U.S. taxpayers spend $43 billion a year subsidizing college educations, through Pell grants, federal direct loan programs, and congressional earmarks, says University of Chicago business professor Luigi Zingales in The New York Times.But there’s a better, more efficient, way to make sure underprivileged kids can go to college: Have venture capitalists invest in promising students, much as they finance other “new ventures with no collateral.”
The students would graduate with no debt, only pay back their investors based on their post-graduate earnings, and the market, free from distorting subsidies, “would create more informed demand for the schools, exerting pressure on them to contain costs and improve quality.” How would this work? Here’s an excerpt:
The best way to fix this inefficiency is to address the root of the problem: Most bright students do not have any collateral and cannot easily pledge their future income…. Investors could finance students’ education with equity rather than debt. In exchange for their capital, the investors would receive a fraction of a student’s future income — or, even better, a fraction of the increase in her income that derives from college attendance. …
This is not a modern form of indentured servitude, but a voluntary form of taxation, one that would make only the beneficiaries of a college education — not all taxpayers — pay for the costs of it.