How do we fund higher education? Assuming that it’s not paid for by everyone through general taxation (including people who never go to university) there are two basic options: either through tuition fees, funded for the most part by a student loans system; or through a special tax on graduates.
But actually there’s a third option, that is distinct from either a student loan or a graduate tax.
It’s been proposed in various forms – for instance by the Social Market Foundation and in the 2014 ConservativeHome manifesto – but the basic idea is that, instead of getting paid upfront, the education provider takes a given percentage of a student’s future earnings above a given threshold, with total payments capped at a given amount.
According to Andrew Ross Sorkin in the New York Times, the idea is being put into practice by “Lambda School, an online learning start-up” with big-name backing from Silicon Valley investors.
The particular funding system is called an “income sharing agreement” and this is how is how it works:
“At Lambda, students pay nothing upfront. But they are required to pay 17 percent of their salary to Lambda for two years if they get a job that pays more than $50,000. (Lambda says 83 percent of its students get a job with a median salary of $70,000 within six months of graduating.) If they don’t get a job, or their salary is lower, they pay nothing. Payments are capped at $30,000, so a highly paid student isn’t penalized for success, and if a student loses a job, the payments pause.”
In principle, this is fairer than a graduate tax because there is a maximum amount payable that is the same for everyone who received the same education. Also, because it isn’t a tax, the money doesn’t go through the grabby, controlling hands of government – important if we believe that our institutions of higher educations should be pillars of civil society, not agencies of the state.
Theoretically, student loans have the same advantages, i.e. financial independence for the education provider and important limits on what the graduate has to pay.
However, the student loan system also has disadvantages. The more lenient the terms for borrowers who don’t benefit from a ‘graduate premium’ to their earnings, the greater the financial burden that’s shifted onto other borrowers or back onto taxpayers (if the state is the ultimate guarantor of the student loans system).
The most serious flaw of both student loans and graduate taxes is one of incentives. If how much – and how fast – education providers get paid bears no relation to the job and wage prospects of their graduates, then they have no direct stake in the long-term relevance of the education they provide.
The Income Share Agreement system, however, ensures that education providers have skin in the game:
“The school is incentivized to only enroll motivated students who won’t drop out; it is incentivized to successfully teach them the skills they will need on the job; it is incentivized to find them a job; and it is incentivized to make sure they are a success once they’re on the job because the school relies on employers to keep hiring its graduates.”
But what about ‘education for its own sake’? Well, I’m all for it. In fact, government should provide financial endowments that allow our finest minds to expand the bounds of human knowledge to the greater glory of civilisation. If more of the small proportion of people capable of making an original contribution to such endeavours have the opportunity to so, that would be great. However, the gifts and interests of most people lie elsewhere – and if they are to go to university at all, it should be to provide them with the foundations of a rewarding career. They too deserve to have their needs met.
Andrew Ross Sorkin worries that an expansion of the Lambda approach “could press programs to ignore a traditional liberal arts education where the earning power is reduced”. However, under the loans-based system, American students are already turning their backs on the humanities. As for fears that “schools may not be willing to take a chance on a promising but higher risk student”, the greater danger is that the misaligned incentives of the status quo are sucking students into a system unsuited to their needs, loading them up with debt and dumping them unprepared into an unforgiving jobs market.
Unless the cost of mis-selling higher education is properly shared among those most responsible, then it will continue.