This week, Republican presidential candidate and former Florida governor Jeb Bush released his plan to reform higher-education finance. It is a welcome and serious departure from the "free college" proposals of President Obama and Bernie Sanders. The plan has received praise by analysts ranging from those at the Brookings Institution to those at National Review.
“Bush's plan would abolish the federal student-loan program and institute a new system.”
For the most part, this approbation is deserved. Bush addresses one of the central problems in the finance of higher education: the lack of collateral. When a homebuyer takes out a mortgage, he puts his house up as collateral, which allows the lender to foreclose should the borrower default. However, for obvious reasons, a student cannot do the same with his college education — so, absent some other form of insurance against default, lenders will be more reluctant to lend to students whom they see as riskier bets.
Several decades of attempts to get around this issue have led the federal government to take over most of the market for college finance. Taxpayers lend to students and cover the losses should they default. Essentially a blank check for colleges and universities, this system has driven a massive increase in tuition over the past few decades. Bush's plan would abolish the federal student-loan program and institute a new system.
Bush's plan employs a version of an idea first championed by Milton Friedman half a century ago: Instead of student debt, use "student equity." Rather than lending students money, President Jeb Bush would give students access to a $50,000 line of credit that students would pay back by surrendering a small portion of their future income (1 percent for each $10,000 borrowed).
This "income share" would essentially use students' future income as collateral, reducing the risk to taxpayers and making life easier for students as well. Since repayment would be tied to income rather than the amount borrowed, poorer students would face the same relative burden as richer ones. The United Kingdom has implemented a similar system.
In addition, Bush would introduce more accountability measures for colleges with poor student outcomes. Finally, he would allow the $50,000 line of credit to be spent on development paths other than college (such as apprenticeships), as long as those programs could demonstrate student success.
All this would certainly be a massive improvement over America's current system, which loads students up with trillions of dollars in debt while colleges walk away with little accountability. The $50,000 cap on government credit would force colleges to hold costs down, while the "skin in the game" provisions for colleges would urge them to improve abysmal graduation rates.
Bush could still go further, though. He should append a plan to develop private options for financing higher education. Income-share agreements could work in the private sector, but they lack a legal framework to do so and thus have not flourished, according to a 2014 AEI report by Miguel Palacios, Tonio DeSorrento, and Andrew Kelly.
“Bringing private investors into the fold by instituting such a framework (as Sen. Marco Rubio has proposed) would improve college accountability even more. ”
Bringing private investors into the fold by instituting such a framework (as Sen. Marco Rubio has proposed) would improve college accountability even more. With their own money on the line instead of the taxpayers', investors would have a major incentive to ensure that colleges help their students succeed. Investors could easily withhold money from colleges with poor track records.
Even without this extra provision, Bush's higher-education plan represents a dramatic improvement over our current system, and is far superior to the proposals suggested by advocates of free college. Regardless of who is the next president, the plan is an important contribution to the education reform debate and will hopefully be looked to by the policymakers of the future.
This piece originally appeared in RealClearPolicy
This piece originally appeared in RealClearPolicy