Purdue University has started a program where a student can pledge a 4-5% of their future income for a set period of years as collateral for a loan today.
Getting a Student Loan With Collateral From a Future Job - The New York Times
Since upwards of 40% of borrowers aren't making payments after school (see Wall Street Journal story here), lenders are looking for a different model.
Wouldn't it be better to make education more affordable through subsidies and tax incentives?
This is an interesting article. It will definitely give students more options to afford college education. I do agree with you, Dr. Apps. It would be better to increase amount of subsidies in order to reduce college expenses. However, ever since the financial crisis in 2008, state officials were left with multi-billion-dollar budget gaps that had to be filled. Now the economy is getting better, but state governments are under pressure to cover mandatory spending programs like Medicaid and pensions. As a result, they had to cut funding for higher education. It would be harder for state governments to give tax incentives or tax breaks because they need revenue to cover their programs. They are not likely to increase funding for education.
ReplyDeleteA friend of mine goes to a public university in Illinois and the tuition has increased a lot because Illinois government kept cutting education funding. So, where does the funding for education really come from?
It's great that Purdue University is starting this new program and I think it will be very beneficial for college students who would've chosen private loan-services with higher interest rate. However, as the article mentioned, it may be riskier for the borrowers in some perspectives. First, according to WSJ article, people choose to go default and "many defaulted borrowers dropped out of school and are underemployed." And Carlo Salerno added that "the government imposes virtually no credit checks on borrowers, requires no cosigners and doesn’t screen people for their preparedness for college-level course work." If this program to work both for prospective college students and for schools lending out loans, there should be more detailed contract, like what would schools do if so many of borrowers can't find a job, or they switch the majors and expected income is much lower? I'm not saying that schools should be more strict about whom to lend it out to, or how much to lend, but I really hope that this program works very well in Purdue so that it can spread out throughout the nation and other schools can see it as a great model.
ReplyDeleteOn the other hand, as Jen said, if there's not much room for funding from the state government, can schools find a way to lower the tuition? I mean, schools are obviously for-profit organizations, but can schools be run under extremely low tuition like France or Germany? Will Sanders make this happen?
Or why can't U.S. cut its funding from defense and make education more affordable?
We all know that socially favorable way for college education is to lower the burdens of students. However, many schools do not want to offer this opportunity because they want to earn money and accumulate their wealth. It is also hard for colleges to get tax subsidies and incentives because those are limited financial resources that should be also used to other parts of society.
ReplyDeleteI am worried that the Purdue's try might initiate another financial crisis that we discussed in the class. What if there is a huge shock on job market and students cannot pay interest and principal for their collateral? It is going be a disaster. It is good that Purdue tries new methods, but I highly doubt its future success.
I love Harvard, Yale, and Princeton because those schools are need-blind schools where can fully support tuitions based on students' family financial situations. For Purdue, it would be effective in long term, if they research how HYP can make virtuous cycles. Devising the collateral finance method is just a short term solution.
We all know that socially favorable way for college education is to lower the burdens of students. However, many schools do not want to offer this opportunity because they want to earn money and accumulate their wealth. It is also hard for colleges to get tax subsidies and incentives because those are limited financial resources that should be also used to other parts of society.
ReplyDeleteI am worried that the Purdue's try might initiate another financial crisis that we discussed in the class. What if there is a huge shock on job market and students cannot pay interest and principal for their collateral? It is going be a disaster. It is good that Purdue tries new methods, but I highly doubt its future success.
I love Harvard, Yale, and Princeton because those schools are need-blind schools where can fully support tuitions based on students' family financial situations. For Purdue, it would be effective in long term, if they research how HYP can make virtuous cycles. Devising the collateral finance method is just a short term solution.