A (better) Way to Fund College Education

August 11, 2020.

Funding education is probably the most heavily debated topic in recent years, with both sides having equally strong views. Some say education is the state's duty and a citizen's right; others call it the individual's responsibility. But the consensus is that school education is the government's responsibility.

We all know the quality of education in government schools and how the absence of competition has made them inefficient. Milton Friedman, in his book "Free to Choose" proposed an excellent solution: divide the total government expenditure on school education by the number of students. Allow everyone to use their share to pay for school fees. The schools can then get the funds back from the government. The students would be wary of spending their coupons on bad schools, and this will foster competition between the schools. Simple yet effective.

However, this article is not about funding schools. It is about college education that many won't consider the government's responsibility.

Now, I don't think it's justified to put the burden of educational expenses to be placed on the government. A peasant earning a meagre income shouldn't pay (indirectly) for the education of a future engineer who probably isn't going to help that peasant directly. Everyone who benefits from training should pay for it by themselves. In that spirit, a flexible payment method - like easy access to loans, or paying fees when we get jobs are the best solution.

Sadly, not all have access to loans (don't have collateral, etc.). A system where one pays college tuition when they start working is excellent but unfeasible for the colleges as they require money for operations. I had another - in my opinion, better - idea on how to fund the college education.

Every college can make a general fund for each batch of each programme. Everyone (corporates, companies, anyone) can buy units of these funds. Something like mutual funds. Then, the entire fund's value divided by the number of students is the share of each student. Suppose the fees turn out to be more than an individual student's share. In that case, the student can pool in extra money (and also understand that his course isn't as valuable as the fees charged). Why would anyone buy units of these funds? Well, the student will have to agree to "return" a portion of their salary - say 10%. Something like the (opposite of) Swedish pension scheme, where a working professional is paying for the education they received years ago.

Not all students will be able to return, as not all will be employable. For those college programmes, the return rate can be higher, with an agreement with student to return higher to the fund back. These "colleges funds" will be valued by the market, taking into account most recent developments (assuming the efficient market hypothesis is true to an extent). Because they have their IPO once every year at the start of the academic term and are then traded, the colleges get their fees irrespective of fluctuations in the graduate's job outlook. The investors undertake all risks for the gestation period (when the student is in college). These risks are represented in the "returns" - what portion of their salary a graduate has to return.

This solution can keep all stakeholders - colleges, students and corporates - happy together. Of course, there are severe ramifications to this plan. Who will ultimately manage this fund? Do colleges have capabilities to handle schemes like these? These are all genuine but solvable questions. When it comes to implementation, I'm confident we can get experts who have sufficient abilities to execute such funds.

I'm also fairly confident this isn't going to be implemented anytime soon. If we weren't able to pull off the coupons in school system despite their showcased success, I'm not so optimistic of this getting executed.