"Equity"-Financed College Is a Solution to a Nonproblem

A blog about business and economics.
July 17 2012 9:42 AM

"Equity"-Financed College Is a Solution to a Nonproblem

As people keep worrying about mounting student debt, there's growing popularity around the idea that perhaps instead of financing college education with debt we should do it with equity.

This naturally sparks jokes about indentured servitude, but one of many reasons why the idea doesn't work is that nobody is actually proposing that 18-year-olds sell themselves into bondage. Instead the idea is really to replace conventional student loans with a more complicated debt instrument. Evan Soltas, who's offered the most detailed discussion I've seen (one, two), puts on the table the idea of a college that instead of charging tuition or fees has students "pledge 5 percent of their annual income over $50,000 in 2010 constant dollars for the next 50 years."


I think this talk of new financing models is largely a solution to a nonproblem. Soltas points to the contrast between how we finance a "human startup" (with debt) and a regular startup business, which is largely with equity. But think about the basic venture capital value proposition. The idea is that we launch 1,000 companies of which 900 fail, 99 are bought by Google for a modest return on our initial investment, and then one becomes the next Google. Thus, we profit. But the expected value of the modal investment is negative. Book publishing also works on this model with a negative expected value on the modal investment, and not coincidentally the way it works is that the author and the publisher basically take a joint equity stake in the book. Basically if you want to get someone to back an investment that will probably fail, you need to offer the investor huge upside.

Schools, by contrast, at least claim to be offering the conventional value proposition—the typical student who goes here will receive more value (however defined) than the cost of providing the education.

The right way to finance something like that is exactly the way we do finance it—with a mix of direct grants (because some of the value is social or nonmonetary in nature) and loans (because some of the value is private income) and then we have political contestation around the appropriate mix. Which I think gets us to the basic point that the problem with student debt isn't that it's debt or that the debt is structured wrong, but simply that a college education has become so damn expensive to provide. If getting a bachelor's degree were financed 50 percent through loans and 50 percent through grants and cost a total of $2,000 we wouldn't be having big ugly fights about it. But in 2008 the average public research university spent $15,000 per student and dividing up $15,000 is a lot harder than dividing up $2,000.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.



Talking White

Black people’s disdain for “proper English” and academic achievement is a myth.

Alabama’s Insane New Abortion Law Gives Fetuses Lawyers and Puts Teenage Girls on Trial

Tattoo Parlors Have Become a Great Investment

Natasha Lyonne Is Coming to the Live Culture Gabfest. Are You?

A Jaw-Dropping Political Ad Aimed at Young Women, Apparently

The XX Factor
Oct. 1 2014 4:05 PM Today in GOP Outreach to Women: You Broads Like Wedding Dresses, Right?

Operation Backbone

How White Boy Rick, a legendary Detroit cocaine dealer, helped the FBI uncover brazen police corruption.


How Even an Old Hipster Can Age Gracefully

On their new albums, Leonard Cohen, Robert Plant, and Loudon Wainwright III show three ways.

The Secret Service’s Big Problems Were Reported Last Year. Nobody Cared.

Hong Kong’s Protesters Are Ridiculously Polite. That’s What Scares Beijing So Much.

  News & Politics
Oct. 2 2014 11:01 AM It Wasn’t a Secret A 2013 inspector general report detailed all of the Secret Service’s problems. Nobody cared.
Oct. 2 2014 12:10 PM Women of America, Here Are the Cities Where You Can Find Marriageable Men
The Vault
Oct. 2 2014 11:07 AM Mapping 1890 Manhattan's Crazy-Quilt of Immigrant Neighborhoods
  Double X
Oct. 2 2014 11:34 AM Alabama’s Insane New Abortion Law Putting teenage girls on trial may finally be too much for the Supreme Court.
  Slate Plus
Behind the Scenes
Oct. 1 2014 3:24 PM Revelry (and Business) at Mohonk Photos and highlights from Slate’s annual retreat.
Brow Beat
Oct. 2 2014 12:04 PM The Audio Book Club Debates Gone Girl, the Novel
Future Tense
Oct. 2 2014 11:41 AM Dropbox Recruiting Video Features Puppets and Data Privacy
  Health & Science
Medical Examiner
Oct. 2 2014 9:49 AM In Medicine We Trust Should we worry that so many of the doctors treating Ebola in Africa are missionaries?
Sports Nut
Oct. 1 2014 5:19 PM Bunt-a-Palooza! How bad was the Kansas City Royals’ bunt-all-the-time strategy in the American League wild-card game?