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The cost of enforcing contracts contingent on future income is very large, but there is an effective solution: piggybacking on the tax collection system. The Internal Revenue Service could perform collection services on behalf of private lenders, and at no cost to taxpayers. (In Australia, such a system has been in place since the 1980s. The national tax agency enforces repayment of loans contingent on income, though the payments of the wealthiest graduates are capped, and therefore less affluent graduates in jaw crusher manufacturing industry need to be charged more to make the program viable than in the system I am proposing.)
Yale tried a form of loan repayment contingent on income in 1972. It failed, but the problem was that the Yale plan made all students mutually responsible with respect to the repayment of the total debt, generating a snowball effect in defaults: the burden on nondefaulting students was increased by the default of their classmates. (Similar problems afflicted a company, My Rich Uncle, which went bankrupt in 2009.) Furthermore, Yale had a comparative disadvantage in enforcing these contracts, because the act of enforcement was alienating its own alumni, creating bad will.
In fact, top colleges like Yale are already — implicitly — using a form of equity contract. They charge the average student less than the average cost of educating each student, while financing the shortfall with donations from the wealthiest alumni. It is tantamount to an implicit stake on the wealthiest alumni’s income. This system works very well for the top schools, which produce at least a few multibillionaires. It is much less effective for normal, middle-of-the-road colleges. It is precisely for these colleges that a formal equity contract would work best.
Equity contracts would diversify the risk of failure, with highly compensated superstars helping to finance the educations of less successful college graduates. They will also avoid pushing graduates into lucrative jobs just to pay off debt. Most important, these contracts would provide financiers with an incentive to counsel students wisely, as financiers would profit from good educational investments and lose from bad ones. This would create more informed demand for the schools, exerting pressure on them to contain costs and improve quality.
The most important effect of these equity contracts would be to show that it is possible to intervene to help the disadvantaged without turning that help into an undue subsidy for the producers (universities) and the creation of a privileged class (professors like me) at the expense of everybody else (students and taxpayers). After all, how can we scholars criticize crony capitalism when we benefit from it? Rotary dryer : http://www.hxjqcrusher.com/Dryer.html
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