Wednesday, September 16, 2015

Financing higher education: ideas from the US presidential poll

Tuition fees in the US have doubled in real terms in the past 20 years, partly because universities have felt no compulsion to curb costs. Student debt is soaring. How to make higher education more affordable? The US presidential poll is throwing up interesting ideas, the Economist reports.

Hilary Clinton's solution: Cap repayment of college loans at a maximum of 10% of income over 20 years. Any shortfall in loan repayment made on these terms would be made good by the government. The cost to government is estimated at $350 bn. As for curbing college costs, Clinton would link government subsidies to reduction in college costs.

Another candidate Marco Rubio wants online programmes to be actively promoted. This is easier said than done. The problem is not lack of information on these programmes, it is that online degrees do not have anywhere near the same acceptability in the market as resident programmes. Rubio has a bold proposal for financing of education: opt for equity financing provided by private investors instead of loans from banks. This would link repayments to earning capacity. To ensure that successful students do not overpay, one could limit the tenure over which repayment happens.

The problem with equity financing, as the Economist points out, is that if a candidate should opt for a low-income career after an expensive education, the private investor loses out. Moreover, those who think they will do well in college and thereafter would prefer to have debt finance to equity as repayments are limited.

One thing is clear: simply leaving it to the market to set fees and trying to fund higher education through loans is creating serious problems. In India, we are aping the American model, especially in respect of management education. We need to think again.

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