Equity Financing

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Author: William Pottenger

While a large portion of Occidental’s student body probably doesn’t agree with Marco Rubio’s conservative stance on social issues, he does have a notable idea for reforming higher education financing. In contrast to Hillary Clinton’s narrower approach to tackling the problem of student debt (i.e. cutting costs), he plans on implementing equity financing.

How does equity financing work? A student pledges a certain percentage of their future income to an investor. In return, the investor (private or public) pays for the students tuition.

Similar to entrepreneurs, many students entering college need capital. However, entrepreneurs have the option to enter the debt or equity market, while students can only enter the debt market to finance their education.

Now, there are other options to help future college graduates manage rising tuition costs. Here are two good supplemental ideas: first, as Rubio also mentioned, we could improve online educational resources, which could help provide students with a more flexible, and less expensive, alternative to a typical four-year program. Second, as Clinton suggested, the government could pick up students’ whats left of students’ tabs after they pay 10 percent of their income toward their loans for 20 years.

Although there are risks, granting students the option to finance their education in the form of equity has the potential to do a lot of good to help future graduates. Furthermore, no moderate reforms will solve this increasingly problematic issue.

One risk is that the market for equity financing would be self-selective. No aspiring bankers, lawyers or other students with high-paying career ambitions would want to enter the equity market; therefore, few investors would enter the market if it was full of demand from students pursuing lower-paying job opportunities. At Yale in the 1970s, this actually proved true when they tried to implement the program.

To remedy this uncertainty, the government could reconsider removing the subsidized loans it currently offers students. Not only would this put the debt and equity markets on more of an even keel, but it would save federal dollars spent on monitoring the loans it currently disperses. By deregulating the market, the government could supplant this moral hazard.

Evidently, the costs government saves on the debt market run the risk of simply shifting to the equity market. Just like venture capitalists, who receive equity, rely on entrepreneurs to follow through on their ambitious promises, the government would put their confidence in students and their ability to maintain good academic standing. In essence, tax payers’ money would shoulder the cost of a failing student.

Feasible ways to avoid losing government money would be to screen the student in an interview process, look at their high school grades, extra-curricular activities, volunteer work, etc. Nevertheless, this is a serious concern that, if equity financing were implemented, would have to be identified and dealt with beforehand.

After taking into account the risks of equity financing, I still think this is an excellent vehicle to help Occidental students, and students across the country, deal with their student loan debt. However, its implementation by the government has to be balanced and careful. From now until November, let’s hope this pressing issue gets more attention than The Donald.

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