2012年6月15日星期五

University graduates became collateral

Academic economists like to make fun of business people: In order to find competition and enter new markets once would quickly lobbied the financing, become barriers to competitors. And my fellow scholars, however, they do not. We work in a competitive environment, enjoy-funded subsidies to most industries: higher education.

We criticized the abuse of students for student loans mortgage brokers and predatory lending. To avoid the recurrence of a crisis of confidence and debt risks, we need to reduce government subsidies, student tuition funding sources to connect with college students work income.
In 2010, nearly eight million students receive Pell funds, spent $ 280 billion. In addition, the federal direct loan program, which allows poor students to apply for government loans at low interest rates, this project from 2010 to 2011 total consumption of the taxpayers $ 1.3 billion. Year of university education subsidies up to $ 3 billions of dollars. Including 20 billion in the U.S. Congress earmarks - which does not include tax subsidies (the Fund); tax cuts (such as university endowments gold), and university R & D allowance.
Prices of similar income subsidies, education grants also contributed to the rapid rise in college tuition. 1977-2009, the average college tuition rose as much as doubled.
The subsidies distort the capital credit markets. Since the government to protect the students student loans, lenders motivation to lend. The borrower will withstand the pressure to make the right choices. Unfortunately, without the advice of experts under the guidance of young people, who just turned 18 is not good at judging the investment earnings loss. When the recommendations they receive huge loans. Student loans accumulated to reach one trillion U.S. dollars. The defaulting lenders also rose rapidly from 6.7% in 2007 to 8.8 percent in 2009.
This is not the worst of these loan subsidies to maintain school spending but not to create a better learning conditions for students, but hindered the students to accumulate useful skills.
I do not feel bad to help poor students to college. A truly free market economy under the equalization of opportunities, if not this should be fair and efficient: the genius can not be buried.
The best way to solve this inefficiency should traced to find the problem: the best students do not have any collateral, can not easily guarantee their future income. However, the venture capital industry that the new private enterprises with unsecured financing will be in business very well. Why can not they fund outstanding students?

Investors by way of equity funding rather than borrowing way. They recovered funds are part of the students' future income from work, even better, part of her income increased from the university entrance, (the difference between real income and real income of high school graduates of the same region can easily be calculated).
This is not indentured servitude version but voluntary tax forms, students will only beneficiaries to pay for school education - not taxpayers.
The cost of the income of the execution of the contract team is also great, but now there is an effective method: Knapsack Tax Collection System. Domestic tax system on behalf of private lenders to the implementation of the tax business, not spending taxpayers' money. 80 years in the 19th century (in Australia, such a system. National tax agents to enforce the income repayment, high-income graduates repayment set limit, so I would suggest that low-income students need to pay the additional costs within the system to maintain the system feasible.)
In 1972, Yale University, experimented with a student loan income mechanism. Subsequently failed, the problem with each other responsible for the repayment of the total accounts at the Yale program students, committed the error of snowballing. No breach of student also shoulder the burden of default of repayment student. (A similar problem occurred in my wealthy uncle's company and eventually went bankrupt in 2009.) There is Yale relatively shortcomings in the execution of the contract, the execution of the contract to alienate their own alumni, did not happen.

In fact, the world's top universities such as Yale has been secretly use the form of equity contract. They charge less than the education of each student spent an average, and then make up the difference from the donations of wealthy alumni. The richest alumni income is equivalent to implicit equity. This mode is very good progress in higher education, also produced a lot of billionaires. But this effect is not obvious to ordinary colleges and secondary schools. It is the official fair equity contract within these universities play a significant role.
Equity contracts through the use of the superstars of the huge sums of money to finance an unsuccessful university graduates to diversify the risk of failure in school education, avoiding the Students can make big money debts were forced to go to work. More importantly, these contracts will provide some financing guidelines are willing to motivate college students, and then the financing will benefit from a good education investment, losing to bad investments. It will also more demand for the school to put pressure on them and then control costs and improve quality.
The most important impact of the equity contract is that it shows that the disadvantage to help those who do not help as unfair subsidies on producers (schools) is possible, it made ​​us realize that the privileged class (the professor like me) rely each taxpayer's dependent (students and taxpayers) to survive. When we benefit from the system of crony capitalism, how to criticize them?

Luigi Zingales University of Chicago Booth School of Business professor of financial firms, the work of "national capitalism: to regain the spirit of American prosperity".

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