Sunday, August 23, 2015
America’s youth are selling off their future income for the chance to go to university
STUDENTS are betting on their long-term incomes, with investment firms now covering the cost of their degrees, in return for a percentage of their future salaries.
In the US, student debt is now so out of control, that it totals $US1.2 trillion — more than the GDPs of Australia, New Zealand, and Ireland combined.
That huge figure is weighing down a generation, potentially preventing people from enjoying higher education.
But a new approach to student debt is taking hold in the country, allowing investment firms to pay for the tertiary degrees of young people in exchange for a percentage of their future income. Known as Income Share Agreements (ISA), the idea effectively creates a share market for future members of the workforce for companies to bet on.
If students earn more than expected when they enter the workforce, they pay back more. If they earn less, they pay back less.
Companies are even producing algorithms to predict student potential in an attempt to earn a return for investors.
Elida Gonzalez, 23, of California recently signed up with a company called 13th Avenue Funding to get a loan of $US15,000. Now she’s on the hook for five per cent of her income for the first 15 years of her employment. If she turns out to be wildly successful, she will pay back much more than if she went with a traditional loan.
She is studying with hopes of becoming a physician’s assistant and could end up paying back $60,000 for the $15,000 loan, reports the Wall Street Journal — something which she says she is “willing” to do.
“Equity is always more expensive than debt”, Chris Brycki, founder and CEO of Sydney investment firm StockSpot told news.com.au.
He’s taken an interest in the emerging market of ISAs in the US and views them as the free-market solution to the burdensome system of student loans in the country.
Unlike Australia’s HECS system which provides loans on non commercial terms that don’t incur interest, in the US, student loans have some of the toughest conditions imposed on them and are becoming crippling for a generation of unemployed graduates.
Mr Brycki believes young people who “back themselves” to be successful in the workplace will stick with the traditional student loans while others who are less confident will be more inclined to seek out the ISA option.
From an investor’s point of view, this could be a problem. These pools of ISA loans are only attractive if they have a good diversity of students, he said.
For instance, those undertaking a liberal arts degree might be more inclined to sign up for an ISA while those studying to enter high demand and well paid industries such as engineering will stick with a regular loan.
“Everyone jokes in Australia that if you do an arts degree then you won’t have to pay back your HECS,” he said. A similar sentiment in the US could almost undermine the scheme or create extortionate terms for the investment loan.
As Andrew Davis, the founder of Educational Equity in Chicago, which offers income-share agreements put it:
“If you start a new medical-insurance business you don’t go looking for the sickest people to insure.”
There is also uncertainty as to the time frame the loans will be repaid. Most ISAs have a repayments threshold — similar to Australia’s HECS system — that means graduates won’t have to make a payment until they earn at least $US18,000 a year. The median wage in the US per person is $US26,695.
That being said, Mr Brycki believes “the market works out pretty quickly what the risk is.” The returns for investors “won’t be astronomical” he said. Unless of course they strike gold with the next Mark Zuckerberg.
ISAs are seen by many as a way of tackling (or at least transferring) the burgeoning student debt in the company which has grown to alarming proportions in recent years. Student debt has surged in the past decade to represent the second largest form of debt in the country. It has trebled in that time to reach $US1.2 trillion.
However the idea of commodifying someone’s future employment prospects is seen by some as somewhat predatory and critics of the idea say it’s taking the education system in the wrong direction.
“It feels icky to me,” David Bergeron, a former Obama White House education adviser, told the Wall Street Journal.
A feeling that was echoed by Kevin Roose of New York Magazine who said these programs amount to making low income students “indenture themselves to patrons in the investor class.”
Others however champion the ISA market for offering the opportunity of higher education to those who would otherwise struggle to access university.
“This concept is quite innovative in its approach to financing college,” Wisconsin Republican Tom Petri said in a release. “These plans would help all students get the financing they need — including students from disadvantaged backgrounds — but without the anxiety that comes with traditional loans.”
While many companies such as Upstart, Pave, and Lumni are getting in on the action, they have faced plenty of challenges because at the moment the market exists in a legal wilderness.
Earlier in the year senator Marco Rubio and Tom Petri introduced legislation that seeks to formally define their terms. The legislation in currently pending in Congress and should provide the much needed legal framework for the emerging market. The bill outlines details such as the maximum length a contract can last (30 years) and the cap on income a fund seeker can owe (15 per cent).
Meanwhile these companies are developing elaborate algorithms that use data points like education, standardised test scores, credit history, and job offers to ensure investors get a return on their bet.
However the stringent due diligence of these loans will likely nullify the purported virtue of providing a university path way for under privileged students.
“It would defeat the whole purpose,” Mr Brycki told news.com.au. “It would become a last resort” for those student who amount to a risky investment.
However while the kinks continue to be worked out, the popularity of the idea is gaining momentum.
Indiana’s Purdue University (one of the biggest schools in the country’s mid west) is the latest institution to endorse the model and is currently soliciting a firm to establish an ISA fund.
“This no-debt, low-risk option is another way we can help keep our school within financial reach of all qualified students,” Purdue University President Mitch Daniels said in a statement this month.
With the skyrocketing cost of certain degrees in the county, it’s certainly not a sure thing for investors but Mr Daniels said a Purdue University student is a “a very sound investment.”
Kansas School District Seeks $1 Million In Emergency Funds To Handle Influx Of Refugee Students
The Wichita, Kansas school district is seeking nearly $1 million in extraordinary needs funds from the state to help handle an expected influx of refugee students.
According to the Wichita Eagle, the school district expects to enroll up to 150 new refugee students this year. Last year, 132 refugees were enrolled in city schools. With the influx and some attrition, the district expects to have 220 enrolled in all — an 88 percent increase year over year.
“Episcopal Wichita Area Refugee Ministries and the International Rescue Committee in Wichita have each received allocations and are actively relocating refugees to Wichita,” Jim Freeman, the Wichita school district’s chief financial officer, wrote to the state on Monday, according to The Eagle.
“As a result the district is seeing a dramatic increase in the number of school-aged students who are refugees from Burma, Somalia and the Congo region of Africa. Some have lived in refugee camps for decades; all are fleeing persecution, oppression and war.”
The school district is one of 38 in the state that have applied for extraordinary needs funds. The fund was created as part of a new block grant school finance system that was signed into law earlier this year. The new system does not automatically increase funding for districts for increased student enrollment.
Besides the costs associated with accommodating the additional students, the refugee students will require special services from the school district.
“Not only do they have huge learning gaps, they also have difficulty adjusting from refugee camp survival mode to a new country, culture and classrooms,” Freeman wrote in his plea for the extraordinary needs funds.
“Students exhibit post-traumatic stress syndrome, emotional handicaps and behavior issues which impact learning, participation and performance in class.”
To help the students, the school district says it needs eight teachers, two counselors to help students with PTSD and eight paraprofessionals to help students learn English.
A spokeswoman for the Wichita school district told The Daily Caller that it receives no grants through the Episcopal Wichita Area Refugee Ministries or International Rescue Mission. Nor does it receive federal money to help serve the additional students.
The Episcopal Wichita Area Refugee Ministries did not respond to a request for comment.
The group began resettling refugees in Wichita in June 2012. According to a 2011 Wichita Eagle article, the group intended to coordinate the largest refugee resettlement in the city in 30 years. According to its website, in 2012, the group resettled 22 Burmese refugees. It planned to resettle an additional 35 to 40 in 2013, with increases in following years.
Rubio's College Reform: Any Other Republicans Care to Engage the Issue?
One of the many issues on voters' minds, particularly young voters, during the 2016 election will be the rising costs of college education. While a federal government even remotely bound by the Constitution would not be involved in education at all — instead leaving such matters to the states per the Tenth Amendment — the reality is that it is involved. Naturally, the result is that we have witnessed bad policy from the feds, though it doesn’t have to be that way. Like it or not, conservative candidates need to engage in the higher education debate — they need to the counter the Big Government, top-down approach with a better alternative. And that alternative needs to first and foremost focus on Liberty.
Last week, we noted that Hillary Clinton had unveiled her plan for reducing the cost of college. In short, her plan is to confiscate $350 billion from taxpayers for redistribution to students, along with attempting to entice states to lower tuition rates.
This top-down approach to solving the high costs of college education certainly is not in the best interest of our nation, or the future of those who aspire to earn a degree. Every time the federal government proposes to spend more money on a program or policy, the cost generally goes up. And Hillary’s plan continues to, as economist Stephen Moore put it, “reward the ivory-towered, money-guzzling beast with another $350 billion.”
Yet for millennial voters specifically, the message they are hearing from Clinton and other Democrats is, “We care. We care about young voters. We want to make your lives better by making college more affordable.” End of pandering and deceitful sound bite.
The rhetoric worked with ObamaCare, so why not try to win young voters with similar rhetoric on the issue of college costs? Republicans can’t repeat the mistake of showing up to the game late. But so far there haven’t been many alternatives to challenge Clinton’s higher education reform proposal. The Republican candidates need to become engaged on this issue, but even more so they need to be able to articulate how their plan is better than any Big Government scheme.
So far at least one candidate has done so, and that is Marco Rubio. Unlike Clinton, who wants to spend more taxpayer money to supposedly fix the high costs of education, Rubio outlined a plan for modernizing higher education. Perhaps the best part of his plan is that it doesn’t raise taxes.
Rubio’s approach is different than Clinton’s in that his plan doesn’t spend more money on a system that’s already broken. Instead he proposes to address the cost of higher education by “promoting choice, competition, greater access and lower costs.”
First, he wants to fix accreditation, which would allow more institutions to become certified to provide degrees. To do this, he wants to “establish a new independent accrediting entity designed to welcome affordable and innovative education providers.” Under this part of his reform, higher education would be exposed to the market forces of choice and competition — in other words, free-market principles — which would lower education costs and provide new avenues for individuals to earn their degree or certification.
Second, Rubio calls for changing the way graduates repay their student loans. He wants to make payments “automatically proportional to a graduate’s earnings, thus reducing the financial risks of pursuing a degree.” He also proposes to allow students to partner with investors who will pay students tuition in return for a small percentage of their salary for a certain number of years following graduation.
Third, he wants to provide college applicants detailed information about how much they can earn with a degree from a certain school. This would give potential students the ability to understand whether or not a degree from a particular university — or more so a particular field of study will be worth the financial burdens or risks associated with it.
Rubio wants to make it possible for as many people in the U.S. to achieve the American Dream, rather than simply having that dream handed to them. For him, it’s about Liberty. Under his proposal there is more freedom of choice, more financial freedom and greater competition leading to higher quality. And there is no increase in spending on behalf of the federal government. Rubio’s plan empowers the individual, whereas Clinton’s plan enslaves the nation with more debt and rising costs.
To date, Rubio is the only Republican candidate to put forth a solid alternative to Clinton’s proposal. Where are the rest of the candidates on higher education reform? Certainly, there are many other pressing issues such as terrorism, immigration, abortion that the candidates want to and of course need to focus on. But the issue of the increasing costs of college must be highlighted as well, because it is directly tied to the economy. Jobs, economic growth and wages are on just about every American’s mind today, and much of that is tied to being able to afford college.
Liberals have historically done a good job selling the lie to the American people that spending more money will “fix” the problems with higher education — or whatever the problem might be. On the flip side, conservatives have insufficiently articulated better alternatives.
If conservatives want to have any chance of winning the “youth vote,” then they must be engaged in this debate. They can’t assume Hillary’s plan is so evidently terrible that voters will see through it. To do so is political insanity, and would be an outright refusal to recognize the danger of bad policies imposed on the nation. We have already been through the gambit of bad policies under the Obama administration, and we can’t afford another four years of this madness.
Posted by jonjayray at 12:56 AM