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.
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2 years ago
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