The revenue from the tax finances ACA subsidies for health insurance purchases.  Also, the tax will force employers to shift more health care spending to individuals, who will be more careful with their own money than with someone else's when making decisions about their own care.  This will help bring down costs.

WP columnist Catherine Rampell points out another benefit from this tax: it will increase take-home pay.  One reason employee benefits represent at least 25% of the cost of labor is that many of these benefits are tax-deferred or are not taxed at all.  If the employer spends $1000 on wages, the employee takes home less than that after taxes.  If the employer spends $1000 on health insurance, the employee gets full value.  But total spending on compensation must equal the value created by the employee for the company, so an extra dollar spent on health insurance means one less dollar in wages.  And as premiums rise over time, wage growth slows.  So the Cadillac tax, which will lead employers to cut back on premium expenditures, will mean a raise for many employees!

Most economists would go one step further and tax all employer-provided health insurance premiums.  Why should individuals buying insurance on their own get no tax benefits, whereas those with employer-provided insurance get a big break?  Rampell points out that employer-provided health insurance was quite rare until wage controls were imposed during World War II.  Employers then used health insurance as a way to get around the controls and raise pay as labor became more scarce.

We are already in the 2016 election cycle and whoever is elected to national office will have to make a decision on what to do with the Cadillac tax.  Will they let it go into effect in 2018?