Had free market principles ruled and had the government not gotten directly involved in the business, many if not most of those people would never have purchased a home. No, they'd have had to rent until they could come up with the down payment and demonstrated the ability to pay back the mortgage over a 10, 15, or 30 year period.
Second, there's the looming collapse of the student loan market. Because the government student loan financing arm, Federal Student Aid, doesn't calculate the borrower's ability to repay, getting a federal loan is pretty easy. Plus, with all of that federal money flowing into the coffers, there's no real incentive to keep universities and colleges from continually increasing tuition. After all, there's no mechanism to deter students from borrowing even larger sums of money to pay those tuition bills. With the government loaning money for students to pay tuitions they can't afford, the default rate--right now, today--is 12%.
Sensing the looming crisis, an Assistant Professor of Finance at Vanderbilt University's Owen Graduate School of Management, Miguel Palacios, and the Director of the Center on Higher Education Reform at the American Enterprise Institute, Andrew Kelly, have devised a new, free market approach: Income-Share Agreeements (ISAs):
- An ISA is not a loan. Students have no outstanding balance to pay back when they graduate.
- Instead, investors finance a student and his/her educational program as well as potential for return on that program. In return, investors receive a fixed percentage of that student's income for a fixed number of years.
- Yes, students who earn more than expected pay more in return. But, those who earn less than expected pay less--and perhaps even nothing--if their academic programs do not translate into earnings.
ISAs protect students from the risk associated with a federal student loan. That is, unless the federal government decides to absolve students of their debts through defined public service programs or after a period of time, let's say 20 or so years. That leaves the taxpayers--including those graduates but "spreading the pain around" to others--on the hook.
ISAs also require students to consider which academic programs are most likely to result in well-paying jobs. Why? Investors will want to students to enroll in the most cost-effective programs that also offer the greatest potential for return on investment. If implemented, ISAs would potentially bring down tuition inflation and make college more affordable by causing academic administrators to terminate costly programs or find alternative way to finance programs that add little if any to the value proposition.
Like most conservative ideas, ISAs offer great promise to resolve one of the nation's many problems. However, conservatives just don't seem to know how to market their ideas and to close the sale with the public. Instead, they try to win over the voters by voting for big government programs that only add to and compound the nation's problems.
Don't believe The Motley Monk?
In 2008, Congress reauthorized and President George W. Bush signed the Higher Education Act. It specifically bans the existence of a federal database linking postsecondary education and wage information. That ban makes it impossible for a vibrant ISA market to emerge. Wonder why?
Let the discussion begin...
To read about ISA's, click on the following link:
"A Better Way to Finance That College Degree."