A lot can happen in thirty years. By the time of his death, Alexander the Great had carved out an empire stretching from Macedon to India. He had toppled kings, led armies and changed the known world forever. But the prospects for today’s twenty-somethings aren’t quite so rosy, and any odyssey across Eurasia is now rather out of the question. To a student in 2019, ‘thirty years’ has one connotation: the period after which any unpaid academic debt is written off.
‘Written off’ is the key phrase here. The fact of the matter is that at a cost of over £27,000 for one degree alone, coupled with a crippling six per cent interest rate outside Scotland, most student loans are quite simply impossible to repay. It’s not only young people that are losing out from this arrangement as a consequence; it’s also the government. The entire set-up, accompanied by occasional Cassandras warning of a public finance black hole of bad student debt, has a ring of the subprime mortgage fiasco to it.
Yet it has been the case for a while now that the student loan scheme as it operates in England isn’t the only way to get more people into higher education. In fact, an alternative approach was first explored in one of Milton Friedman’s papers back in 1955, in which he advocated an ‘Income Share Agreement’ by which universities could fund a student’s academic career in return for a cut of their future earnings.
The advantages of such a scheme are many. The first clear benefit is to the student, in that individuals with talent and a strong work ethic can have enormous value added by a university with no upfront costs and, equally importantly, no psychological burden of debt. A common criticism of ISAs is that they can leave students feeling short-changed when universities continue to take a small percentage of their income long after graduation. The counter to this, however, is twofold. Firstly, a small amount of regulation placing a ceiling on the size or duration of ‘repayments’ would go a long way to finding a balance. The second point is that ISAs give a university a genuine financial stake in each of their students, meaning the more value they add, the more they will receive back. The advantages are clear when compared to the current UK system, under which students simply sit with the burden of a loan until their salary rises to a level at which the government can start regaining its money.
Universities trialling ISAs are fairly few in number, presumably as under the loan scheme the university receives its payment immediately with any repayment risk passing to the government and its subsidiaries. Purdue University in Indiana, however, is one of those trialling ISA schemes through its Purdue Research Center. Purdue offers ISAs as an option, with the possibility of traditional private loans (under the American system) still present. This means the student is able to decide on the option that is best for them. If their course tends to produce high earnings fairly soon after graduation—or leads to a reliably high salary like many STEM disciplines—loan repayments pose less of a problem and look more attractive as an option. But other students expecting a slower start to their earnings, such as humanities, could opt for an ISA. This has added benefits for individuals from lower-income backgrounds, avoiding a heavy dose of debt on graduation whilst being able to enter graduate-level carers and pay scales that might have been financially inaccessible otherwise.
It is clear that if introduced in the UK, ISAs would need rules and regulations to avoid enormous inflation of the most ‘valuable’ degrees and an unwillingness to invest in low returners. But correctly handled, Income Share Agreements could provide a serious incentive for universities to add value to their students as the party shouldering the risk. The potential catastrophe for the government of bad student debt could also be avoided, making for a system designed to be stable, durable and to nurture hard work and talent across the social spectrum. Alexander the Great may perhaps still be relevant after all: just look what happens when you invest in the youth.
Peter Wollweber is a research intern at the Adam Smith Institute.