Marco Rubio slams college 'cartel,' proposes 'investment' plan for students (+video)(Read article summary)
GOP presidential hopeful Marco Rubio urges overhaul of higher education funding, whereby private investors pay student tuition, for a cut of a graduate's future earnings.
GOP presidential hopeful Marco Rubio came out with strong words against the US higher education system in a speech in Chicago on Tuesday, dubbing it a “cartel” that shuts out innovative, low-cost competitors and leaves debt-ridden graduates unable to find a job.
“We do not need timid tweaks to the old system. We need a holistic overhaul,” Senator Rubio (R) of Florida told local entrepreneurs at 1871, a tech incubator in Chicago's Merchandise Mart.
While some of his ideas mirror the Obama administration’s efforts to make college more affordable, one stuck out as a distinctly capitalist solution to the issue of ballooning student debt.
Rubio proposed a system in which private investors could pay a student’s tuition in return for a cut of the graduate’s future earnings. In economics circles, the concept is known as “student investment plans,” “human capital contracts,” or "income share agreements."
At an event last year at Miami-Dade University, Rubio went into more detail on how such a student investment plan might work.
A student who needs $10,000 for tuition makes an agreement with a private investment group to pay the lender 4 percent of their income after graduation for 10 years, regardless of whether this is more or less than $10,000, he said.
Before settling on the terms of the contract, the investors would look at things like the student’s major, university, and grades to determine the likelihood of the person finding a solid high-paying job. Meanwhile, colleges would be required to tell potential students what salaries they can expect from a given degree.
The goal for investors, writes Richard Vedder, an adjunct scholar with the American Enterprise Institute in Washington, would be to create a diversified portfolio of students that would be able to provide a good return.
In such a system, markets would throw out "useful signals" to students, he adds.
“It may be an income share agreement involving an anthropology major at Slippery Rock State University would lead to the student agreeing to forgo 20 percent of her income for 25 years, while a similar agreement for a petroleum engineering major at MIT might involve only 10 percent of the income for 12 years even though the value of the tuition paid is greater,” he wrote.
Wouldn't such a system penalize students intending to go into fields with high social value but not necessarily high financial value? Not really, he says, because, over time, a shortage of teachers, for instance, would lead to higher wages for teaching jobs and more incentives for students to gravitate toward careers in education.
Not surprisingly, some higher education activists view the plan with skepticism. Carrie Warick, director of partnerships and policy at the National College Access Network, said efforts should be made to revamp the federal loan system before turning to “student investment plans,” which she argued could hurt higher education access for low-income students.
“The federal student loans provide the best interest rate for students and they also treat all students equally,” Ms. Warick told US News & World Report. “So regardless of their background, or their major, or other what could be considered high-risk investment factors, those loans are available to students.”
But the idea itself is not just theoretical: Several startups have taken “human capital contracts” into the real world.
Upstart is a for-profit company founded to set up this kind of peer-to-peer lending. The website takes into account education level, income, career, university, and choice of major to determine lending rates and estimates rates of return.
In Latin America, a nonprofit company called Lumni was launched to provide education funds for low-income students through human capital financing.
“The most important asset in the world is people,” Lumni co-founder Felipe Vergara told The New York Times. “But modern society hasn’t organized itself in a way to invest in most people. I like to think of Lumni as a springboard that allows people to pursue their dreams – it offers a way out of a situation where the ceiling is very close to your head.”
To date, such initiatives are small scale, and economists are still debating their effectiveness.
Even so, just a month before the first GOP primary debate, Rubio is positioning himself as the candidate looking at big conservative free-market solutions to social problems.
"Only through an innovative economy can we translate new technologies into new middle class jobs, and only through a revolutionized higher education system can we equip all our people to fill those jobs," he said in Chicago.