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Student Financing

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"WASHINGTON (Reuters) - U.S. Republican Senator Marco Rubio, a possible 2016 White House contender, unveiled legislation on Wednesday to broaden the use of financial vehicles known as "income share agreements" that students can use to fund their higher education costs.

Under the agreements, which are marketed as an alternative to traditional student loans, private investors or organizations provide students with financing for their education costs in exchange for a percentage of their future earnings.

"My guess is that you will likely see this more often than not in a graduate level, people going into the STEM fields or medicine or some other profession where there is certainty for the investor that, that person is going to find a job and make sufficient money to make their payments," Rubio said."

http://www.chicagotribune.com/news/politics/sns-rt-us-usa-congress-rubio-education-20140408,0,2720334.story

Scepticus described something like this a couple of years ago - anyone have links?

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Denninger posted on this.

Seems to think its just another addition to the ponzi.

That said, I doubt companies will want to waste money on no-hopers or media studies types. So long as it replaced (rather than applied alongside) student loans, id consider it an improvement. And as enrollment falls, so might tuition fees as a consequence.

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If it comes to the UK any student taking up such a scheme would be well advised to read every bit of the small print extremely carefully - especially the bit that will for sure say something like the company can change things like the interest rate and conditions etc if necessary.

Edited by billybong

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"WASHINGTON (Reuters) - U.S. Republican Senator Marco Rubio, a possible 2016 White House contender, unveiled legislation on Wednesday to broaden the use of financial vehicles known as "income share agreements" that students can use to fund their higher education costs.

Under the agreements, which are marketed as an alternative to traditional student loans, private investors or organizations provide students with financing for their education costs in exchange for a percentage of their future earnings.

"My guess is that you will likely see this more often than not in a graduate level, people going into the STEM fields or medicine or some other profession where there is certainty for the investor that, that person is going to find a job and make sufficient money to make their payments," Rubio said."

http://www.chicagotribune.com/news/politics/sns-rt-us-usa-congress-rubio-education-20140408,0,2720334.story

Scepticus described something like this a couple of years ago - anyone have links?

LMGTFY

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So the Stakeholders In Suitable Trainees (SISTs -the term Investors In People has already been used) will have a motivation to minimise/prevent those who would compete with their investment - so they'll not want cheaper workers/competitors from anywhere including from overseas? They'll likely want lots of red tape, bureaucracy and restrictive practices to protect their investment - plus bailouts whenever necessary.

It might work for say Doctors as even with a constant stream from overseas there seems to be a continual shortage but the range of suitable jobs does seem to be limited.

Edited by billybong

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"WASHINGTON (Reuters) - U.S. Republican Senator Marco Rubio, a possible 2016 White House contender, unveiled legislation on Wednesday to broaden the use of financial vehicles known as "income share agreements" that students can use to fund their higher education costs.

Under the agreements, which are marketed as an alternative to traditional student loans, private investors or organizations provide students with financing for their education costs in exchange for a percentage of their future earnings.

"My guess is that you will likely see this more often than not in a graduate level, people going into the STEM fields or medicine or some other profession where there is certainty for the investor that, that person is going to find a job and make sufficient money to make their payments," Rubio said."

http://www.chicagotribune.com/news/politics/sns-rt-us-usa-congress-rubio-education-20140408,0,2720334.story

Scepticus described something like this a couple of years ago - anyone have links?

Modern day slavery.

Surely the people that are dead certs to succeed in these fields will have companies willing to sponsor them or they'll get scholarships, if not then theyll be charging a fortune in wages to pay the bill.

PS I just googled Marco Rubio and he has one of those faces id never tire of punching or stamping on.

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http://

dictionary.reference.com/browse/indentureship

indentureship

in·den·ture [in-den-cher]

noun

1.

a deed or agreement executed in two or more copies with edges correspondingly indented as a means of identification.

2.

any deed, written contract, or sealed agreement.

3.

a contract by which a person, as an apprentice, is bound to service.

4.

any official or formal list, certificate, etc., authenticated for use as a voucher or the like.

5.

the formal agreement between a group of bondholders and the debtor as to the terms of the debt.

....

....

Apparently they tend to go with very low wages for the period of the indentureship.

All the time house prices will be going up and getting further out of reach - so it's important to choose a job that will pay well afterwards to stand a chance of making up all the lost ground.

Of course if house prices aren't going up and there's a decent job to go to after training then that's a far better situation altogether - not only for the employee but also for the employer as the employee doesn't need such high wages to catch up.

Edited by billybong

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I have to say this is something I've thought about for a long time. I asked myself why it won't happen. It won't happen if it is up to the providers.They wouldn't want to take that risk on if they didn't need to. What they want to do is seduce young people with attractive courses knowing full well the students are unlikely to get value back in exchange for their investment.

The only way it could happen is if government pass regualtion to make it so, in order to encourage universities to promote courses that would provide greatest value to the economy and the individuals.

of course, financialisation has brought with it runaway costs and salaries for the Unis.

thats running out of steam as all the borrowing is based on growth...how to achieve more is the aim...trees all grow to the moon.

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Thanks for the bump OKC.

I just visited my old thread on this and found this in the second to last post, from 'Saberu'.

Scepticus you are once again proving you live in a land of your own, and what pray tell will these trained people end up doing?

Where are you now Saberu and what are you calling yourself?

Slavery takes many forms, but be careful to distinguish ancient slavery from the modern form, it is quite different and doesn't really bear a causal comparison.

For a start, debt slaves have bankruptcy protection. No such luck for the ancient slaves, whose masters were able to execute them on the spot.

Really, this kind of thing is simply another mechanism (a social constraint) for distributing scarce resources into a series of buckets, like anything else in our economic infrastructure.

And there will always be such mechanisms, despite those misguidedly gushing about the 'end of scarcity'. Accordingly there will always be inequality, and given the same inequality distribution, what relevance does the distribution mechanism really have?

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I dont see why this is necessarily a bad thing, a common (although disputed) claim in economics is that a fair bit of inequality can be explained by liquidity constraints arising from the fact that people typically cant borrow money against either their own, or their children's, expected future incomes. So for example if a parent who lives in poverty has a very smart child who they are sure will manage to get a well paying job if provided with the right education, they cannot borrow against the expected high future earnings of that child to fund private school/university/etc. Some random papers on this are here, here and here, but there are many others.

This results in market inefficiency that you can see at all levels - logically a student who (eg) studies an engineering degree at a top university should be allowed to borrow $50-100k+ against their future income to have a decent life at university, because their expected salary after graduation is so high that repaying this wont be a problem, but in practice most banks only let people borrow against their current income rather than expected future income. This means that you need government interference in order to persuade banks to lend to students - either the Student Loans Company in the UK, or the weird non-discharagble student loans you get in the US.

So if you buy into this general line of argument (and I think its interesting even though I'm not 100% convinced) then schemes like the one mentioned above that grant loans specifically linked to your future salary seem like a great idea, since they smooth out the liquidity problems caused by the fact most people earn a lot more at 30 than they do as teenagers, yet they cant borrow against that money to help fund a better education when they are young.

Edited by Smyth

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I dont see why this is a bad thing, one of the more interesting theories in economics is that a fair bit of inequality can be explained by liquidity constraints arising from the fact that parents cant borrow against their child's future earnings (so that if for example someone who lives in poverty has a very smart child who they are sure will manage to get a well paying job if given the right education, they cannot borrow against the expected high future earnings of that child to fund private school/university/etc). Some random papers on this are here and here, but there are many others.

This results in market inefficiency that you can see at all levels - logically a student who (eg) Cambridge to study law should be allowed to borrow £20-50k+ against their future income to have a decent life at university, because their expected salary after graduation is so high that repaying this wont be a problem, but in practice most banks only let people borrow against their current income rather than expected future income (the Student Loans Company in the UK is the exception of course). So if you buy into this general line of argument (and I think its interesting even though I'm not 100% convinced) then schemes like the one mentioned in this thread are great

Or the state could fund education directly itself based on the enhanced national wealth that will be the outcome of that education. This does have the disadvantage that bankers cannot interpose themselves and cream off a profit from our children- but that's sacrifice I am prepared to live with.

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"Under the agreements, which are marketed as an alternative to traditional student loans, private investors or organizations provide students with financing for their education costs in exchange for a percentage of their future earnings.

So the land of the free makes its own children slaves?

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I dont see why this is necessarily a bad thing, a common (although disputed) claim in economics is that a fair bit of inequality can be explained by liquidity constraints arising from the fact that people typically cant borrow money against either their own, or their children's, expected future incomes. So for example if a parent who lives in poverty has a very smart child who they are sure will manage to get a well paying job if provided with the right education, they cannot borrow against the expected high future earnings of that child to fund private school/university/etc. Some random papers on this are here, here and here, but there are many others.

This results in market inefficiency that you can see at all levels - logically a student who (eg) studies an engineering degree at a top university should be allowed to borrow $50-100k+ against their future income to have a decent life at university, because their expected salary after graduation is so high that repaying this wont be a problem, but in practice most banks only let people borrow against their current income rather than expected future income. This means that you need government interference in order to persuade banks to lend to students - either the Student Loans Company in the UK, or the weird non-discharagble student loans you get in the US.

So if you buy into this general line of argument (and I think its interesting even though I'm not 100% convinced) then schemes like the one mentioned above that grant loans specifically linked to your future salary seem like a great idea, since they smooth out the liquidity problems caused by the fact most people earn a lot more at 30 than they do as teenagers, yet they cant borrow against that money to help fund a better education when they are young.

What if your smart children want to lead creative lives or make new discoveries or god forbid, want to help people?

What are you going to do? Commit them?

You have an as unashamedly abashed view of the world as anyone on the forum. A view that not many share.

Edited by 7 Year Itch

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So if you buy into this general line of argument (and I think its interesting even though I'm not 100% convinced) then schemes like the one mentioned above that grant loans specifically linked to your future salary seem like a great idea, since they smooth out the liquidity problems caused by the fact most people earn a lot more at 30 than they do as teenagers, yet they cant borrow against that money to help fund a better education when they are young.

We already have this solution. It's called 'funding through general taxation'. Earn more = pay more.

It has zero administration costs (vs any specific loan scheme)

It cuts out the financial sector.

It means that there is a large buyer of 'education services' which has enforce standards and negotiate on prices.

It means that students will compete for places based on academic merit and hard work, as opposed to ability to pay.

Quite frankly, as long as we have bankruptcy laws, then there is no way for commercial loans to fund education to work. So such loans end up being state-backed anyway, with increasingly brutal terms and conditions to enforce payment (how long until passports are confiscated? Indentured servitude?). And the only reason this is done is because of blind ideology every bit as blinkered as Soviet farm collectivization.

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Student loans in the US can't be written off- they are unique in this respect.

They can, if "undue hardship" can be proven. Nearly impossible but can happen, essentially if a person is in a position that they will never be able to earn enough to pay it off.

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We already have this solution. It's called 'funding through general taxation'. Earn more = pay more.

Funding through general taxation is inefficient because it means people dont need to consider the value of their degrees since they are 'free', which leads to overconsumption of degrees like media studies/sociology, resulting in deadweight loss. It also means that degrees which are likely to lead to well-paying jobs become "infinitely expensive" since you never stop paying the increased tax that results, which distorts incentives.

Edited by Smyth

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Funding through general taxation is inefficient because it means people dont need to consider the value of their degrees since they are 'free', which leads to overconsumption of degrees like media studies/sociology, resulting in deadweight loss. It also means that degrees which are likely to lead to well-paying jobs become "infinitely expensive" since you never stop paying the increased tax that results, which distorts incentives.

I don't have an issue with the way government chooses to fund.

But we have gone from a situation where going to university was pretty much a no brainer to a situation where the benefits are much less obvious in a short space of time.

Provided the government are giving people the proper tools to make an unbiased decision on whether it is worthwhile for the individual I don't see the problem.

Unfortunately I don't think they are.

Edited by Gigantic Purple Slug

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Funding through general taxation is inefficient because it means people dont need to consider the value of their degrees since they are 'free', which leads to overconsumption of degrees like media studies/sociology, resulting in deadweight loss.

That's just daft. People are still going to look at their future earnings!. Indeed, if this is correct then how do you explain the fact that different courses had different entry grade requirements, even in the era of zero fees and student grants?

Never mind, of course, that the taxpayer is not required to fund an unlimited number of places. It didn't previously.

It also means that degrees which are likely to lead to well-paying jobs become "infinitely expensive" since you never stop paying the increased tax that results, which distorts incentives.

Doesn't make any sense either - the expense if not 'infinite', that' just mathematically illiterate. You pay a slightly higher rate of tax than otherwise, but there is no evidence that the current top rate of tax is a disincentive anyway.

It's interesting that you didn't bother to address the rest of my post.

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What if your smart children want to lead creative lives or make new discoveries or god forbid, want to help people?

What are you going to do? Commit them?

You have an as unashamedly abashed view of the world as anyone on the forum. A view that not many share.

All kids want to work in the City don't they? I thought everyone knew that. Only science grads have any future 'value' and this is a meritocracy right? Their salaries will rise exponentially forever and their offspring will become Tory Lords and everything will be right with the world.

Get a grip man.

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Unless you confiscate all graduates passports it does not really matter what debt funding method you use (taxation, loans, salary clawback etc) since if your students leg it to a foreign jurisdiction once qualified you are going to struggle to get your money back.

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Unless you confiscate all graduates passports it does not really matter what debt funding method you use (taxation, loans, salary clawback etc) since if your students leg it to a foreign jurisdiction once qualified you are going to struggle to get your money back.

Indeed. Although if people don't see an explicit payment it's unlikely they'll notice as much.

Of course, if every country used general taxation this would not be an issue.

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They can, if "undue hardship" can be proven. Nearly impossible but can happen, essentially if a person is in a position that they will never be able to earn enough to pay it off.

Like flipping burgers for a career?

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