The basis for President Obama’s action to cap student loan responsibility at 10% of earned income for 20 years (10/20 plan) is that education is a public good and the public should pay for it. Parts of the public, employers and lenders, receive significant benefits from subsidized education: an educated worker through which to build effectiveness and/or profit on the one hand, and interest payments on long-term debt on the other hand. The student is left holding the bag with both hands.
“Much of today’s American workforce is engaged in roundabout production, which Böhm-Bawerk [Austrian economist] equated with capital. There is no longer a meaningful distinction between labor and capital. Labor is capital.”
Arnold Kling
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Starbucks and Arizona State University (ASU) announced a deal on Sunday: Starbucks employees who are juniors or seniors would be provided reimbursement for online education at ASU. The agreement shows insightful, mutually beneficial, action to reduce long-term indebtedness of student borrowers. It should be the tip of an iceberg of innovation.
Social and personal benefits accrue when an individual has critical thinking skills, insights and abilities that have value — and, in short, is educated. Students bear the brunt of educational costs with a lifelong encumbrance to pay for the four-year university experience. For better or worse the 10/20 plan predictably retires debt forever. Remaining balances are picked up by the taxpayer.
The 10/20 concept has hidden costs. Students may take on debt that exceeds what the 10/20 plan will ever repay; select majors in which no jobs exist or pay scales are low; be underprepared or uncommitted; or attend slovenly universities bloated with excess and overhead. Graduates, lenders, employers, and universities relieved of debt without accountability create an unhealthy dependence on taxpayers and teach poor citizenship, stewardship, leadership, and guardianship.
Responsive and interactive repayment responsibility could be individually negotiated at any time before debt retirement, based on market forces. Innovation, not strangulation, is required. A form of market homeostasis follows.
Debt is a commodity: The debt required to attain an education should be available to be traded as a commodity. “Labor is capital.” As major beneficiaries of this capital, public and private sector employers could share some responsibility by taking on a share of an employee’s obligation as a benefit of employment. Debt of a non-performing or transient employee might revert to the individual. A two-way warranty exists. Incentives and permutations abound without limit in the triangle of interest created by graduate, employer, and lender.
For example, an elementary education graduate with significant indebtedness may never pay the full loan amount under the 10/20 plan. The school system could assume all or part of a graduate’s obligation as a condition of employment: an after-the-fact scholarship when excellence has been demonstrated. Some schools, public and private, already operate from this vantage point, creating interdependence between employee and employer, with opportunity for lenders to favorably restructure debt in response to the marketplace: need, skill, ability and obligation.
Individual negotiations: Likewise, corporations might hire graduates with market-responsive loan pay-offs negotiated between graduate, lender, and the employer to benefit all. The employer who gains most from the capital of labor accrues a direct benefit as employee effectiveness is increased. Tax incentives should be legislatively reinforced into the equation.
Reduced time to payoff: Additionally, employers could negotiate with graduates and lenders to purchase debt in a shorter timeframe as a “carrot” to the strongest graduates providing “earned” liberty to stay or go, debt-free, in response to the time-value of money. Such negotiated payment puts the lenders in a role as a motivated partner in the loan liquidation process as risk is reduced.
Lower costs of college: Thoughtful students and families might select more cost-efficient, reduced frill, academically focused universities, because graduates carry less debt to pay off and lower “buy-down” costs to employers. Effective schools create more lucrative commodities (sorry, graduates with lower debt) and thereby attract more, and potentially stronger, students.
Limiting federal government involvement to last ditch bailouts (21st century educational bankruptcy protection), the 10/20 plan could energize the market and entrepreneurial instincts of students, lenders, employers, and universities to create millions of “good deals.”
Simple immunity from debt’s burden is not a good deal but a treacherous seduction.
The pundits are correct. University education costs too much and students without motivation, interest or preparation for university work are a burden to themselves and society – now for 24 years. Bankrupt graduates floating from job to job contribute little to anything except statistical wins in the number of college graduates. Education with no gainful employment, or productive graduate study opportunity, is a lose-lose proposition.
Our universities must be imaginative in finding ways to curtail and align costs for higher education. Additionally, students, employers, and lenders in a triangle of shared responsibility present an appealingly powerful market based approach that shines in contrast to walk-away loan forgiveness.
Buyers — students, lenders, and employers — beware.
