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Alternative loan system would halt student debt crisis

THERE IS A fundamental problem with the way our society values education. Canadians have long believed wholeheartedly that an investment in post-secondary education will inevitably lead to significant gains in future income and an improved standard of living. Simple concept, right? Wrong.

This perception of the inherent benefits of all post-secondary education has led to a disproportionate number of students enrolling in fields of study that will not necessarily equip them with the skills and knowledge needed to guarantee them jobs upon graduation. Instead, the expectation that education equals employment will leave a large number of students in poor-paying jobs or ones that do not relate to what they got their degrees in—all with large amounts of student debt.

Burdensome problem
According to the Canadian Federation of Students (CFS), Canadian university students have accumulated nearly $14 billion in student debt. The CFS uses this figure to legitimize their claim that the federal and provincial governments should further subsidize the costs of university education to help ease the financial burden students face upon graduation, but that is not a viable solution. In fact, the CFS doesn’t even know what the real issue is.

The problems associated with creating a better educated, more employable generation of workers is not the high tuition rate, but that students are—more than ever—choosing to study in fields that offer little to no return on the investment of tuition fees.

According to the American National Center for Education Statistics, student enrolment in the fields of science, technology, engineering, and math (STEM) has barely changed over the last 25 years, despite significant population growth. Enrolment in the arts (visual and performing), psychology, journalism, and communication, however, has almost doubled.

Surprisingly or not, the latter are typically fields of study where unemployment is high and median earnings are low. The supply of graduates in these fields far exceeds the number of available jobs.

The source of the surplus of students with useless degrees is not high hopes and naive dreams—it is lack of information. When faced with a wide array of undergraduate programs to choose from, prospective students are not given the data necessary to make an informed decision.

The secondary education system takes a decidedly agnostic position regarding the value of various fields of study; an actuarial sciences major (0 per cent unemployment rate) is presented as equally valuable as a clinical psychology major (19.5 per cent unemployment rate).

The result is increased university enrolments in non-STEM fields, which has led to the often reported “epidemic” of students graduating with essentially worthless degrees and the debt incurred to achieve them.

Economics equals solution
Students graduating with degrees in the STEM fields are also graduating with record levels of debt, but they face promising career prospects and potential future earnings high enough to justify their investment in post-secondary education. An efficient market would not charge those students the same interest rate for the debt incurred as non-STEM students, who have much higher probabilities of default.

A possible solution to increasing debt levels and the associated limitation of opportunity faced by Canadian post-secondary students could be summed up as “equity financing.” This proposal suggests fully funding students’ post-secondary education in return for a set percentage of their post-graduation income, for a set period of time; this arrangement would be formalized in a “human capital contract” (HCC).

How it would work
Being equity-like financial instruments, HCCs are better suited than the current student loan system to attract funds from the private sector needed to finance higher education. Since repayment depends on projected future earnings—and therefore payments would be higher or lower according to the students’ capacity to pay—HCCs should be more attractive to students than traditional loans.

This model would reduce the incentive for students to enter fields associated with high unemployment rates. These students would either shift their focus to more “productive” fields of study or skip the traditional four-year undergraduate education altogether. The introduction of HCCs would virtually end the equal funding of unequal undergraduate programs.
The introduction of equity financing for post-secondary education would be a powerful force for a more effective job market. A greater amount of private sector capital would be directed toward financing post-secondary education, as investors would be provided with a model in which they might see an upside to their investment.

Students coming out of high school would be able to make use of the human capital contract costs when deciding what field to major in, providing for a much more efficient process that would see less disconnect between the degrees students complete and the occupations that need to be filled.

The bottom line of this proposal reflects the fact that post-secondary education has the potential to be the single greatest investment a student might make in his or her lifetime.

Depending on the field of study chosen, equity financing in education—and human capital contracts specifically—would create a greater incentive for students to pick those fields associated with the highest potential earnings and lowest unemployment rate. This would ensure graduates an enormous degree of financial security. This point could not be emphasized enough—its real-world consequence would be game-changing.

—Chris Spoke