Thinking Through a Higher Education Fantasy

If you could build the American higher education system from scratch, what would it look like?

Crafting an answer to that question is a little like designing a crazy concept car that you steer with a joystick and an eye-tracker – it’s not practical at the moment, but it’s worth thinking about. Even though incremental change is all we can hope for in the short-term, at some point it would be nice to make progress toward big picture reform.

One idea that’s starting to get attention is replacing student loans with a system where colleges take a percentage of students’ future earnings. That would be a good start, but it still wouldn’t fully change the fundamental structure of higher education. The reason college is so expensive is that a scarce number of college acceptances are treated as the desired commodity. If we want to create a system that really puts students first we need something where the student (in the form of future earnings, donations, or alumni glory) is the desired commodity.

How would a system like that work? Probably not too different from how it is now. At the moment you send a school an application, and if you’re accepted you get an offer: “You may pay us $160,000 in exchange for an education.” However, to change that dynamic all we need is for schools to send every student a uniquely tailored offer involving no up-front payments. “Pay 10% of annual income for 15 years. Maximum payment of $150,00.” “Pay 2% of annual income for 30 years. No cap.” “Receive $20,000 for successfully earning a diploma. Pay 20% of annual income for 3 years.” “Pay 4% of annual income until cap of $300,000 is reached.” Colleges would need teams of actuaries and lawyers working on this full time. (Look, my plan is also a job creator!)

More options should make every student better off. The kid who could never afford to go to college will have better odds of finding somebody to take a chance on him (albeit, at a high future cost.) The absence of an upfront cost will also spur people to go to college who otherwise might have made a bad decision to not go. Economically speaking, taking out a $100k loan and owing $100k in future real income aren’t all that different, but the psychological difference should have an effect.

What about the kid on the other end of the spectrum, the valedictorian who can go anywhere? Right now he essentially has two choices: Pay full tuition at Harvard/Yale/Princeton, or stay home and get a full scholarship to the local Big Ten or ACC school. In a world where colleges make unique offers, his choices will open up. Maybe Penn will offer a full scholarship or Yale will offer a much better deal than Harvard or Princeton. Maybe some college will want him so badly they’ll pay five figures. All of these benefits will go to average and weak students too. Whatever happens, there will be more choices, and that will allow students to not only have a say in where they go to college, but in the conditions under which they go to college.

A system of uniquely tailored offers will also make it easier for at-risk students to go to the same colleges as their friends (See: Posse Foundation for why this can be important.) A student could get into a smarter friend’s more selective college by taking a less favorable offer, or the smart friend could take a more lucrative offer at a less selective school. The additional choices allow students to capture more of the gains from trade (the trade being money for education/prestige.)  Creating ways for universities to transfer more value to students is the key to any higher education solution. It doesn’t matter if it’s through cheaper education, better education, or some other channel.

As far as I can tell, there are two big downsides to this type of system. Each of these unique contracts will act as a tax on future earnings, and that will discourage graduates from earning money. However, the difference between earning money and doing something with social value is rapidly increasing. Although graduates will choose to earn less money, that could entail deciding to be an entrepreneur or a volunteer instead of heading straight to law school or Goldman Sachs.

The bigger problem relates to university budgets. Schools would need a lot of help during the 5-10 year period in which their revenue stream transitions from up-front payments to deferred payments. Once the transition was complete, schools would also bring in less revenue, and I think we’ll figure out a tuition-free way to fund every college for 10 years before we’ll see schools allow their financial systems to be jeopardized.

If this system of hyper-specific offers seems crazy, remember that it’s closer to the way higher education works at the graduate level. If we want to make higher education a better value for students, we need to build a system where students have real bargaining power.